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Study presentation and summary The principles of Islamic finance
Islamic financial markets
Islamic insurance (takaful)
Islamic banking activity in Europe
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elcome to the first annual Efma-Solving Efeso report on Islamic finance in Europe. Efma and Solving Efeso have investigated to measure the attention paid by the European banks to Islamic banking and more especially to Islamic retail banking. This research has three main goals. The first one is to remind Islamic finance specificity. The second one is to present the different components of Islamic finance (finance, insurance and banking). The third one is to analyse the market of Islamic retail banking in Europe. What is remarkable in Europe is both the huge potential and the resistance of the countries to create the legal framework to promote the development of Islamic banking if you except the UK, and now France. Less than twenty companies have declared their visions but most of them are awaiting what is going to happen, observing each order. We hope that this study will provide a good focus on Islamic finance and banking. At last, we would like to thank survey participants for their contribution and especially the banks that took time to answer the questionnaire.
Thomas de Bellaigue Head of financial services
Patrick Desmarès Secretary general
Solving Efeso. Established 1980. A top management consultancy firm. 350 experienced consultants, twenty offices worldwide, thirty nationalities. Our mission is to support client organisations in releasing the opportunities “locked” in their value chains with substantial, tangible and lasting gains. Solving Efeso has a long tradition in supporting the Financial Services Sector. Our team combines learnings from numerous projects: from Trading plateforms to Asset Management, from Retail banking to Back offices, from Custodians to Islamic finance Solving Efeso Tel. : +33 1 53 30 35 00 Fax : +33 1 53 30 35 69 www.solvingefeso.com
The European financial management and marketing association (Efma) is the leading association of banks, insurance companies and financial institutions throughout Europe. On a non-for-profit basis, Efma promotes innovation and best practices in retail finance by fostering debate and discussion among peers supported by a robust array of information services and numerous opportunities for direct encounters. Efma was formed in 1971 and gathers today more than 2,200 different brands in financial services worldwide, including 80% of the largest European banking groups. Efma 16, rue d’Aguesseau 75008 Paris France Tel. : +33 1 47 42 52 72 Fax: +33 1 47 42 56 76 www.efma.com
Quite apart from its religious roots. fuelling growing demand for this kind of product. however.
Growth of Islamic finance: the reasons for success
It is estimated that Islamic banks have some $500 billion under management and that the number of Islamic investment funds (private equity.
(1) Islamic Development Bank. Far from being confined in its development to particular geographic areas or communities. Islamic finance has been distinguished since its inception by its attachment to the real economy. is the desire on the part of investors to diversify their holdings by investing in their local economy. A questionnaire was circulated to banks to gauge their level of interest in this issue. Islamic finance has enjoyed massive growth since the beginning of the decade. equities) is around 700 (1) . This summary brings together the results of the questionnaire and of research work. Efma and Solving Efeso joined forces to extend this analysis and assess the positioning of European banks with respect to the issues of Islamic finance. buoyed by rising oil prices and the massive repatriation of funds to the Islamic world by the Gulf states in the wake of 11 September. a model that is gaining ground. real estate. 33rd Annual Report 1428H (2007-2008)
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Study presentation and summary
Origin and objectives of Islamic finance
The origins of modern Islamic finance date back to the 1970s. and unequal sharing of profits and losses.
Study objective and approach
Consultants Solving Efeso has carried out research and assignments on the theme of Islamic finance. the emphasis is placed on profit from entrepreneurial risk while prohibiting speculation. Its aim is to develop financial products and banking services compatible with Shariah law. the remuneration of money in the form of interest. In addition. Two events have accounted for most of the spectacular growth in Islamic assets: One is the religious revival among the peoples of the Middle East and certain South East Asian countries. Islamic finance is very much part of the globalisation of financial exchanges. More important.
cooperative model and its close links to the real economy merit careful attention in this period of financial crisis. different interpretations of these principles as they relate to finance. spoke of making the United Kingdom the European gateway to Islamic finance.
Aspects of the Islamic model: finance. In 2006 Gordon Brown. currently spearheaded by France and especially the United Kingdom. Analysis shows. but their products are basically destined for offshore customers. rather. France is aware of having lost ground to make up. While Islamic finance calls into question the universality of the conventional economic model. where initiatives are aimed at making UK financial markets more attractive to Middle Eastern capital. They also open up another prospect: the development of an Islamic banking offering aimed at the 12 to 15 million Muslims living in Europe. although the mechanisms and causes have not been clearly understood. this link between religion and the economy raises its own questions in secular countries.
. it also reminds us that the economic sphere cannot be divorced from a cultural model.An alternative system?
Islamic finance is built on a profit-sharing. Insurance A market still in its infancy but enjoying strong growth thanks to Islamic finance. In consequence. however. The study of this model is as much a subject for the social and human sciences as it is for applied mathematics. which provides the instruments it needs to develop. insurance and banking
Europe and Islamic finance Western financial institutions have kept pace with the development of Islamic finance and some are even historic players. An Islamic banking offering in Europe: is it feasible? Islamic banking is a radical innovation in Europe. and the UK was the first European country to pass laws to that effect. reflecting a link between the religious and the economic spheres. that the model has not been able to withstand the current storms. and has officially announced its intentions of lifting the excess fiscal burdens on Islamic finance. then Chancellor of the Exchequer. Its development has gone hand in hand with a complexity of offerings that has raised questions and debate as to how far certain new products comply with the principles of Islam or.
The very low response rate by banks to the Solving/Efma questionnaire highlights the fact that very few mainstream banks are moving into this area. and HSBC via its Islamic window. Currently the UK is the only country where active Islamic retail banks are to be found.Islamic insurance.
. . the first Islamic financial institution to be approved in Europe in 2004. HSBC Amanah.the underlying principles of Islamic finance. . . but the accompanying research shows that the banks are paying considerable attention to the developments under way and keeping a watching brief on their competitors. particularly in the light of the current financial crisis.the radical innovation represented by Islamic retail banking in Europe.the factors leading to the development of an alternative financial model or forming part of an "ethical" segment of a global model.I s l a m i c
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The initiatives taken by Islamic banks or financial institutions can only succeed if they are accompanied by a suitable legislative framework (as the failures encountered in the Netherlands and Denmark illustrate only too clearly).
