Czech Republic: Seeking Solutions
France: Seeking diversity
Germany: More talks, little action
Ireland: Will Islamic finance offer respite?
Italy: Friends in high places
Luxembourg: Gaining momentum
Malta: The Bahrain of the Mediterranean
Russia: Lukewarm reception
Turkey: A bumper year for Islamic finance
UK: Real estate to dominate
Full Guide
Czech Republic: Seeking solutions
Ivana Hrdlickova
The Czech Republic is a central European country with post-communist development. It has been a member of the European Union since 2004 and part of Schengen since 2007. The communist regime was overthrown in 1990 and the whole economic and political system has been completely changed. The Czech economy is highly successful compared to other East European or postcommunist countries, but is still far behind more prosperous countries. The Czech Republic is not a member of euro area, and its independent currency (the czech koruna) is quite strong.
The Czech Republic has a civil law system and the operation of financial institutions is regulated by central bank legislation. The banking (and all financial market) supervisory authority is the Czech National Bank. Currently there are 40 banks or Czech branches of foreign banks and 15 cooperative saving associations. Cooperative saving associations have a long tradition in the Czech Republic. After a big boom in 1991 many associations were bankrupted, however currently, according to the amended legislation, such associations work successfully. In 2010 two cooperative associations obtained a bank license. A significant part of the Czech economy also comprises of funds: mainly investment and mutual funds.
In 1991 a coupon privatization began in the republic and this procedure has influenced the Czech economy considerably. At this time many investment funds were established, but unfortunately many of them were unsuccessful and many people lost money. This is one of the main reasons why there is currently significant distrust of this kind of investment in the country.
The Collective Investing Law of 2004 (implemented following the EU Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities [UCITS]), and its amendment in 2006 and 2009, nonetheless allowed for a huge development of investing and mutual funds. This amendment installed an institute of qualified investors (investors with special benefits according to the law).
The Czech Republic also has a highly developed consumer credit and non-banking loans sector, as these products are easily accessible.
2011: A snapshot
• The newest amendment of the Collective Investing Law became effective in July 2011, with the implementation of EU Directive 2009/65/ES (UCITS IV), introducing the master-feeder fund structure, open market and new regulations of cross-border company reorganization. This amendment allows funds to operate more effectively, especially for foreign investors.
• However, in the consumer credit and non-banking loans sector, high interest rates has led to a number of many personal bankruptcies, and this figure has increased over 2011.
• A reform of the pension system this year introduced a new voluntary contribution pillar: however people are scared to trust the state in this reform and still prefer saving money in their own way.
• The amendments of the commercial code, labor code, trade code, business register and simplified conditions for starting business has made business operations more flexible.
• Despite the fact that there is currently no Islamic finance practice in the Czech Republic, public awareness concerning Islamic finance is growing.
• The newest amendment of the Collective Investing Law became effective in July 2011, with the implementation of EU Directive 2009/65/ES (UCITS IV), introducing the master-feeder fund structure, open market and new regulations of cross-border company reorganization. This amendment allows funds to operate more effectively, especially for foreign investors.
• However, in the consumer credit and non-banking loans sector, high interest rates has led to a number of many personal bankruptcies, and this figure has increased over 2011.
• A reform of the pension system this year introduced a new voluntary contribution pillar: however people are scared to trust the state in this reform and still prefer saving money in their own way.
• The amendments of the commercial code, labor code, trade code, business register and simplified conditions for starting business has made business operations more flexible.
• Despite the fact that there is currently no Islamic finance practice in the Czech Republic, public awareness concerning Islamic finance is growing.
2012: A preview
The Czech Republic will continue economic reforms in the coming year. Many people are trapped in a vicious circle of loans, especially with non-banking financial institutions. More and more people become aware that interest-based financing is dangerous, especially due to the high levels of interest rates many are experiencing. The level of financial education among the Czech public is very low. There is a significant need to educate people in financing and also to show them how Islamic financing works, before they can be offered Islamic finance products.
The Czech Republic will continue economic reforms in the coming year. Many people are trapped in a vicious circle of loans, especially with non-banking financial institutions. More and more people become aware that interest-based financing is dangerous, especially due to the high levels of interest rates many are experiencing. The level of financial education among the Czech public is very low. There is a significant need to educate people in financing and also to show them how Islamic financing works, before they can be offered Islamic finance products.
The funds market and cooperative saving associations might be a good place to start. At the same time there is a need to educate financial and legal professionals about Islamic finance principles and their mode of use within the Czech legislation and business and financial environment.
Ivana Hrdlickova is a judge at Appelate Court Pardubice, Czech Republic. She can be contacted at ivana@hrdlickova.com . France: Seeking diversity
Antoine Saillon
France has been on the radar of the Islamic finance industry for the past three years. In 2008, Christine Lagarde, as minister of economy, expressed her commitment to making France the Islamic finance hub of the Eurozone. Since then, the French market regulator (AMF) has issued two positions, allowing Shariah compliant investment funds and Sukuk listing; the Paris stock exchange has created a Sukuk segment; and four tax regulations (Murabahah, Sukuk, Ijarah, Istisnah) have been published, confirming a tax treatment on par with conventional operations. All these regulatory measures and political push, backed by countless conferences, have long remained in contrast however to the barely nascent actual market, despite France’s attractiveness for Islamic finance investors.
France is indeed attractive because it has a stable and diversified real estate market (US$3 billion-worth of Shariah compliant transactions have been counted since 2005), it is the world’s fifth largest economy, it is located in the heart of the Eurozone, and it is home to 6 million Muslims, the largest Muslim population in any western country.
More specifically, a recent survey by the French institute IFOP (sponsored by the Muslim association AIDIMM and consultancy IFAAS) shows a potential of 1.5 million customers for retail Islamic banking products, representing a EUR14 billion (US$18.2 billion) market — EUR7 billion (US$9.2 billion) market for savings products and a EUR7 billion market for financing products.
2011: A review
After some unsuccessful attempts, this virgin market is finally being addressed. In June 2011 Chaabi Bank, the long-established French subsidiary of Moroccan Groupe Banque Populaire, opened an Islamic window, offering deposit accounts for individuals.
After some unsuccessful attempts, this virgin market is finally being addressed. In June 2011 Chaabi Bank, the long-established French subsidiary of Moroccan Groupe Banque Populaire, opened an Islamic window, offering deposit accounts for individuals.
