A Report of the World Islamic Finance Conference 2011
The question whether or not Islamic finance will have a future in Europe is not an easy one to answer. There is definitely strong support in Europe for the interest-free Islamic version of a financial system from all official sides.
Nevertheless, the expansion of Islamic finance does not meet the high expectations of its promoters. In two European countries with the largest Muslim populations, France and Germany, so far no Islamic bank applied for a full banking licence nor have any major Islamic investments come to notice.
Thus the big question discussed on Islamic finance conferences is whether or not there is a potent market demand for Sharia-compliant finance and what might be the hindrances encountered by installing Islamic financial institutions.
As Carole d´Armaille of Paris Europlace and Leslie Lançon of the French Market Authority (FMA) pointed out at the recent Fleming Gulf organised World Islamic Finance Conference held in London, March 28/29, this year, French politics and regulation is very welcoming towards Islamic finance. Christine Lagarde, the Minister of Economy, Finance and Industry, asked the committee Paris Europlace and the Treasury to assess and develop France’s potential to attract Islamic money. Starting with ensuring a conducive environment for the emerging market, a standard framework for Sharia-compliant finance was sought and found in the AAOIFI regulations (Accounting and Auditing Organisation for Islamic Financial Institutions – AAOIFI – based in Bahrain), which are currently being translated from Arabic into an official French version.
Carole d´Armaille pointed out that French legislation posed no specific tax obstacles to the implementation of Islamic financial products, so only minor status adjustments needed to be made. Furthermore, the committee is working together with four Sharia-boards established in France to guarantee the compatibility of all taken measures with Sharia jurisprudence. Leslie Lançon straightened out that the FMA is in no way responsible for determining whether or not a fund is compliant with Sharia principles, but only to ensure the conformity of a product to French regulation. As such, the FMA delegate could not see any regulatory constraints for Islamic Finance. In order to help Paris become a Sharia-finance hub, it published a comprehensive handout of questions and answers on Sukuk (Islamic bonds).
Yet, albeit these joint efforts, no Islamic bank has so far applied for a full banking licence nor has any Sukuk originated from France. One of the intrinsic hindrances discussed were the diversity of Sharia-judgements, their deficient transparency and the apparent lack of experienced Sharia-scholars. France opted for the AAOIFI standards while Luxembourg is inclined towards the IFSBI standards (Islamic Financial Service Board based in Kuala Lumpur). The systems of the GCC and Malaysia are different in method and judgements. In Malaysia, the government assigned a Sharia-high court whose judgements are binding for all Malaysian Islamic financial institutions. This system avoids diverging standards for same products and therefore avoids discussions on whether or not specific products are Sharia-compliant or not. In the GCC, each financial institution chooses its own Sharia-board. As there is no higher authority, judgements can differ depending on the scholars sitting on the board. The Malaysian system is very efficient and easier to handle for companies, the GCC system allows for the diversity of opinions to coexist and the possibility of each company to choose the Sharia-scholars that their clients trust to be authorities in their field. Sheik Nizam Yaqubi, one of the top ten Sharia-scholars world-wide, stated at the World Islamic Finance Conference that 90% of all Sharia-judgements are coming to the same conclusion and that diversity of the rest is in no way a significant problem.
Nevertheless, in 2008, German officials were set back by the well known paper on Sukuk by Sheik Taqi Usmani, another of the top ten Sharia-scholars. It would have put the first ever issued Sukuk in Europe on shaky ground. This Islamic bond was issued by the regional government of Saxony-Anhalt situated in East Germany and strongly supported by the German regulatory authority, BaFin. Inspired by the possibility to attract new investors and hoping for an advertising effect in favour of Eastern Germany, the regional state was prepared to try out new methods of financing besides conventional state bonds. Edgar Kresin, then head of Treasury in Saxony-Anhalt, said at the EuroFinanceWeek in Frankfurt in November 2010 that the state even accepted higher costs in order to issue the Sukuk rather than conventional bonds. The Sukuk transactions were successfully completed in 2009, but the German practitioners of Sharia-compliant finance were forced to pay attention to the sensitive issues of Sharia-compatibility. On a symposium held in Frankfurt in June 2010, Dr. Thomas Prüm of Ashurst, even referred to the diversity of judgements as the “Sharia-trap”. In spite of the created confusion, the BaFin strongly supports the development of Sharia-compliant finance in Germany. Yet, just like in France, no Islamic Bank has applied for a full banking license in Germany nor have there been any follow-ups to the Saxony-Anhalt Sukuk.
Is the reluctance to start a new Islamic bank in two of the strongest European economies and among the largest Muslim populations in Europe due to a lack of demand?
Prof. Volker Nienhaus challenged the audience at the World Islamic Finance Conference in London asking whether Islamic retail banking had a sound perspective in Germany and in Europe at all or whether the future of Sharia-finance is much rather to be seen in projects and in corporate enterprise. He questioned the real demand of the mainly Turkish Muslim community in Germany. Various studies did suggest a high demand among Europe’s Muslim immigrant populations. In contrast, the first Islamic banks that started business in the UK suffered a failure in retail banking as did an Islamic car insurance company. Islamic banks in Turkey have got a market share of about 5% although they can refer to one of the longest practice in Islamic Finance and an overwhelming majority of its population is Muslim. Which, according to Prof. Nienhaus, could indicate that the expatriate community originating from Turkey is a rather secular one and interest in Sharia-compliant finance is rather low.
At one of the panel discussions at the World Islamic Finance Conference presenting several Islamic Finance practitioners from UK, France and the US, the general agreement therefore was that the industry is rather new and a shaky start had to be expected. Though the actual numbers are still rather disappointing, a substantial growth of Islamic Finance has only just started to show. Real demand is not even tapped due to a lack of information among the Muslim public.
In conclusion, the experts asked for patience and the continuation of the optimistic approach.