The study addresses the following issues: . with five establishments including the Islamic Bank of Britain.
one of the pillars of Islam. the predominantly Ibadite Sultanate of Oman bans Islamic finance. but risk as such is not forbidden. Prohibition of interest (riba): the payment or receipt of interest on a financial transaction is forbidden. In addition. Bahrain) As Anouar Hassoune. a specialist in Islamic finance at Moody’s Investor Service (Paris) points out: "It is investors and/or consumers who ultimately approve the (sufficiently) Islamic nature " of a product or service. almsgiving (zakat). Only Malaysia has its own central Shariah Board. Paris 2008
. the Islamic Financial Services Board (IFSB. conventional financial sector) is forbidden (haram). in La Finance islamique à la française. (2)»
(2) Anouar Hassoune. arms or in any company in breach of the fundamental principles of Shariah (highly leveraged companies. Bahrain). Bahrain). Major efforts at standardisation are being made by numerous international organisations based in the Middle East and Malaysia: the Accounting and Auditing Organization of Islamic Finance Institutions (AAOIFI. making a profit on the exchange of money is unethical. This lack of standardisation and the possibility of a fatwa overturning an existing certification expose institutions to reputational risk. the General Council for Islamic Banking and Finance Institutions (GCIBFI. otherwise. Tangible assets as backing: financial transactions must be based on a real economic activity. and a fatwa issued by the influential Al-Azhar University declares interest permissible under certain conditions. for example. implies that part of the profits will be redistributed in the form of charitable donations. Sharing of profit and loss: the parties to a financial transaction must share the rewards and the risks. directed by Jean-Paul Laramée.
Compliance with Shariah
Shariah compliance of operations and transactions must be confirmed by a fatwa issued by a board of Islamic scholars meeting as a Shariah Board. Many operations transacted in Malaysia are not considered Shariah-compliant in the Gulf states. Bahrain). Secure Finance. Prohibition of uncertainty (gharar) and speculation (maysir): financial contracts must not be subject to random events. « La finance islamique globale connaît une croissance vertigineuse mais fragmentée ». Conversely. it is up to institutions to set up their own Shariah Board whose legitimacy will be determined by the reputation of its members.The principles of Islamic finance
The five pillars of Islamic finance
Islamic financial products must comply with the fundamental principles of Shariah law based on the Koran and the precepts of Sunna. The existence of different Islamic legal schools means that opinions may vary between Shariah pronouncements on a particular product category. tobacco. Investment in ethical activities (halal): investment in sectors such as gambling. alcohol. Malaysia) and the Islamic Liquidity Management Centre (ILMC. the Islamic International Rating Agency (IIRA.
Financial contracts used in Islamic finance
There are 14 types of contract that can be used to structure Islamic financial instruments.I s l a m i c
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Islamic banking and Islamic finance
It is not necessary to be an Islamic bank to engage in Islamic finance and offer Shariah-compliant financial products. however. Istisna is a forward purchase on instalments of an asset to be delivered on completion. Islamic bonds (sukuks) or Islamic insurance (takaful). to have the Shariah compliance of their Islamic products certified by a Shariah Board.
These contracts are used in financial operations and can be used to structure loans. must have an internal Shariah Board which certifies that all the bank's transactions are Shariah-compliant. investments. Musharaka is a form of joint venture where the bank and its customer both contribute capital to finance a project and share the profits and losses. the other party the labour. Islamic banks. Salam is a cash payment in advance for goods to be delivered later. Ijara is similar to a leasing contract. the most important being: Variable income profit-sharing instruments
Mudaraba is similar to a trust: one party provides the capital. It is perfectly possible for many conventional institutions. relying on competencies either internal (Islamic Business Unit) or external (specialist firms).
Fixed income instruments
Murabaha is a cost-plus contract in which a party purchases an asset on behalf of a client and sells the asset to the client on deferred terms for a profit.
2008. Ernst & Young calculates that between 70% and 90% of Muslim investors prefer Islamic investments. since the standard insurance model is incompatible with Islam. The market for structured products and hedge funds is beginning to develop. The recent subprime crisis has also shed new light on Islamic banking and finance.
(3) ParisEuroplace. This new order has led several European countries to come out officially in favour of Islamic finance: the UK passed laws to that effect in 2003. With banks needing to respond to increased demand for investment products compatible with the religious beliefs of investors and savers in the Gulf. Assets under management on Shariah-compliant principles are estimated at $700 billion and are growing constantly. It raises questions as to what prospects it may offer as an alternative or complement to conventional finance. a new form of rivalry emerged.Islamic financial markets
Among the European banks there are many pioneers in Islamic finance that have been developing Shariah-compliant investment and savings products since the 1980s. real estate funds. The emerging model of Islamic finance is still under construction. France. Enjeux et opportunités du développement de la finance islamique pour la place de Paris. Elyés Jouini & Olivier Pastré. The cooperative model of takaful is being encouraged as a way of promoting the development of insurance in Muslim countries. estimating the potential volume of assets that could be attracted at €100 billion(3). It was not until the aftermath of 11 September 2001 and the massive repatriation of liquidities from the USA to the Gulf states that Islamic finance attracted special attention. holding $500 billion of these assets on their balance sheets. Banks play an essential role. began amending its laws at the end of 2008.
. which offers the clear advantages of a pragmatic model based on tangible assets and risk-sharing. Banks in Luxembourg and Switzerland are looking for ways to meet this demand. The stakes had changed. The main investment vehicles are equity funds. private equity and Islamic bonds (sukuk). in turn. prompting both local and global players to develop Islamic financial products.
2 % 11.0 % 27.2 to 1. n°21 septembre-octobre 2006
Source : The Banker
.7 billion Muslims worldwide Top 15 countries by sharia-compliant assets
Rank 2007 1 2 3 4 6 5 7 8 9 10 11 12 14 15 Country Iran Saudi Arabia Malaysia Kuwait Brunei UAE Bahrain Pakistan Lebanon UK Turkey Qatar Bangladesh Egypt Sharia-compliant assets ($m) 154 616 69 379 65 083 37 684 31 535 35 354 26 252 15 918 14 316 10 420 10 066 9 460 4 332 3 853
Source : Questions internationales. 26/06/2007) .0 % 26. « islam.0 % 12. Pakistan. Soudan.0 % 12. islams ».I s l a m i c
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Islamic finance and Islamic banks worldwide
Europe < 10 billion $ World Kuweit South Arabia United Arab Emirates Qatar State of Bahrain Malaysia < 1.
1. Turquie 380 billion $ Southeast Asia 110 billion $
Source : S&P séminaire AGEFI.5 % North America < 5 billion $ & Iran.0 % 6.