The first results exceed expectations: about 500 new deposit accounts are being opened each month, mostly by new customers. Even though the number seems modest, it is satisfying for a small bank with only 17 branches operating in France, and even more satisfying when considering that no public announcement has been made yet.
On the 20th December 2011 a second critical step was taken with the launch of a home financing product (570 Easi immo), a 10-year Murabahah contract, by 570 AM and Chaabi. Home financing is among the key expectations of retail clients, making this new product promising. However, as it is currently structured, it is mainly targeting households with comfortable revenues or able to make a significant down-payment for their property.
On top of these retail banking breakthroughs, France also confirmed its commitment to Islamic finance with the translation into French of the AAOIFI Standards, a reference for professionals worldwide, into French.
From now on, French speakers will finally have access to a French translation of the Arabic standards. More than a mere translation, the French standards actually give a thorough transcription of the Shariah law concepts (as described in the AAOIFI standards) into French law concepts. Moreover, as the French civil law system is very close to those of many French speaking countries in Maghreb and Africa, we can bet that these French standards will go a long way.
2012: A preview
In the coming weeks, Chaabi will open its Shariah compliant deposit account to SMEs, thus addressing a latent need of small businesses for Islamic banking products. SMEs have voiced an important demand for Islamic products, as French Muslims are known for their entrepreneurship and represent an interesting customer base for Islamic banking.
In the coming weeks, Chaabi will open its Shariah compliant deposit account to SMEs, thus addressing a latent need of small businesses for Islamic banking products. SMEs have voiced an important demand for Islamic products, as French Muslims are known for their entrepreneurship and represent an interesting customer base for Islamic banking.
Hopes are now high again that France will develop a sound Islamic finance market. But much remains to be done. First, the French AAOIFI standards have yet to be distributed and spread.
Second, Chaabi Bank is not yet offering the most complex products: corporate funding and mortgages. Chaabi says it is aiming at a full set of products by the end of 2012, which seems realistic in light of the recent 10-year Murabahah home financing product.
Third, wholesale banking and capital markets are yet to be developed. Chaabi’s first French Islamic window should pave the way for international Islamic investment banks willing to penetrate the French market. The Sukuk market may also benefit from the current funding difficulties experienced by French international corporations, which could take advantage of the comprehensive French framework for Sukuk issuance and listing.
Fourth, Takaful is not yet a mature topic in France, even though synergies will appear evident with the rise of distribution networks for Islamic banking products.
Finally, among the key 2012 drivers are the coming presidential and legislative elections in May and June. But no matter what the results will be, the industry will keep developing in France thanks to sound foundations and strong potential. The election result only effect will be to influence the pace of the industry’s growth.
Antoine Saillon is the head of Islamic finance at Paris EUROPLACE. He can be contacted at saillon@paris-europlace.com .
Germany: More talks, little action
Islamic Finance news
German financial institutions are active in Islamic finance – but not within Germany. All German global players in banking and insurance offer Islamic financial services and products to customers in the Gulf region and in Asia through subsidiaries in London, Dubai and Kuala Lumpur. In the opposite direction, there is virtually no business. Islamic banks do not offer products to customers in Germany. Neither German corporations nor public entities have tapped the Islamic capital market. The sovereign Sukuk of Saxony-Anhalt of 2004 matured and did not find a successor.
2011: A review
While no new Islamic finance business started in Germany, media reports and public events have focused on Muslims in Germany and the Islamic retail market. Well-known figures were often repeated: for example the number of Muslims in Germany (4 million in total, 2.8 million Turks), their high savings rate of 18% (Germany’s average 10%), a savings capacity of EUR2.2 billion (US$2.9 billion), and an estimated total Muslim wealth of EUR25 billion (US$32.9 billion). Muslims were questioned about their religious attitudes and their interest in Islamic finance products. Surveys found that 60-70% of the Muslims (or Turks) in Germany consider themselves as (very) religious and that more than 70% have an interest in Islamic finance products. A business consultancy in 2008 published the estimate of a EUR1.2 billion (US$1.58 billion) potential market for Islamic banking in Germany.
While no new Islamic finance business started in Germany, media reports and public events have focused on Muslims in Germany and the Islamic retail market. Well-known figures were often repeated: for example the number of Muslims in Germany (4 million in total, 2.8 million Turks), their high savings rate of 18% (Germany’s average 10%), a savings capacity of EUR2.2 billion (US$2.9 billion), and an estimated total Muslim wealth of EUR25 billion (US$32.9 billion). Muslims were questioned about their religious attitudes and their interest in Islamic finance products. Surveys found that 60-70% of the Muslims (or Turks) in Germany consider themselves as (very) religious and that more than 70% have an interest in Islamic finance products. A business consultancy in 2008 published the estimate of a EUR1.2 billion (US$1.58 billion) potential market for Islamic banking in Germany.
Although frequently quoted, there are at least two problems with this figure.
- First, it is doubtful that the surveys meet the criteria of representative polls. In addition, real world decisions can differ widely from answers to hypothetical questions.
- Second, the figure is not very plausible. If the annual savings amount is EUR2.2 billion and the Islamic market potential is estimated at EUR1.2 billion, this implies a share of approximately 50% of total savings. However, the aggregate market share of the four Islamic banks in Turkey is less than 5% of total bank deposits. It is very questionable whether Muslims in Germany have a 10 times stronger preference for Islamic products than Muslims in Turkey.
Extrapolating the Turkish figures, a more plausible figure for the market’s potential is in the range of EUR200-300 million (US$263.6-395.5 million). This is the size of a small cooperative bank in a rural area of Germany. For such a small market, the costs of Islamic operations may be too high for conventional German banks. In spite of the ‘friendly attitude’ of the German regulator, there is a host of unsolved accounting, legal and tax issues, including guaranteeing Shariah compliance. German banks also fear critical media reports and a loss of conventional customers. They have shown little interest in Islamic banking.
This does not mean that Islamic banking is not viable in Germany. Prospects for a subsidiary of an Islamic global player with access to Gulf capital may be bright. If an Islamic bank could come up with innovative products for corporate finance with attractive risk/cost and risk/return profiles (such as targeting family-run SMEs with excellent growth prospects), the market would not be limited by the savings of Muslims living in Germany. But this requires an approach focused more on corporate finance and less on retail banking.
