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Islamic Banking in Italy:

Regulatory issues
Mohamad Bakkar

17 MARCH 2008
PALAZZO MEZZANOTTE – BORSA ITALIANA
MILAN
Content of Presentation
• Introduction

• Regulatory Challenges

• Conclusions

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Introduction

An effective legal infrastructure is


essential for the development of any
type of sector in any country,
especially in the Islamic finance
sector which is currently enjoying a
renaissance

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Notable Facts and Figures
• Islamic funds in global financial institutions
are approximated to a total of US$1.3
trillion
• Islamic banking assets worldwide are
ranging between US$200 billion and $400
billion
• Annual growth: 10%-20%

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Current Situation in Italy
• Banking regulation does not allow banks to offer
Islamic banking services
• Tax regulation does not permit competitiveness
of Islamic banking services

• Project of opening first Islamic bank in Italy:


 a 100 million Euros institution
 Shareholders: Middle Eastern banks

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Challenges in Italy
Regulatory
and
tax issues
Islamic Banking
understanding by Trained and skilled
clients Islamic Bankers

Clear basic CHALLEN Arabic Terminology


understanding of
Islamic contracts GES

Competition with Exchange of surplus


conventional Islamic Banking liquidity/funds between
banks Control by conventional and
regulators : Islamic Banks
Shariah
Governance

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Islamic Banking Framework

• EU Regulation

• Islamic Banking Law

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EU Regulation
• Does EU Regulation on Financial Services
allow Islamic Finance?

• Definition of deposit/Contradiction with


principle of Profit & Loss Sharing

• European “passport”

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EU Regulation
• Do we need a new EU Regulation on
Islamic Finance?

• Harmonization

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Islamic Banking Law
If ITALY does not have the tax and
regulatory framework to deal with the
basic products,

… than ITALY will not be in a position to


fully participate in any emerging market of
associated securities or derivatives
equivalents (SUKUK Market).
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Islamic banking law
• Definition of Islamic Bank:
Islamic bank is the bank whose Article of
Association comprises the undertaking not to
breach, in the operations it carries out, the
provisions of Islamic Law (Shariah), and not to
pay or receive interest.

• Definition of Deposit: Profit & Loss


sharing principle
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Islamic banking law
• Definition of products: Murabaha,
Musharaka, Mudaraba, Ijara, Istisna…

• The application of Islamic modes of


financing requires Islamic banks to
assume at some stage the ownership of
the underlying asset before
transferring it to the client.
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Islamic banking law
• Shariah Advisory Board:
A Shariah Advisory Board must be
established by each and every Islamic
bank, Islamic window & Takaful operator

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Shariah Advisory Board
 Reviews and certifies the permissibility
of products offered by Islamic Bank
 Ascertains that investments and projects
in which the Islamic Bank has
participated are Shariah compliant
 Observes that the Islamic Bank is
managed in accordance with Islamic
principles
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Tax barriers

• Double stamp duty or registration tax

• VAT on Murabaha mark-up

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Double stamp duty or registration tax
Office price
Islamic 1 =1.000.000 €
2 Bank

Client

7% 7%
VAT=20%
= 20.000€

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Murabaha = Extra VAT ?
20% VAT on mark Cost price
Islamic 2 =100.000 €
up= 2.000 €
1 Bank
Seller
Client 4 3

Item VAT=20%
PB + mark-up =
= 20.000€
120.000 + 10.000
=130.000 €
SP
PC =
=
(SP +mark-up) + VAT on markup
Cost price + VAT
=
=
132 .000€
120.000 €
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Central Bank
• Authorization of Islamic Banks
• No authorization for Islamic Windows

• If Central Bank is a financial regulator and


not a religious one, than who will control?
• Shariah Supervisory Board at Central
Bank

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Shariah Supervisory Board
• an independent body of specialized jurists
(scholars) in Islamic commercial jurisprudence.
• the Board may include a member other than
scholars, who should be an expert in the field of
Islamic financial institutions
• the duties of the SSB are: directing, reviewing
and supervising the activities of the Islamic
financial institution in order to ensure that they
are in compliance with Islamic Shariah rules and
principles.
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Shariah Supervisory Board
• Sole authoritative body to advise Central
Bank on Islamic Banking and Takaful

• “a priori & “a posteriori” control:


 “a priori”: accept Shariah Advisory Board
 “a posteriori”: co-ordinate the activity of
Shariah Advisory Boards

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Dispute Resolution

• Jurisdiction

• Applicable law

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Jurisdiction
The SSB of Central Bank will be referred to by
the court or arbitrator in disputes involving
Shariah issues in Islamic banking & finance
 In the case of the arbitrator, the SSB’s resolution
“shall be binding” upon the arbitrator (obligatory)
 In the case of the court, the SSB’s resolution
“shall be taken into consideration” by the court
(advisory)

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Applicable law
• Clauses of contracts: reference to Shariah
principles & choice of law of the land

• Validity of clause (English experience):


Rome convention
National law
Shariah rules are not identified

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Conclusions
European Strategy to introduce Islamic
Finance to European customers

Enacting Islamic banking law and


amendments to tax law

Ensure optimal Shariah governance of


Islamic Financial Institutions
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Conclusions
European Islamic Center for
Reconciliation and Arbitration for the
Islamic finance industry

A specialized branch to deal with Islamic


financial transactions at the Chamber of
National & International Arbitration of
Milan
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Italian
Passport ?
I hope soon

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GRAZIE MILLE !

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For further information kindly contact:

Mohamad Bakkar

PETRUCCI & ASSOCIATI


STUDIO LEGALE E TRIBUTARIO
Via Lanzone 31, Milano

Tel : +39.02.88891711
Fax : +39.02.88891777
www.petrucciassociati.it

mbakkar@petrucciassociati.it

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