Asia. backed by tangible assets). telecommunications. etc. there are no real specific differences between Islamic and conventional finance as regards equity funds. apart from the specific allocation of assets. the Dow Jones Group designed a range of indicators covering Shariah-compliant companies: a global Islamic index geared to geographical concerns (Europe. by nature. Only companies with debts totalling less than a third of their market capitalisation are considered. As a result. insurance.
Dow Jones Index S&P Shariah Indices FTSE Global Islamic index Global GCC Islamic index Dar Al-Maal Al-Islami (DMI) 150 index In 1999. Excluded on principle from the indexes are all companies engaging in: the production and sale of alcoholic products. which may not be invested in companies whose activities are prohibited under Islam or which are leveraged beyond a certain threshold. financial services (banking. brokers). games of chance and pornography. USA. sectors (technology. sharing of profits and losses.
. defence. Once they have successfully passed through this initial filter. pork-based products.
The Shariah-complaint nature of equities makes them instruments of choice for Islamic finance
Equities are. Islamic funds apply ethical selection criteria to their investments.) or management style (small and large caps). In common with socially responsible investment (SRI).Islamic equity funds
The total number of Islamic equity funds in existence was in excess of 300 in 2007 with assets of some $20 billion under management (source: Islamic fund research firm Failaka Advisors. These indexes act as benchmarks for the funds launched by banks and list the equities of companies engaging in Shariah-compliant activities. etc. highly compatible with Shariah (attracting no interest.). 31/12/2007). companies are subject to another principle of Islamic law: the ban on credit.
Performance (5 years)
Comparative performance of the S&P 500 Shariah index and the conventional index
160 140 120 100 80 60 40 20 0
26/12/03 16/04/04 6/08/04 26/11/04 18/03/05 8/07/05 28/10/05 17/02/06 9/06/06 29/09/06 19/01/07 11/05/07 31/08/07 21/12/07 11/04/08 1/08/08 21/11/08 S&P 500 S&P 500 Shariah
Observation period: from: 26/12/03 to 26/12/08
S&P Shariah S&P Price
Performance over the observation period
+ 3% .an underweighting of financial stocks in the Shariah index which rules out investment in companies whose activities are based on riba (interest).an overweighting of more industrial stocks which have suffered less from the downturn.29%
14. The following points are to be highlighted.49%
S&P 500-Shariah (Dec-08)
Materials C Telecommunications services 2.I s l a m i c
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The performances of conventional funds and Islamic funds are correlated
The performances of the S&P 500 Shariah index and its traditional counterpart the S&P 500 are correlated. The Shariah index has held up better against the subprime crisis (2007).88%
I Information technology
3.22% Utilities Consumer discretionary
2. This outperformance is due to asset allocation: .34%
Health care H Financials F
S&P 500 (Dec-08)
Telecommunications services M Materials 3.08%
Pictet et Companie Al Dar World Equity fund (equity fund). SGAM AI Baraka index is an index of 30 stocks selected from the 2. HSBC Amanah HSBC Amanah Pan-European Equity Fund (equity fund).Global Equity (diversified equity fund).Examples of funds SGAM AI SGAM AI Baraka is a financial product offered by Société Générale. Launch in 2007 of the first fund compliant with both Shariah and French law matching the Easy ETF DJ Islamic Market Titans 100 index. UBS UBS Islamic . Launch in 2006 of BNP Paribas Equity Optimizer (based in Luxembourg). The pick of 30 stocks is aimed at outperforming the benchmark index. through its subsidiary BFCO (Réunion).400 Dow Jones Islamic Market World Index stocks. Crédit Suisse CS Sicav One Equity Al-Buraq I (equity fund). Deutsche Bank Deutsche Islamic Equity Builder Certificates (equity fund).
Number of Islamic funds
800 700 600 500 400 300 200 100 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 102 105 126 183 233 319 414 539 706
Source : Fakala Zawya / Rooz & Company
. BNP Paribas Launch in 1996 of one of the first Islamic funds (Caravan Fund).
is the leading issuer of sukuk traded over the counter. but other financial centres are following suit.I s l a m i c
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Islamic bonds (sukuk)
Exponential growth cut short by the financial crisis
From virtually zero in 2000. which has an extensive legal framework for Islamic finance. Dubai and London are the two main quotation centres. Frankfurt. given that a sukuk is not based on interest rates and must be backed by an underlying. France is encouraging Euronext down this road. even though Islamic bonds had absolutely nothing to do with the subprime crisis.
Local and global sukuk volume issues
Issuing (billion US$)
40 10 20
Amount (billion US$)
0 2001 2002 2003 2004 2005 2006 2007 2008
Local sukuk issues
"Global sukuk" issues (US$)
Source : Bloomberg
. issuance of Islamic bonds or sukuk grew sharply to reach a level of some $100 billion by end 2007.
A global but relatively illiquid market
Malaysia. especially in Europe: Luxembourg. The listed sukuk market is expanding and now accounts for 25% of issues. however. with most securities held to maturity. however. It seemed as if nothing could stand in the way of this juggernaut of growth. The secondary sukuk market is very illiquid. The sukuk market felt the full force of the 2008 bond market crisis. partly because of much higher demand from key players in the Muslim countries of the Middle East and South East Asia and partly due to the enthusiasm of Western investors. etc.
Sa ou di
.Value of sukuk listed per stock market (amounts in M$)
18 000 16 000 14 000 12 000 10 000 8 000 6 000 4 000 2 000 0
do n ua n g ra in Ar ab ia D IF X ur em bo Lo n La b Ba h g H on ud i
6 793 4 950 3 961 11 347 16 470
Number of sukuk listed per stock market
20 18 16 14
Ar ab ia
bo ur g
La bu an
Lu xe m
H1 2007 sukuk top bookrunners (amounts in M$)
Source: DIFX. February 2008 data. December 2008. Enjeux et opportunités du développement de la finance islamique pour la place de Paris.
Standard Chartered Bank Citigroup Credit Suisse National Bank of Abu Dhabi HSBC Amanah AmInvestment Bank Bhd Goldman Sachs International BNP Paribas Deutsche Bank Barclays Capital CIMB Islamic
425 426 433 433 540 611 625 650 908 1 758 3 329
Source: Islamic Finance Information Service (ifis. including domestic and international issues (with duplicates) in Paris Europlace.com).securities. February 2008 data. including domestic and international issues (with duplicates) in Paris Europlace. December 2008. Enjeux et opportunités du développement de la finance islamique pour la place de Paris.