2012: A preview
The nucleus of Islamic banking in Germany is the Kuveyt Türk Beteiligungsbank, a subsidiary of the Turkish member of the Kuwait Finance House Group. Established in 2010 in Mannheim, it started operations on a modest scale in 2011. To become the first Islamic bank in Germany, Kuveyt Türk has to extend its present license for the brokering of deposits with enterprises outside the European Economic Area into a full banking license. An application has been made, and it seems possible it can meet the regulatory requirements. However, the unsolved (or even untouched) legal and tax issues make it doubtful that the full banking business can start early in 2012.
The nucleus of Islamic banking in Germany is the Kuveyt Türk Beteiligungsbank, a subsidiary of the Turkish member of the Kuwait Finance House Group. Established in 2010 in Mannheim, it started operations on a modest scale in 2011. To become the first Islamic bank in Germany, Kuveyt Türk has to extend its present license for the brokering of deposits with enterprises outside the European Economic Area into a full banking license. An application has been made, and it seems possible it can meet the regulatory requirements. However, the unsolved (or even untouched) legal and tax issues make it doubtful that the full banking business can start early in 2012.
Other Islamic banks (including some with European passports) have verbally expressed their interest in operations in Germany, but none have taken concrete steps. It seems that Kuveyt Türk has to prepare the ground alone. It may benefit from the growing interest from German business associations, legal and tax consultants and academics, who produce an increasing number of studies, articles and conference papers on specific topics of Islamic finance under the German corporate law and tax regime. The Federal Financial Supervisory Authority (BaFin) will organize a follow-up to its 2009 conference on Islamic finance in May 2012. This could place Islamic finance (once again) on the political agenda. Another noteworthy event in Germany, although not restricted to the German market, is a Workshop on “Islamic Finance and Financial Stability”, jointly organized by the Islamic Financial Services Board and the European Central Bank in Frankfurt by the end of January 2012.
The German market will see the introduction of a new savings product for Muslims: At roughly the same time in December 2011, when the “Meridio Global Islamic Multi Asset Funds”, launched only in May 2010, was liquidated, WestLB opened the subscription for its “Islamic Strategy-Index-Certificate”. In the past, WestLB had structured a number of Shariah compliant deals as an investment bank. This time it acts in its retail capacity as the central institution for the savings banks in two German states (North Rhine-Westphalia and Brandenburg). The savings banks will become the main distribution channels for WestLB’s open ended index tracker certificate with a stop loss mechanism.
The new “WestLB Islamic German Index” comprises the largest German (DAX and MDAX) companies whose businesses and financial ratios meet the criteria of Shariah compliance. Initially, the certificates will represent a basket of 10 stocks that will be purchased physically. The issuing date for certificates (with an issue price of 10.00 Euros) is the 17th January 2012, and trading will start on the Frankfurt and Stuttgart exchanges on the 20th January 2012. The stop loss mechanism of the certificate will be triggered by a loss of 8% (or more): In this case the stocks will be sold and the proceeds will be kept on an interest-free money account until the index has reached or exceeded its previous level. Since the new retail product differs from the liquidated one in all relevant respects – portfolio composition, distribution channel, risk limitation and Shariah certification —, its prospects may be much better.
Professor Dr Volker Nienhaus is a visiting professor at the University of Reading, UK and a member of the governing council of INCEIF. He can be contacted at volker.nienhaus@gmx.net .
Ireland: Will Islamic finance offer respite?
Gary Palmer
Ireland is the jurisdiction of choice for internationally distributed investment funds, used as a gateway by the world’s leading fund promoters to establish and service investment funds which are sold to investors across the globe. Following the adoption of facilitative regulation and legislation, together with the creation of an International Financial Services Center (IFSC), the international investment funds industry in Ireland has more than 20 years’ experience and expertise and today is one of the world’s leading fund domiciles and administration centers, servicing assets worth over EUR1.8 trillion in some 11,000 funds. Due to the robust and efficient regulatory and tax environment, wide range of specialist expertise, high quality business-friendly environment and the ease of global distribution offered by an Irish fund platform, more than 850 fund promoters from over 50 countries have chosen Ireland as their international fund hub.
As a leading center for internationally distributed UCITS funds, the globally recognized investment fund product that has become the universal standard for regulated investment funds, Irish authorized UCITS are distributed in 70 countries. The world’s leading center for the administration of alternative investments, servicing in excess of 40% of global alternative investment fund assets, Ireland has unrivalled expertise in the administration of sophisticated investment products and is benefiting from the recent trend towards greater regulation and transparency. Demonstrating innovation and thought leadership in new regulatory and market developments, Ireland was the first jurisdiction to provide for regulated hedge fund products and continually leads on policy and practice in anticipation of the industry’s continuously evolving requirements.
Home to 50 world class fund service providers and with a support structure of over 11,000 industry professionals, Ireland offers the widest range of expertise in fund domiciling and servicing. The Irish funds industry offers a complete range of services including fund set-up, structuring and listing, fund administration, depositary and transfer agency services, compliance, consultancy, tax, audit and legal services. Irish fund structures can include the broadest spectrum of investment policies from ‘long only’ retail funds to sophisticated investment strategies. With no tax liability at fund level, the tax efficiency of Irish investment funds is further enhanced by access to Ireland’s double taxation treaty network which extends to 60 countries. With openness, transparency and regulation as the pillars of the industry, Ireland leads the global industry in compliance with internationally agreed tax standards.
Building upon the foundation of UCITS and conventional fund products, in recent years the Irish authorities have extended and developed the regulatory and tax environment to provide the same effective and efficient investment fund products using both conventional and Islamic financial instruments. Highlighting these developments the Irish Prime Minister during 2011 noted: “We are determined to ensure that the IFSC is a center of excellence for Islamic finance and the changes in recent Finance Acts will support its development,” as he referred to the confirmation provided by the Irish office of the Revenue Commisioners that Shariah compliant funds, Ijarah transactions and Takaful arrangements were to be taxed on the same efficient basis as comparable conventional financial products. This added to the 2010 amendments to Irish tax laws to include Islamic banking products and Sukuk issuances. Ireland’s corporation tax rate remains at 12.5% and no Irish stamp duty arises on the issue, transfer or redemption of a Sukuk certificate. Islamic finance transactions, where those transactions correspond to VAT exempt financial services transactions, are also exempt from Irish VAT.