Of the many contracts that exist in Islamic finance. Appearances aside. there are many points of convergence with conventional financial instruments. which are by nature Shariah-compliant as long as not invested in prohibited activities. sukuk issues may be structured into different asset classes: "equity". Mudaraba and Murabaha are mainly used for the issuance of sukuk. The sukuk can then be rated according to the quality of the counterparty (for assetbased sukuk) or according to the characteristics of the underlying assets in the case of asset-backed sukuk.
As is the case with conventional securitisation. sukuk rely on specific financial contracts in order to comply with the five principles of Islamic finance mentioned earlier (prohibition of interest. prohibition of uncertainty. sharing of profit and loss. Sukuk whose remuneration and redemption are based essentially on underlying assets and which are therefore. etc.
Sukuk and securitisation
It should be stressed that the mechanisms of securitisation are essential and permissible for the structuring of sukuk. in other mechanisms— as in the formal obligation of being based on tangible assets. In particular. similar to asset-backed securities. "senior". As with any Islamic financial instrument.
. to a degree. "mezzanine". backing by tangible assets. Ijara.I s l a m i c
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Unlike equity funds. permissible activities). Musharaka. the backing of a tangible asset entitles the holder to receive part of the profit generated by an underlying rather than interest. a Shariah Board must certify the sukuk as Shariah-compliant. Where the sukuk clearly differs is not so much in the absence of an interest rate —a feature echoed. by construction. Two main categories of sukuk are currently issued:
Sukuk whose remuneration and redemption are indeed based on underlying assets but which are underwritten by a counterparty and which are formally based on the underlying (asset-based).
takes in the funds and uses them to buy the underlying assets. the German Land of Saxony-Anhalt became the first ever non-Muslim issuer of a sukuk. an SPV issues the sukuk. These assets are then leased to a third company which makes periodic lease payments. the Land was both the originator of the sukuk and the lessee. In the case of the Saxony-Anhalt issue.Example of an Al Ijara sukuk Issuance of a sukuk by the German Land of Saxony-Anhalt (2004-2009) When it raised €100 million in 2004 through the issue of an Al Ijara sukuk.
Head Lessor The State through Ministry of Finance & LIMSA Originator = borrower
Advance Head Lease Rental 100-year Head-Lease of Assets 5-year Sub-Lease of Assets Sub-Lease Rentals
Special Purpose Vehicle (SPV) Stichting Sachsen-Anhalt Trust Dutch Foundation
Sukuk Funding $ 100 million Six Monthly Coupon + Principal
Sub-Lessee The State through Ministry of Finance & LIMSA
Sukuk Holders Investors
. In the case of an Al-Ijara sukuk.
which are not permitted to hold securitisation instruments.
Dow Jones Citigroup Sukuk Index
115. most often securitisation instruments similar to asset-backed securities and despite the fact that a systemic default by borrowers could therefore affect the Islamic model.00 90.00 85. may be called into question by other scholars.00 95. This recent affair. such as CDOs containing ABSs and other CDOs. With regard to the mechanisms by which the financial crisis spreads. by virtue of their structure.00 105.00 110. even if certified by a Shariah Board. In September 2008. This same principle has served as protection for Islamic funds.8 billion in 2008 compared to 37 billion in 2007). unlike the conventional banks which wrote back into their balance sheets the credit risks transferred to the markets by financing the hedge fund industry.com/sukuk/
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Sukuk and the financial crisis
Certain factors inherent in Islamic finance absolve it from any responsibility for the spread of the financial crisis. which is opposed to any form of capital or income guarantee.00
Source : http://zawya. The prohibition of interest does not allow Islamic banks to rely on leverage. sukuk were still not spared by the crisis in the bond market. He referred in particular to the principle of sharing profits and losses. is a timely reminder that nascent Islamic finance is a model still under construction. sukuk are heavily exposed to reputational risk due to the lack of standardisation affecting Islamic financial products.00 100. however. there are three main reasons for coming to such a conclusion: The principle whereby a sukuk must be backed by a tangible asset does not permit securitisation chains. Their compliance with Shariah. this announcement could have played a part in the collapse of the sukuk market at the end of 2008. the same cause would not produce the same effects. the Chairman of the Shariah Board of the AAOIFI estimated that nearly 85% of sukuk issued failed to comply with all the principles of Islamic finance. Although sukuk are.
High exposure to reputational risk
Despite great efforts at standardisation. which serves to highlight the uncertainties associated with financial innovation. With a reduction of 62% in the volumes issued in 2008 (13. As the Secretary General of the AAOIFI regretfully noted subsequently.
the central banks. The current situation. fuelled by the first oil boom. the interbank market and the money market do not have all the tools needed in order to function properly. Its earliest theoreticians promoted the profit-sharing and cooperative principles best suited to supporting the development of local economies. it is also one of its weaknesses in that it limits the depth necessary to a financial system. Singapore). in December 2008. is radically different from that of the 1970s. financial hubs are being created
. At its most recent summit. On a par with the development of airline companies in the Gulf states and the creation of hubs to capture air traffic and tourism. Islamic finance is still strongly correlated with oil prices and conventional finance. one that is independent of conventional finance? The performances of Islamic investment funds have shown a very strong correlation with conventional finance (see above). To a certain extent. the impact of the bond market crisis on sukuk. while the lower level of sophistication of Islamic finance has proved to be one of its virtues. Bahrain. instruments specific to Islamic finance and unrelated to the subprime crisis.Outlook
A new financial model?
Certain characteristics of Islamic finance offer safeguards. standardisation institutions. and there is every likelihood that its growth will slow and fall short of earlier forecasts made for 2009. with its emerging model still under construction and developing successfully as a complement to conventional finance under the impetus of the Gulf states and certain countries of South East Asia (Malaysia. but how it fits in with the conventional model. rating agency. powerhouse of Islamic finance
Modern Islamic finance came into existence in the 1970s. Oman and Qatar. the United Arab Emirates. The current decade is seeing resurgence in Islamic finance. all the member states with the exception of Oman reiterated their aim of launching a common currency in 2010. banks. however. firmly committed to globalisation: the Gulf Cooperation Council. since Islamic finance is now part of the process of the Gulf states' preparation for the post-oil era. real estate. Western financial institutions remained the vessels of choice for investing oil revenues. But can Islamic finance really offer itself as an alternative model. In view of the disappointing early results. tourism and opening up economies to overseas investors. The question that arises is therefore not so much the independence of the Islamic model. etc. encouraged by a new rise in oil revenues. The growth of Islamic finance and its industry (financial markets. a common market comprising Saudi Arabia. At the same time. efforts towards standardisation must also be pursued to improve liquidity.) must be put to work on developing infrastructure.
The Gulf states. Furthermore. This shift is being achieved through the creation of a new economic territory. Kuwait. expert firms. At present. however. This is by no means to call into question the growth prospects for Islamic finance. has also shown Islamic finance to be part of the global financial system.
66 % 33.33 %
Doha Stock Exchange
London Stock Exchange
. Far-reaching changes in the international banking and finance landscape are ongoing. must necessarily flow. Gulf stock markets are vying to become the international market of record. can thus count on a powerhouse likely to ensure sustained growth for the future. Western and Middle Eastern actors have a common interest in working together: Western interests are looking to the Gulf to drive future growth. The specific characteristics of Islamic finance also position regional institutions as key players. Islamic finance. offering them a more level playing field on which to compete with Western banks and institutions. The sovereign funds of the Middle East that have underpinned the development of both Islamic and conventional financial institutions in the region are now acquiring substantial holdings in conventional Western institutions. not only for regional business but also for global trade in their time zone. as part of a wider move towards greater openness by the Gulf states as they seek to build a new economic space founded in globalisation. Reciprocal acquisitions of equity stakes between Western and Gulf stock markets in 2007 and 2008 illustrate how closely the financial systems are interlocked.6 % 25 % 75 % 15.
Equity stakes acquired 2007-2008
Investment Corp Dubai (sovereign fund)
Qatar Investment Authority (Sovereign fund)
66. particularly Islamic finance.I s l a m i c
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in Dubai. Doha and Bahrain through which finance. with Western banks' massive financing requirements undermined by the financial crisis. while Gulf interests have the liquidity necessary to finance external growth.99 %
Nasdaq merger OMX
conventional bank HSBC Middle East Finance Company. conventional bank with Islamic window Dubai Islamic Bank.Investissements du fonds souverain Investment Corp Dubai dans le secteur financier Emirates NBD. Islamic financial institution National Bank of Fujairah. Islamic financial institution Borse Dubai Commercial Bank of Dubai. conventional bank Union National Bank. conventional bank with Islamic window Shuaa Capital asset manager
Gulf cooperation council
Area (km2) South Arabia Kuweit Qatar State of Bahrain United Arab Emirates Oman
PIB / inhabitant
Private sect deposit (US$ Mds) 125 53 13 10 46 10
2 149 690 17 820 11 437 665 83 600 309 500
27 000 000 2 500 000 885 000 700 000 3 750 000 3 200 000
13 723 31 591 62 293 20 860 37 531 14 031
Gulf Cooperation Council (GCC) Countries G
. Islamic financial institution Noor Islamic Bank. conventional bank National Bonds.
With $2. as a result of the obligation imposed on Islamic insurers to give retakaful priority call on their premiums. the takaful market is still in its infancy but is growing at an annual rate of 20%.6 billion in annual premiums. the first company dedicated exclusively to reinsurance. the equivalent of conventional reinsurance.
Takaful companies in the world
Number of Takaful companies Middle East Africa Asia Pacific The rest Total Takaful co's & windows 41 19 40 24 124 In formation 16 2 1 1 20 Total 57 21 41 25 144
Source : Magazine Banque Stratégie n°257 .I s l a m i c
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Islamic insurance (takaful)
A market in its infancy
The first takaful insurance companies were created in Sudan in 1979 and in Malaysia in the 1980s. Retakaful. Takaful Re Limited.mars 2008
Takaful geographic breakdown
Middle East Southeast Asia Africa Others
Source : : ICMIF in Banque Stratégie. thanks particularly to the growth in Islamic finance which is providing the instruments necessary for its development. n° 257. was founded in 2005. mars 2008
. has only developed to any significant extent in the last few years.
. cooperative insurance and conventional insurance
Contract Donation and/or
Cooperative contract cooperative contract Payment out of funds faken in
Contract of exchange
Payment out of funds taken in. Islam is not opposed to conventional insurance per se. décembre 2008. however certain rules must be followed as regards primarily riba (interest) and haram (unethical investments). Enjeux et opportunités du développement de la finance islamique pour la place de Paris.A cooperative model
In a takaful contract. if insufficient. if insufficient out of equity
Insured party responsibilities Equity
Payment of contributions
Payment of premiums
Capital paid in by participants No restrictions other than prudential
Capital paid in by shareholders No restrictions other than prudential
Source : Paris Europlace. the participants pay in a sum of money which will be used on a cooperative basis to indemnify members against loss or injury. funds may be borrowed without riba Payment of contributions
Payment out of funds taken in.
Comparison of takaful.
This is a model encountered primarily in Malaysia.I s l a m i c
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Mudharaba and Wakala
In the Mudaraba Model. based in Malaysia. The takaful operator nevertheless receives a fixed commission known as wakala which covers the costs of managing the fund and which is generally expressed as a percentage of the premiums paid by the insured. The Islamic Financial Services Board (IFSB). Recent years have seen major global groups. all technical profits revert to the insured. particularly Western groups (Axa. profiting from their expertise in conventional insurance. Losses are assumed by the insured as capital providers. is working towards greater standardisation.
Growth subject to the development of Islamic finance
The first takaful insurers were basically small local establishments. which is found primarily in the Middle East. The takaful insurer acts as the agent of the insured in managing the takaful fund. etc.). The company receives only the management fees in payment. Score.
The difference between these two models of Islamic insurance lies in the way any profits are distributed: In the wakala model. all technical surpluses are shared between the insured and the company. The growth of takaful insurance is still being held back by the lack of opportunities for investment in Islamic products and by a shortage of staff skilled in both Islamic rules and insurance risk management. The contract stipulates how the profits will be shared between the insurer and insured (percentage of profits after deduction of technical and management costs and overheads). The risks are carried by the fund and any operating surplus belongs to the participants.
In the Wakala model. subject to the entrepreneur having performed his part. Takaful products are sold by Islamic institutions or by Islamic windows within a conventional institution. In the mudaraba model. the insurer acts as the entrepreneur and the insured as the providers of capital.
. moving into the market by way of takaful windows. the relationship is that of principal and agent.
penalise Islamic lending in most European countries as a result of tax friction. The banks use mechanisms involving provisions and reserves to smooth yields in order to reduce this risk. ijara or istisna make it possible for financial institutions to offer a wide range of personal loans. salam. Loans Fixed-income contracts such as murabaha. Visa and cheque cards are all available in Islamic versions with flat-rate fees. This characteristic exposes Islamic banks to liquidity risks linked to the possibility of massive withdrawals.