These enhancements to the tax framework add to the previous developments in the regulatory environment, where the Central Bank of Ireland has an established Shariah Funds Specialist Unit to ensure Shariah funds can be authorized with consistency and efficiency. With 20% of the Islamic funds market outside the Middle East now located in Ireland there are many fund promoters from MENA who have funds domiciled or serviced in Ireland with total assets under administration of nearly EUR2 billion, according to Lipper. The industry in Ireland supports and services promoters from Kuwait, Lebanon, Saudi Arabia and UAE with funds investing in areas from Global to Emerging Africa & Middle East to US and the Far East/Pacific.
As we leave 2011, a year of some uncertainty, and as we enter 2012 one thing is certain: Islamic finance is one of the major growth areas in international finance and the industry and authorities in Ireland will continue to provide the product solutions, operating efficiencies and international opportunities to assist this growth be realised.
Gary Palmer is chief executive at the Irish Funds Industry Association. He can be contacted at gary.palmer@irishfunds.ie .
Italy: Friends in high places
Alberto Brugnoni
The current crisis in the Eurozone has exposed the systemic and recurrent flaws of a conventional financial system that has parted company with real activities and tangible assets. Calling into question the vicious circle of an ever-increasing debt based on interest and the ensuing over-leverage, several initiatives in the Italian peninsula bear witness of a growing acceptance that today’s Islamic finance has striking similarities of method with 19th century western finance and as such is a sound proposition that transcends a faith-based approach.
2011: A review
Regulator
After hosting in 2009 a conference on Islamic finance chaired by Mario Draghi, then Italian central banker, and was attended by regulators from major Islamic finance jurisdictions, Banca d’Italia has published ‘Finanza islamica e sistemi finanziari convenzionali. Tendenze di mercato, profili di supervisione e implicazioni per le attività di banca centrale’, a detailed analysis on regulatory issues faced by Islamic finance in Italy. This study marks a watershed in the perception by the Italian regulator of the Islamic financial market as an opportunity for innovation and not a risk to stability. This is also seen as a step towards the possible implementation of Islamic finance services in the peninsula by a prime Islamic bank that is rumored to have filed a request to open up for business in Italy. With Mario Draghi now the European central banker, a pan-European initiative on Islamic finance is also a distinct possibility.
Regulator
After hosting in 2009 a conference on Islamic finance chaired by Mario Draghi, then Italian central banker, and was attended by regulators from major Islamic finance jurisdictions, Banca d’Italia has published ‘Finanza islamica e sistemi finanziari convenzionali. Tendenze di mercato, profili di supervisione e implicazioni per le attività di banca centrale’, a detailed analysis on regulatory issues faced by Islamic finance in Italy. This study marks a watershed in the perception by the Italian regulator of the Islamic financial market as an opportunity for innovation and not a risk to stability. This is also seen as a step towards the possible implementation of Islamic finance services in the peninsula by a prime Islamic bank that is rumored to have filed a request to open up for business in Italy. With Mario Draghi now the European central banker, a pan-European initiative on Islamic finance is also a distinct possibility.
Public bodies
SIMEST, the development finance institution headed by the ministry for economic development that promotes Italian business abroad, is working on the possible launching of the Mediterranean Partnership Fund. This initiative, dedicated to the support of small and medium-sized enterprises in the MENA region through equity or semi-equity instruments, sees the involvement of the Union of Arab Banks, several Arab governments and Islamic multilateral development banks. Following the request of the partners of the Southern Bank, this conventional fund shall have a sizable Shariah compliant section.
SIMEST, the development finance institution headed by the ministry for economic development that promotes Italian business abroad, is working on the possible launching of the Mediterranean Partnership Fund. This initiative, dedicated to the support of small and medium-sized enterprises in the MENA region through equity or semi-equity instruments, sees the involvement of the Union of Arab Banks, several Arab governments and Islamic multilateral development banks. Following the request of the partners of the Southern Bank, this conventional fund shall have a sizable Shariah compliant section.
The Italian Banking Association coordinates a Working Group on Islamic Finance that is at present focusing on the problems related to the issuing of a corporate or sovereign Sukuk. The Working Group, composed of lawyers, tax experts and bankers, meets regularly in Rome and Milan and is preparing a draft bill to be discussed by the relevant parliamentary commissions before the final discussion and possible approval of the text by the parliament itself.
The Market
A distinguishing feature of the Italian Muslim population is the variety of countries of origin with no nationalities prevalent, as happens in all other European countries. This 1.583 million-strong Italian Muslim community (Caritas/Migrantes 2011) allows the Banca del Monte dei Paschi di Siena to project a potential for Islamic retail banking deposits of EUR4.5 billion (US$5.8 billion) and revenues of EUR170 million (US$218.6 million) by 2015 and EUR26 billion (US$33.4 billion) and EUR950 million (US$1.22 billion) respectively by 2050. Moreover, extremely detailed surveys and market analyses filtered by the countries of origin and the banking services used, are now available and highlight the difference in the financial behaviors of each Muslim community. Banca Prossima has put together a working group on Islamic retail services and is at present working on a home financing product.
A distinguishing feature of the Italian Muslim population is the variety of countries of origin with no nationalities prevalent, as happens in all other European countries. This 1.583 million-strong Italian Muslim community (Caritas/Migrantes 2011) allows the Banca del Monte dei Paschi di Siena to project a potential for Islamic retail banking deposits of EUR4.5 billion (US$5.8 billion) and revenues of EUR170 million (US$218.6 million) by 2015 and EUR26 billion (US$33.4 billion) and EUR950 million (US$1.22 billion) respectively by 2050. Moreover, extremely detailed surveys and market analyses filtered by the countries of origin and the banking services used, are now available and highlight the difference in the financial behaviors of each Muslim community. Banca Prossima has put together a working group on Islamic retail services and is at present working on a home financing product.