. Other examples of tax friction. particularly regarding purchase/sale transactions. the solution adopted by the Islamic banks to circumvent this difficulty was to offer a full refund of the deposit. leaving the depositor free to refuse the refund on the grounds of his religious convictions. Payment means Cash cards. Home loans in particular may be subject to double stamp duty as a result of the two-stage transfer of ownership (once when the bank purchases the property and a second time when it sells the property to the customer on maturity). Profit-sharing contracts such as musharaka or mudaraba are more often used in the structuring of capital lending and PSIAs. which have been lifted in the UK and partially lifted in France. After much discussion.Islamic banking activity in Europe
Islamic banking offering
Deposits Islamic banking offers two main types of deposit account on which a range of current and time deposit accounts are based: Non interest-bearing accounts: qardh hasan These accounts are akin to conventional non interest-bearing sight accounts. The second type of account poses certain difficulties for the FSA as regards compliance with the legal definition of a deposit account in the United Kingdom and also as regards EU law which requires deposits to be guaranteed. Regulatory restrictions. may be negative. in the event of losses by the bank. have been removed in both the UK and France. credit cards. Profit-Sharing Investment Account (PSIA) The distinctive element of these time deposit accounts is that any returns depend on the bank's performance and.
but also in countries with Muslim minorities (Singapore. They have their own internal Shariah Board. There are close on 300 Islamic institutions and subsidiaries in 75 countries: in the Middle East and South East Asia.I s l a m i c
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Types of establishment
Islamic Financial Institutions (IFI)
Islamic financial institutions comply with Shariah in their activities and products as well as in their structure and operating mode. two distinct licenses are granted to conventional financial institutions and Islamic financial institutions. In many Gulf states. Islamic financial institutions may be Islamic from the outset or Islamised. United Kingdom)
Positioning of the main Islamic banks in the Gulf
ß NCB ß SAMBA ß National Bank of Kuwait ß National Bank of Abu Dhabi ß Emirates Bank International ß Al Rajhi Bank
$ 30 Mds
ß Abu Dhabi Commercial Bank ß Qatar National Bank ß Gulf International Bank
ß Kuwait Finance House ß Dubai Islamic Bank
$ 15 Mds
ß Abu Dhabi Islamic Bank ß Qatar islamic Bank ßAl Shamil Bank ß Bahrain Islamic Bank ß Sharjah Islamic Bank (ex NBS) ß Emirates Islamic Bank (ex MEB) ß Internation Bank of Kuwait ß Dubai Bank ß Arcapita Bank ß Gulf Finance House ß Unicorn Investment Bank ß Gulf Investment House ß Bank Albilad ß Masraf Al Rayan Bank ß Boubyan Bank
ß Commercial Bank of Kuwait ß Commercial Bank of Qatar
Source : S&P 2007 / Zawya / R & D Solving
Universal Regional Banks
Historical Islamical Establishments
Conventional Establishments recently islamized
This should be seen in context. While financial products. however. nothing to prevent conventional banks from creating and distributing certain Islamic products such as investment funds or loans. compliance with Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) standards. There is. shariah Board. In the Middle East. Unlike the other Gulf states. for example. the Shariah compliance of an Islamic retail banking offering will undoubtedly be more dependent on the opinion of local religious leaders. Conventional banks Conventional banks without an Islamic window are unable to offer a full certified Shariah-compliant universal banking offering. Muslim communities are drawn from very different traditions. books. Saudi Arabia makes no distinction between conventional and Islamic banks. The Islamic window offers a conventional institution the opportunity to present a full Shariah-compliant universal banking offering and to obtain an Islamic banking license if necessary. The customer's degree of sensitivity differs considerably depending on the regional influence of the different schools interpreting the law of Islam. In Europe in particular. for example. since an Islamic window is only really necessary in countries which grant two distinct licenses for banking activities. investment funds and sukuk distributed on a global scale will be required above all to comply with the international standards laid down by bodies such as the AAOIFI.
.Islamic windows Islamic windows are Islamised subsidiaries or divisions of conventional financial institutions and are required to comply with the following criteria: segregation of assets (Chinese walls between accounts. offer a Shariah-compliant fund even though they do not have an Islamic window. Muslims from North Africa or South East Asia will undoubtedly have their own specific evaluation criteria. dedicated and exemplary senior managers. some local players have opted for total Islamisation of their structure in order to underscore their legitimacy. information systems). What positioning to adopt? In the end. investor protection against fraud and negligence. it is the customer who decides on whether the product or institution is sufficiently compatible with his religious convictions. Both Société Générale and BNP Paribas. even if some institutions have chosen to be fully Islamic.
AM. Bahrain). brokerage. Private banking and asset management from Switzerland and bases in Dubai and Bahrain Full integration of specialist subsidiary NORIBA and creation of an Islamic window within the group.
SGAM AI: Creation of Islamic financial products (funds)BFCOI: Retail distribution of Shariah-compliant products (investment funds) in Réunion.I s l a m i c
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Examples of European banks' positioning HSBC Amanah Lloyds TSB Société Générale Standard Chartered
Universal Islamic banking and finance offering via its Islamic subsidiary HSBC Amanah. Islamic Business Unit in Bahrain responsible for developing Islamic financial products. insurance. Standard Chartered Saadiq. etc). mainly in the United Kingdom. Malaysia and the United Kingdom. operating in the United Arab Emirates. Islamic banking offering and distribution of "alburaq" products of the Arab Banking Corporation International Bank (ABC.
BNP Najmah Deutsche Bank UBS
. Indonesia and the Middle East via its Islamic window. Islamic financial products offering in the Middle East. Islamic Business Unit in Bahrain responsible for developing Islamic financial products (funds and corporate banking).Banking offering in Saudi Arabia in the Saudi Fransi world (Commercial.
Islamic banking and finance in Malaysia.
and Muslims in the UK tend to have origins in South East Asia. and from one group to another.
EU population: 466 million
Country France Germany United Kingdom Spain Netherlands Italy Belgium Austria Sweden Denmark
Source : BBC News (mars 2008)
Estimated Muslim population 6.000 270. in particular Pakistan and Bangladesh.000. Answers to the question of how Islamic banking activities will develop will no doubt differ from one country to another.000 1. All the sources agree.000 340.000 830. are not uniform and are made up of a complex mix of religious followings and cultural traditions.000 300. statistics on the Muslim population are based for the most part on unofficial estimates.Muslims in Europe
As with most religious groups.
. Muslims in the Netherlands generally trace their origins to what is now Indonesia.600. the Muslim population originates primarily from the Maghreb and Africa. In France. on a population of between 12 and 15 million Muslims out of a total population of 466 million people living in the European Union.000 1.000.000.000
It should remembered that Muslim communities.000 400. however.000 950.000 3. Very different migration routes and integration processes have left each Muslim community with its own distinctive features. just like others.
HSBC via its Islamic subsidiary (Islamic window). HSBC Amanah. approved in 2004. One example of the principle in action is the removal of double taxation on the many Islamic transactions in which the bank buys an asset or an underlying for resale to the customer.023 25. when the Financial Services Authority (FSA) gave its approval for the launch of the Islamic Bank of Britain. Islamic retail banking Islamic Bank of Britain (IBB): an Islamic financial institution (the first and only fully Islamic retail bank).4 30. HSBC and Lloyds TSB are the two biggest conventional banks providing an Islamic banking offering: . 8 branches.000
2006 83. .1
. no special favours" is the guiding principle adopted by the UK since 2003 in its introduction of legislation and standards to overcome the obstacles to the development of Islamic banking and finance.814 51.8 42. the United Kingdom has thus far been the only European country with an Islamic banking offering aimed at the country's Muslim communities.5 14. National Savings & Investment is also authorised to distribute Shariah-compliant financial products for individual savers.7 4. The FSA has also encouraged the parallel development of Islamic retail banking to promote banking takeup among British Muslims and avoid the phenomenon of banking exclusion on the grounds of religious beliefs.032
2005 47.Lloyds TSB via its range of Islamic accounts and its distribution of alburaq products from the Arab Banking Corporation International Bank.I s l a m i c
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Overview by country Royaume-Uni
2004 2. Political commitment "No obstacles.000 64.
Islamic Bank of Britain Customer deposits (£m) Customer financing assets (£m) Customers Accounts
2007 135 15.9 10. with the stated objective of establishing the UK as the European gateway for Islamic finance and the most attractive marketplace for Middle Eastern capital.
980 5. European passport To date.024
Equity 24.146.004) (4. It is the case.827 316.695.407 179.014.919.601.612 2.771.640.825.601 779.505.848. only BMLE seems to have taken advantage of the European passport entitling it to offer investment services across the whole of the European Union.Islamic investment banks Four Islamic establishments approved as investment banks: European Islamic Investment Bank (EIIB): approved in 2006 Bank of London and the Middle East (BLME): approved in 2007 European Finance House: approved in 2008 Gatehouse: approved in 2008 Islamic insurer Salaam Halal: approved in 2008 Equity in UK Islamic bank capital is wholly owned by Islamic establishments and Gulf nationals.
Financial indicators for UK-based Islamic banks.720. Rodney Wilson.936. novembre 2008
2007 data.476.402.322 297.786 (10.736
Profit (loss) (6.917 . however.750
Customer deposits 134. that local regulations and tax law in most EU countries currently limit the competitiveness of Islamic products.020 385.999
Source : Pr. in Echanges.432 143.781)
697. £ Sterling
Banks IBB EIIB BLME Total
Assets 164.309 180.
"47% of Muslims living in France were interested in savings accounts and 55% in loans based on Islamic principles". France now aims to catch up the UK's lead and make Paris an attractive marketplace for Islamic finance and capital. End 2008: three Islamic banks reportedly apply for approval in France: Qatar Islamic Bank. There have certainly been any number of political initiatives since 2007.
. reflecting a market still in its infancy. France beginning to legislate On the strength of its expertise. 2007: the AMF grants its first approvals for Shariah-compliant funds. July 2008: the AMF rules on the possible listing of sukuks on a regulated French market.I s l a m i c
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Pioneering players and the biggest Muslim population in Europe France has a number of pioneering players in Islamic finance. December 2008: first adaptation of the tax framework: sukuk and murabaha.
France keen to catch up with the UK
June 2007: a Senate report underlines the fact that France has fallen behind the United Kingdom. and changes to regulations in order to accommodate Islamic finance (and hence banking) are under way. there is not a single Islamic retail banking product on offer in mainland France. The survey estimates that currently some 500. is an initiative that deserves a mention. April 2008: finance minister Christine Lagarde commissions a study by Paris Europlace on the measures needed to make Paris more competitive as a centre for Islamic finance. In a country where the principle of secularism holds a central place. Two French banks replied to the Solving/Efma questionnaire. the reception this experiment receives and its degree of success will no doubt prove crucial to the prospects for developing an Islamic retail banking offering in France. The launch of Islamic products in Réunion in February 2008 by Société Générale through its BFCOI subsidiary. According to the findings of an IFOP survey conducted in June 2008 on behalf of IFAS (a UK consultancy specialising in Islamic finance) and AIDIMM (a Muslim association seeking to identify alternatives to conventional bank loans).000 people of Muslim origin "would be very interested in Shariah-compliant bank loans". Since 2004. Kuwait Finance House and Al-Baraka Islamic Bank (Bahrain). Although France has the largest Muslim population in Europe. SGAM has also offered Shariah-compliant funds developed with the assistance of SGAM AI (UK). 2nd half of 2008: Christine Lagarde announces a series of regulatory adjustments in favour of Islamic finance. as part of a public offering approved by the AMF. The French Banking Commission and the CECEI banking regulator announce they are open to any requests for approval from Islamic financial institutions within the framework of existing regulations and legislation. starting with BNP Paribas and Calyon which began developing Islamic products in the 1980s.
German banks also have considerable expertise in Islamic finance and have developed Islamic products and services. but rather what form it will take. designed to remove the constraints on the competitiveness and profitability of the Islamic model in France. Some of the possibilities that could be envisaged are: . . however.Islamic banks in the UK to offer their products and services in France thanks to the European passport. Deutsche Bank. insurance). . Commerzbank and Dresdner Bank all have Islamic windows in the Middle East and in Indonesia.
. with a large Muslim population likely to support the development of Islamic retail banking.the creation of Islamic windows with a universal Islamic banking offering. since they have the resources to pursue external growth. In addition. savings. could now make it possible for: . some Corporate and others aimed at a wealthy Muslim offshore customer base. Only one German bank replied to the Solving/Efma questionnaire.Islamic financial institutions.the distribution of certain Islamic products through the conventional network (loans. largely Turkish in origin. are well placed to play a major role in the development of halal banking.