Turning to wholesale banking, Unicredit and Banca Intesa are active in the Islamic capital markets (mostly trade finance, Murabahah and participations in syndication facilities) though from foreign offices or wholly-owned foreign subsidiaries. Mediobanca is quite active in the Gulf region and works on Private Public Partnership (PPP) structures with the use of the Ijarah Mausufah Fi Zimmah contract. Turning to Islamic insurance, Assicurazioni Generali, after its 2009 joint initiative with Bank of Qatar and BEMCO for the structuring of Takaful products, has sealed a joint cooperation agreement with Bahrain-based Takaful International to provide group employee benefits coverage. On the other hand, the Association of Italian Insurers (ANIA) has organized a well-attended seminar on the principles of Takaful.
Universities
There is also a plethora of initiatives in the academic field, with the number of dissertations and thesis on different aspects of Islamic finance increasing exponentially. The summer school on ‘Islamic Finance in Europe’ organized by the Università degli Studi di Roma Tor Vergata with the name ‘Tools for the development of a plural financial system’ was attended by leading academicians and practitioners, it provided a fresh perspective on the role of Shariah for the construction of a more inclusive European society.
There is also a plethora of initiatives in the academic field, with the number of dissertations and thesis on different aspects of Islamic finance increasing exponentially. The summer school on ‘Islamic Finance in Europe’ organized by the Università degli Studi di Roma Tor Vergata with the name ‘Tools for the development of a plural financial system’ was attended by leading academicians and practitioners, it provided a fresh perspective on the role of Shariah for the construction of a more inclusive European society.
2012: A preview
The idea that Islamic finance is good both for business and society is slowly spreading amongst Italian regulators, the business world and, importantly, influencers and the press. There is now a real focus on promoting Italian-incorporated initiatives and a recognition that the backbone of the Italian economy, the family-owned SMEs, resembles that of the GCC. This change in attitude will certainly bear abundant Islamic finance fruit in the year to come.
Alberto Brugnoni is the managing director of Association for the Development of Instruments of Alternatives & Financial Innovations (ASSAIF). He can be contacted at alberto.brugnoni@assaif.org .The idea that Islamic finance is good both for business and society is slowly spreading amongst Italian regulators, the business world and, importantly, influencers and the press. There is now a real focus on promoting Italian-incorporated initiatives and a recognition that the backbone of the Italian economy, the family-owned SMEs, resembles that of the GCC. This change in attitude will certainly bear abundant Islamic finance fruit in the year to come.
Luxembourg: Gaining momentum
Marc Theisen and Sufian Bataineh
Besides Luxembourg’s solid reputation for stable pro-investor systems and a flexible regulatory/tax framework in general, the country has for more than 30 years been a pioneer in the Islamic finance field in continental Europe.
This is in line with the overall pragmatic approach adopted by Luxembourg in order to become a major international financial center in the heart of Europe, capable to attract new innovative projects.
This is also the result of more specific efforts performed by the Luxembourg authorities and financial actors to promote the Luxembourg financial investors towards Muslim investors who, for the vast majority, did not even know about it and to evidence to them that Islamic finance can find a suitable legal and economic environment to develop successfully in a non–Muslim country such as Luxembourg (for instance, the tax authorities have issued circular letters dealing specifically with the tax treatment of Islamic finance transactions).
All those efforts resulted in the Luxembourg Stock Exchange being the first to list Sukuk in continental Europe in 2002 and to more than 40 Shariah-compliant funds now being incorporated in Luxembourg.
2011: A review
2011 was not a very successful year for the Islamic finance industry in Luxembourg, whether in terms of Shariah compliant investment funds or Sukuk.
2011 was not a very successful year for the Islamic finance industry in Luxembourg, whether in terms of Shariah compliant investment funds or Sukuk.
In 2011, only four Shariah compliant investment funds have been incorporated in Luxembourg: by traditional players such as BLME Asset Management (three funds) and QIB (UK) (one fund).
In terms of Sukuk, there was no new Sukuk issue on the Luxembourg Stock Exchange. The latter even lost the Islamic Development Bank Trust Services issue of US$750 million in favor of the London Stock Exchange in the first half of 2011.
However, the government continued to support this industry segment, as evidenced inter alia by the fact that, in October 2010, the Central Bank of Luxembourg (CBL) was a founding member of and even the sole European institution participating in the International Islamic Liquidity Management Corporation (IILM), and that, in May 2011, the CBL became the first European institution to host the 8th IFSB annual summit in Luxembourg: ‘Enhancing Global Financial Stability: Challenges and Opportunities for Islamic Finance’. These events were regarded by the main British economists as a threat to the position of the London market as a hub of Islamic finance.
The second half of 2011 appeared to be more positive. Indeed, major Islamic financial institutions from GCC have launched projects to set up Shariah compliant fund structures in Luxembourg. In addition, some other major Islamic financial institutions, mainly from Malaysia, are studying the possibility of having a Luxembourg platform for their European investments.
This attractiveness has not been limited to the investment funds’ sector. Indeed, new players seem to be contemplating the establishment of regulated financial institutions in Luxembourg in order to offer Shariah compliant products or services (e.g. brokerage services).
The acquisitions of two Luxembourg banks (Dexia-BIL and KBL) by Qatari investors in the last quarter of 2011, although the purchases will probably not lead to such banks becoming Islamic banks, will nonetheless undeniably open doors for more Shariah compliant structures and transactions in Luxembourg in the medium- to long-term.
Finally, it is interesting to note that, during an official economic mission to Kuala Lumpur in October 2011, Luc Frieden, the Luxembourg minister of finance, declared that he is pushing for the launch of a Luxembourg sovereign Sukuk, possibly in the first quarter of 2012. In his view, this will further enhance the attractiveness of Luxembourg as a major (if not the leading) European financial center for Islamic finance and will offer new investment opportunities to investors from Asia and the Middle East.
2012: A preview
We believe that 2012 will be a more prosperous year, for the following reasons:
We believe that 2012 will be a more prosperous year, for the following reasons:
- Due to the efforts made in 2011, the opportunities offered by the Luxembourg financial center are now better known by investors from the MENA countries.
- The Luxembourg authorities and financial players will maintain their promotion efforts. For instance, a series of economic missions are already planned in different MENA countries such as in January to Doha and Dubai.
- The running projects at the end of 2011 will be materialized and the acquisitions of Dexia-BIL and KBL will become effective.
- Migration of certain projects from offshore jurisdictions to Luxembourg to escape the tougher regulations from G20.