Germany's demographic situation is similar to that of France. . The German government has not demonstrated the strong political commitment to Islamic finance that would be capable of removing the barriers to its development. particularly in the Gulf states. to move into the market. Deutsche Bank has set up launches of sukuk issuance programmes and developed a range of retail financial products in conjunction with Saudi Arabian banks. Germany differs from France on two headings. is less sensitive to the issue of Islamic finance. mainly through acquisitions. The lifting of tax frictions. French banks. with dense networks in one of the most heavily banked markets in Europe and undeniable expertise in Islamic banking.Islamic financial institutions to propose an Islamic banking offering by way of distribution partnerships. Germany's Muslim population.2009: start of Islamic banking activities? The question now is undoubtedly not so much whether an Islamic banking offering will be launched in France.
Belgium also appears to lack the strong political commitment that would encourage the development of Islamic finance. .launching an Islamic fund in Indonesia in June 2007. No Belgian banks replied to the Solving/Efma questionnaire. however. In 2007. launching an Islamic SICAV (mutual fund) in 2008: Fortis B Fix 2008 Islamic Index 1. . that France's initiatives are being closely watched in the Brussels Capital region and could serve as an example for the development of Islamic finance in the region. A more successful example is ING. Local players stress. Only one Spanish bank replied to the Solving/Efma questionnaire. a financial institution specialising in consumer credit and home loans that went to the wall in 2008 for lack of the tax adjustments that would have allowed it to develop its offering. there has been little substantial development of Islamic finance since then. Fortis is relatively active in the field: . Belgium's Muslim community.
Despite a statement from the Dutch Finance Minister in 2007 that the government wants "to make the Netherlands the financial market of record for Islamic finance in Western Europe". is highly sensitive to the issue of Islamic finance.acquiring a stake of under 5% in Malaysian bank Maybank. Bancorreos (Spain's postal bank) and Deutsche Bank signed agreements on the distribution of certified Islamic products. which has expertise in Islamic finance that it is developing in Malaysia.acquiring a 40% equity stake in a major Malaysian reinsurer (Re Takaful). It has a growing Muslim population that represents real potential for the retail banks and is well disposed towards halal products. largely Moroccan in origin.
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Spain is fertile ground for the development of Islamic finance and banking. but Belgian banks feel the demand is too small to sustain any substantial development of Islamic retail banking in Belgium. One failed experiment was that of Bilaa Riba. No Dutch banks replied to the Solving/Efma questionnaire.
Sweden has no Islamic banking offering despite a community of some 300. Takaful SA. In 2008. One bank replied to the Solving/Efma questionnaire. however. London). This equity fund was set up to manage pensions for Swedish Muslims. four regional banks (Sparekassen Farsø. Worth noting is the launch in October 2008 of a Shariah-compliant pension fund. due to management problems.
. Luxembourg is playing an increasingly important role in the management of Islamic assets. No Danish banks replied to the Solving/Efma questionnaire. Sparekassen Hobro and Den Jyske Sparekasse) launched a joint offering of Shariah-compliant home loans: Amanah Kredit mortgages. which provides interest-free loans. Takaful SA also has a UK subsidiary. It has now ceased trading. there were 31 Shariah-compatible funds. As early as 2002. Its founding was prompted by Danish Muslim intellectuals. No Swedish banks replied to the Solving/Efma questionnaire. In March 2008.
No Italian banks are engaged in the Islamic finance market. Takaful Limited.Luxembourg
There is one Islamic insurance firm. One bank replied to the Solving/Efma questionnaire. the Islamic Bank International of Denmark (Copenhagen) was one of the first Islamic banks to set up operations in Europe. but in 2008 the Union of Arab Banks announced the setting up of an offshoot of the European Islamic Investment Bank (EIIB. the Luxembourg stock market was the first in Europe to list sukuks. specialising in life insurance with mostly British investors. Some Muslims are attracted by the principles of cooperative banking.
In 1985.000 Muslims. Sparekassen Vendsyssel. which distributes life insurance products developed in Luxembourg.
Islamic finance has as yet seen little development in the cultures of the Maghreb and Africa. and particularly for home loans. The number of responses to the Solving/Efma questionnaire was very small (only 10 replies).
Source: Isla Invest Consulting France Source: Al Maalya. supply could possibly create its own demand. Furthermore. Austria. as the failed examples of the Dutch financial institution and the Danish bank clearly illustrate. Hungary)
None of these countries has engaged in any particular initiatives in Islamic finance. wondering whether a broad market exists.I s l a m i c
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Many Swiss financial institutions and banks have developed Islamic products for their Middle Eastern customers. however. wealth management and custodian banking. services provided include private banking. France is the country most often mentioned as having potential for the development of Islamic retail banking. however. Islamic Finance consulting
. That same year. Islamic finance can only become a reality when the legislative framework is adapted to overcome the disadvantages of the real economy. Pictet Suisse bank also has a division specialising in Islamic finance. Banks are. One Swiss bank replied to the Solving/Efma questionnaire.
Other countries (Greece. UBS and Crédit Suisse have set up their own Shariah Boards to develop their Islamic financial products.
Summary of European Islamic banking
The study conducted by Efma and Solving Efeso highlights the fact that European banks report receiving requests (unquantified) for Shariah-compliant loans. One bank in each of the countries replied to the Solving/Efma questionnaire. UBS fully integrated its Islamic subsidiary Noriba (Bahrain). In view of the results of the IFOP survey and the interest that Islamic finance generates in North Africa. Faisal Private Bank was the first Islamic bank to be established in Switzerland. In 2006. where most of the Muslims living in Europe have their origins.
models depend on the extent to which Islamic finance is capable of reconciling three prevailing currents: . Islamic finance is still a relatively restricted and illiquid market as compared to the conventional model.a religious current which guarantees legitimacy according to Shariah. The two-way flow of investment between Western countries and the Middle East has given Islamic finance a global dimension.a social current at the grass roots. Given the huge liquidities provided by oil revenues and a Muslim population that accounts for a quarter of the world population. rather. the Maghreb and Asia. . but the Islamic financial model is still under construction and in the process of standardisation by agencies in the Gulf countries and Malaysia. the growth drivers for Islamic finance appear sustainable despite the slowdown in the world economy. Until such time as a clearer picture emerges of this future model.
The issues of Islamic banking and finance are important not only in financial terms but also in political and social terms. even if it means curbing financial innovation. which sometimes risks undermining the specific nature of Islamic finance when it seeks to replicate all the instruments of conventional finance.an industrial current. The future model or. particularly in Africa. arguing for the profit-sharing model as ideally suited to promoting development aid.
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Islamic finance February 2009