- A number of Sukuk issuances in Luxembourg are already planned by many institutions such as the Luxembourg government, IDB, and an English asset management corporation in 2012.
Marc Theisenis is the managing partner and Sufian Bataineh is a partner at Theisen Law. They can be contacted at mtheisen@theisenlaw.lu and sbataineh@theisenlaw.lu respectively.
Malta: The Bahrain of the Mediterranean
Reuben Buttigieg
The financial crisis and the several country-specific issues that occurred in 2011 put Islamic finance in a positive limelight. The Mediterranean Islamic Finance Conference held in Malta in November 2011, entitled New Openings, brought to light many of the opportunities that Islamic finance has in store. This is particularly so for Malta due to its geostrategic position and the opportunities its tax and legal instruments provide.
The publication of the Guidance Note on Islamic Funds by the Malta Financial Services Authority was a positive step towards the introduction of Islamic funds in Malta. The aforementioned note on its own is certainly not enough to attract the necessary interest in Malta, as it needs to be read in conjunction with other legislation. However, following its publication Malta has seen a considerable amount of interest from various countries including Italy and Qatar to register Islamic funds in Malta.
In assessing Malta one needs to consider a holistic package. One of the considerations is certainly its advantageous tax system, of which many are still unaware. Also, the combination of various legal instruments that render many Islamic finance transactions possible is often overlooked. The use of legal instruments such as the Trusts and Trustees Act structured in combination with other special purpose companies means that most transactions can be achieved in a more efficient way than in other countries, such as Luxembourg . If one considers also the Mercantile Shipping Act, the aviation opportunities and the opportunities provided by similar legislation then Malta certainly has its own story to tell.
The development and analysis of these structures is however, not a simple exercise. Regrettably certain assertions made by uninformed organizations were factually not correct, which led certain Islamic finance institutions to be wary of Malta. Most Islamic finance transactions can happen through Malta. The establishment of the World Islamic Finance Institute (WIFI) in Malta, backed by major Islamic finance institutions, is an endorsement of Malta’s potential . During the recent conference, which saw the signing of the statute of WIFI, it was also announced that a Shariah compliant microfinance fund is being registered in Malta. Furthermore, the announcement of a possible Takaful firm in Malta targeting the North African market and the number of special purpose vehicles used to structure Islamic finance transactions all over the world is indeed another endorsement of the Malta option.
In spite of the above endorsements Malta has not found the strong support it expected from the Islamic finance industry. This may be also due to the complexity of understanding certain structures and also on the wrong messages it sometimes portrayed. Malta has structures in place to allow most Islamic finance transactions in a tax efficient manner. An understanding of what Luxembourg and Ireland are doing in this context would also assist to highlight the advantages of Malta.
Malta is part of the European Union, which provides passporting opportunities and certain international branded frameworks such as UCITS. An in-depth analysis of these frameworks however, may lead to one question: whether the Islamic finance transactions within these directives can really and truly remain Shariah compliant? Many question, for example, whether the UCITS framework allows actually space for Islamic funds. An in-depth analysis of this was made in a study done recently by the Malta Institute of Management which clearly concludes that other structures within Malta, Ireland and Luxembourg may be more appropriate.
With respect to North Africa, the declarations made by various political parties is certainly encouraging, particularly for Malta. Malta will have a major role in the flourishing of Islamic finance in North Africa and it is already doing so. Malta has a strong reputation in the financial services sector and will continue to act as a conduit of Islamic finance to North Africa (and southern Europe). This is not a new scenario for Malta, as it has acted already as a gateway to Libya for various international conventional banks that placed their trust in the Malta system.
Reuben Buttigieg is the president of the Malta Institute of Management of Malta Institute of Management and he can be contacted at rbuttigieg@maltamanagement.com .
Russia: Lukewarm reception
Madina Kalimullina
Russia is a fledgling and promising market for Islamic finance with Muslims constituting about 20% of its population. Indeed, the number seems strong. However, before assuming any data, certain preconditions should be taken into account. First, the practicing segment of these Muslims, who present real demand for Islamic finance, is merely 5%. Second, Russia has still a rather bureaucratic system of decision-making, especially when one speaks about changing or amending the law. Still, the market is slowly but steadily moving to its long-desired goal – a sound and diversified Islamic financial system - with its pace accelerating.
2011: A review
In this regard, the year 2011 has had much to witness. Further expansion of microfinance projects; one of the regional banks opening the Vostok Capital Islamic window in March; Tatarstan-based Amal Finance House launching diversified Islamic finance operations in early spring – these all have contributed to the rise of the Russian Islamic finance market in the first half of the year. Later on, the acquisition by the aforementioned Amal of the one-year-old Yumart Finance partnership, the first in the Tatarstan market, and the subsequent deal of the year – a US$60 million debut syndicated Murabahah in September by AK BARS Bank, supported by several Gulf investors - have completely warmed up the market. Citibank and the Islamic Corporation for the Development of the Private Sector, who acted as exclusive joint lead arrangers and bookrunners, believe that the deal has been an important and strategic step that will foster further development of Islamic financing in the region.
In this regard, the year 2011 has had much to witness. Further expansion of microfinance projects; one of the regional banks opening the Vostok Capital Islamic window in March; Tatarstan-based Amal Finance House launching diversified Islamic finance operations in early spring – these all have contributed to the rise of the Russian Islamic finance market in the first half of the year. Later on, the acquisition by the aforementioned Amal of the one-year-old Yumart Finance partnership, the first in the Tatarstan market, and the subsequent deal of the year – a US$60 million debut syndicated Murabahah in September by AK BARS Bank, supported by several Gulf investors - have completely warmed up the market. Citibank and the Islamic Corporation for the Development of the Private Sector, who acted as exclusive joint lead arrangers and bookrunners, believe that the deal has been an important and strategic step that will foster further development of Islamic financing in the region.
Some minor developments have also been on the agenda: including proposals to issue Shariah compliant debit cards, initiating mutual fund projects and opening of a Takaful division by one of Russian insurance companies. However, these projects, which would have attracted much attention among prospective customers, still have been mainly remaining on paper so far.
Tatarstan International Investment Company, which was launched with the participation of ICD in Kazan in 2010, has been mainly focusing on the selection of decent projects for investment. However, the market is simply not used to business planning Islamically. The organizers of the Investment session at Moscow Halal Expo 2011 came across the same problem: most of the projects applying for investment are either professionally written but involved to some extent with non-halal activities, or are prepared with a purely Halal intention but lack expertise in financial analysis. But a year of consultation and selection will certain expedite matters.
Thus, the market is mainly driven by the country’s capital, Moscow, which is a home to a Muslim population of about 2 million and is the headquarters of an expert association in Islamic finance. The city accumulates a huge part of the country’s financial resources and hosts annual discussions and exhibiting platforms like the Moscow Halal Expo. The city of Kazan and the Republic of Tatarstan with its strong government support, well-known and established KAZANSUMMIT, active international relations, stable resource base and a dedicated Muslim community is another driver of the Islamic finance market. Ufa, the capital of Bashkortostan, is not lacking behind. The region, rich in mineral and human resources with deep Islamic roots, is one of the largest Halal producers in the country and the number of applicable initiatives is increasing. And it is Ufa where Ellips Bank plans to open its second regional Islamic division office. The Caucasus region is also worth mentioning, with Express Bank’s Islamic division continuing expanding its operations after launch of Murabahah financing in spring 2011.
The market, with the different approaches stemming from the regional players, is harmonized with the help of the economic department of the Russia Muftis Council through the conferences, seminars, and practical training abroad it organizes; dissemination of the Russian version of AAOIFI Shariah standards; and many other positive initiatives. The contribution of international experts in the industry is also remarkable.
2012: A preview
Whatever the progress may be, the need to provide a favorable and proper legal platform is still on the agenda.
Whatever the progress may be, the need to provide a favorable and proper legal platform is still on the agenda.
Civil servants, bankers, and the Muslim population continue to discuss the party which should come up with the legislative initiative to resolve the issue positively.
Yet, the recent negotiations between the Russian government and the international Islamic financial community anticipate positive developments in the months to come.
The year 2012 is expected to witness the launching of new projects, particularly in Moscow, which represent the market with higher risk but with ample opportunities. These include, among others, the establishment of an Islamic investment company. The new law on investment partnerships, aimed to deliver the legal basis for the development of innovations in the Russian economy, was also signed by the president in late November 2011 after a year of discussions, and provides a scope of opportunities for Islamic financial companies. The bankers, however, have to wait until their turn comes.
Madina Kalimullina is the director of the economic department at Russia Muftis Council and member of the Russian Expert Association in Islamic Finance. She can be contacted at econodep@gmail.comTurkey: A bumper year for Islamic finance
Aytug Buyukatak and Burak Gencoglu
The Turkish financial market maintained its constant development in 2011 and recent reports from reputable international financial institutions project that this development will continue in 2012. In 2011, Sukuk was introduced to the Turkish market by a participation bank, Kuveyt Turk Katılım Bankası, based on the new communiqué on lease certificates which entered into force for the first time on the 4th April 2010. Another significant development for the Turkish legal and financial system is the new Turkish Commercial Code (TCC) and Code of Obligations, which will both enter into force on the 1st July 2012.
In the third quarter of 2011, Turkish GDP surged to 8.2%, the second fastest growing economy in the world after China, and for the first nine months the expansion of the economy reached 9.6% compared to the same period a year before.
2011: A review
Banking sector
A recent development in Turkey took place concerning Turkish banking licenses. A new banking license has been issued by the Banking Regulation and Supervision Board to Bank Audi, a major Lebanese bank operating in Europe, the Middle East and North Africa. Bank Audi has become the first bank to obtain a license in the Turkish banking sector in over 10 years. The decision of the board was given on the 27th October and was published in the Official Gazette on the 28th October 2011.
Banking sector
A recent development in Turkey took place concerning Turkish banking licenses. A new banking license has been issued by the Banking Regulation and Supervision Board to Bank Audi, a major Lebanese bank operating in Europe, the Middle East and North Africa. Bank Audi has become the first bank to obtain a license in the Turkish banking sector in over 10 years. The decision of the board was given on the 27th October and was published in the Official Gazette on the 28th October 2011.
This new development demonstrates that the Turkish banking sector has promising opportunities and is now open to new players from around the world. Bank Audi has become the 49th bank in the sector.
Another important development in the Turkish banking sector is the announcement for sale of Denizbank. Dexia SA (DEXB) is the main shareholder of Denizbank and recently declared its intention to sell its shares. HSBC and the Qatar National Bank are interested in the Turkish retail operations of Dexia, a Franco-Belgian investment bank, which could be worth up to US$6 billion. Denizbank’s chief executive Hakan Ates stated that Dexia is talking with potential investors from several countries about selling its shares in Denizbank.
Developments in the Sukuk market
In addition to the growth in the banking sector, Sukuk (which is a relatively new financial instrument for Turkey) has also been issued for the second time by Kuveyt Turk participation bank. There was a high demand for this US$350 million, five-year Sukuk issuance from European and Gulf investors. This recent Sukuk issuance was also important for being the first issuance carried out as a part of the Communiqué Serial III No.43 on ‘Principals Regarding Lease Certificates and Asset Leasing Companies’.
In addition to the growth in the banking sector, Sukuk (which is a relatively new financial instrument for Turkey) has also been issued for the second time by Kuveyt Turk participation bank. There was a high demand for this US$350 million, five-year Sukuk issuance from European and Gulf investors. This recent Sukuk issuance was also important for being the first issuance carried out as a part of the Communiqué Serial III No.43 on ‘Principals Regarding Lease Certificates and Asset Leasing Companies’.
After this kick-off, more Sukuk deals with greater volumes are expected to be realized by Turkish participation banks.
2012: A preview
Expectations for the banking sector
In accordance with the growth in the banking sector and in the Turkish Economy overall, more banking licenses may be issued by the board for those who fulfill its criteria. In a recent interview Tevfik Bilgin, the chairman of the board, stated that it may issue new banking licenses for persons who bring US$300 million or more in capital to the country. The issuance of the banking license to Bank Audi for US$300 million capital proves that new licenses are likely to be issued providing the minimum capital requirement is met.
Expectations for the banking sector
In accordance with the growth in the banking sector and in the Turkish Economy overall, more banking licenses may be issued by the board for those who fulfill its criteria. In a recent interview Tevfik Bilgin, the chairman of the board, stated that it may issue new banking licenses for persons who bring US$300 million or more in capital to the country. The issuance of the banking license to Bank Audi for US$300 million capital proves that new licenses are likely to be issued providing the minimum capital requirement is met.
Particularly for the participation banks, more players are needed in the sector since there is already a great demand for the products presented by the current participation banks.
Regulatory Changes
The New Turkish Commercial Code (TCC) was enacted in January 2011 and will be in force by the 1st July 2012, together with the Code of Obligations which was also adopted in 2011.
The New Turkish Commercial Code (TCC) was enacted in January 2011 and will be in force by the 1st July 2012, together with the Code of Obligations which was also adopted in 2011.
The new TCC was introduced by Professor Tekinalp, the chairman of the New TCC Commission, to promote harmonization with international standards. The new TCC provides convenience to individuals who want to establish a sole corporation or be the sole shareholder of a company. The present code does not allow a person to solely establish a limited or joint stock company or be the only shareholder. This was a huge obstacle for foreign investors who wanted to enter the Turkish market through establishing a new company or taking over all shares of a limited or joint stock company. According to the present code, there must be at least two shareholders to establish a limited company, or at least five shareholders to establish a joint stock company. The new code will allow the establishment of a limited or joint stock company with only one shareholder.
The other important change is that the new TCC provides more transparent companies. Many changes have been made to increase the transparency of company accounts. Companies are now obligated to have a website, and regularly update it with financial tables, auditing reports, annual reports and any other relevant information. This obligation will be in force from the 1st July 2013.
The auditing mechanism has also been changed and companies are obligated to assign both internal and external auditors. The financial reporting standards are fixed to the Turkish Accounting Standards, which in turn are implemented from the International Financial Reporting Standards.
Real Estate
The real estate market in Turkey has significantly increased over the past few years. According to the reciprocity rule in Turkish law, there are obstacles or even prohibitions to some countries’ citizens (89) acquiring property in Turkey. The Turkish government is working on a legislative proposal which will allow foreign citizens to acquire property even if their nationality does not fall within the reciprocity rule.
The real estate market in Turkey has significantly increased over the past few years. According to the reciprocity rule in Turkish law, there are obstacles or even prohibitions to some countries’ citizens (89) acquiring property in Turkey. The Turkish government is working on a legislative proposal which will allow foreign citizens to acquire property even if their nationality does not fall within the reciprocity rule.
Accordingly many countries, including Azerbaijan, Kazakhstan, Turkmenistan, Syria, Qatar, Iran, United Arab Emirates, Russia and Saudi Arabia will have better opportunities in the Turkish real estate market and authorities expect an increase in market share of Islamic countries in the Turkish real estate market.
Aytug Buyukatak and Burak Gencoglu are associates at Baspinar & Partners. They can be contacted at aytug.buyukatak@baspinar.av.tr and burak.gencoglu@baspinar.av.tr respectively.
UK: Real estate to dominate
Dr Natalie Schoon
It should not come as a surprise that 2011 was a much better year for Islamic finance in the UK than the years immediately preceding it. Although by the middle of 2010 every one started to be optimistic again, and it turned out to be a reasonable year, this was by no means a foregone conclusion.
Contrary to 2010, however, 2011 has shaped up to be a better year. Earlier in the year, Bank of London and The Middle East (BLME) reported a profit over the year 2010, and the results for the first half of 2011 clearly show that the bank is on track to achieve its target for 2011.
Gatehouse Bank has been steadily focusing on building a real estate portfolio with a strong focus on international student accommodation, which appears to attract investors and provide attractive returns. European Islamic Investment Bank is currently going through a strategic redirection which, hopefully, will set it up to be on track towards profitability in 2012. Islamic Bank of Britain is making good progress in the UK retail markets and is now in a position to build on its investments in infrastructure. Last but not least, European Finance House (EFH) has rebranded to be QIB (UK). The UK-based Islamic investment banks have developed a strong offering in Islamic asset management, with a variety of funds currently in operation or in the process of being set up. This is complimented by the Islamic financial services offering from the large UK based conventional banks, although the majority of their offerings appear to be built around interbank lending and Sukuk issuance. In early 2011, the National Employment Savings Trust (NEST) announced that it will aim to introduce a Shariah compliant fund as part of the range of solutions offered.
The Islamic finance industry in the UK is continuing discussions with Her Majesty’s Treasury, Her Majesty’s Revenue and Customs and the Financial Services Authority to ensure that Islamic financial services in the UK are treated in the same way as other financial services; thus enhancing the level playing field for UK-based institutions. One of the main concerns, in particular for the fully-fledged Shariah compliant institutions, is associated with the instruments that qualify for regulatory capital purposes. Under the current rules, the instruments banks can hold to satisfy the capital buffers are highly rated government bond issues. Due to the fact that all of these instruments are interest-bearing, Islamic banks will lose out on an opportunity to generate a return on capital since their options are to either donate any interest received to charity or to hold their capital in cash. A few Sukuk issues have been approved for this purpose, but these are subject to significant haircuts.
Following a relatively unsuccessful 2009 and the tentative recovery of 2010, the year 2011 has mainly been a period of recapitalization and strategic redirection. A new level of maturity has been reached which provides the Islamic financial industry in the UK with a firm footing for the future; and it is expected that UK institutions will start to reap the benefits from this as early as 2012. Although the overall economy is not expected to show any significant growth over the next 12 months, this does not imply that growth expectations for the Islamic financial industry are equally depressed. Conventional banks have significantly reduced their lending capacity, and are expected to do so in light of the fact that they are continuing to experience liquidity shortages due to the cautious behaviour of investors and depositors alike.
Banks, investors, borrowers and depositors will increasingly be looking for alternatives to satisfy their financial requirements. Due to a combination of the fact that Islamic banks still have liquidity available, along with wide acceptance and understanding of the principles of Islamic finance among the general public, and the increasing maturity of Islamic financial institutions, Islamic financial instruments will be able to provide a strong alternative for lenders and borrowers alike. The year 2012 is showing all the signs that the Islamic financial industry in the UK will be able to capitalize on this and experience significant growth.
Dr Natalie Schoon, CFA is the principal consultant at Formabb. She can be contacted at mail@formabb.co.uk .
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