POTENTIALLY the largest domestic market for Islamic finance in Europe, France recently took a step nearer to developing Paris as a hub for Islamic finance. The move was made with the adoption in late September by the French National Assembly to amend Article 2011 of the French Civil Code relating to the formation of trusts. The amendment is generally regarded as a positive step toward facilitating the origination of Sukuk (Islamic securities) out of France.
France hopes that this amendment, first approved by the Senate in June, will help the sukuk market take off in France, which has an estimated Muslim population of between 8 million to 10 million. French President Nicolas Sarkozy earlier this year publicly declared that his government supports the facilitation of Islamic finance products in France under the country’s financial inclusion policy and is keen to make Paris the other Islamic finance hub in Europe.
In April, the French government started to overhaul its tax laws to facilitate Islamic financial transactions such as Murabaha (cost-plus-financing) used primarily in commodity finance; and for sukuk. This move has been on the cards since the summer of 2008 when Paris announced that it had started its tax neutrality review to facilitate Islamic financial products.
France is also keen to attract Islamic investment both at home and through joint ventures in third countries, especially in Francophone North African and Sub-Saharan African countries, most of which are member countries of the Islamic Development Bank. Islamic finance might also be attractive to French corporates and all those interested in ethical finance.
Indeed over the last year there have been rumors of an imminent French sukuk issuance and also the authorization of the first full-fledged Islamic bank in France. Unfortunately, nothing has materialized, which has disappointed many Islamic financial institutions, who have been waiting for concrete developments in France Some cynics stress that the French Islamic finance initiative is more hype than substance.
They point to the fact that the French Islamic finance initiative has been led by Paris Europlace and LunaLogic, which are both essentially marketing and promotion agencies. This is unlike in the UK where the Bank of England under the Gov. Eddie George set up an Islamic Finance Advisory Group in which top city law firms, banks, auditors and government departments participated. Indeed the likes of HSBC and Norton Rose, the City-based international law firm, did many of the initial discussion documents and research on a pro bono basis, which formed the basis for the enabling laws and amendments for the provision of alternative housing finance (Islamic mortgages) and alternative financial investment bonds under the Finance Acts in 2006, 2008 and 2009. The Banque de France, the central bank, does not have a similar organization in place although it has some ad hoc advisers in Islamic finance.
Some officials of French financial institutions and professional finance and business organizations privately rue the fact that the French Islamic finance initiative is being led by promotional agencies which lack the in-depth knowledge of the dynamics of the financial markets and centers let alone Islamic finance. They would like to see a much more proactive role played by the Banque de France and other government departments.
The amendment to Article 2011 of the French civil code relating to the formation of trusts, stress French bankers, should pave the way for the first French sukuk origination. Indeed, according to reliable French sources, who wish to remain anonymous, the Sarkozy government and the French regulators have already given the approval for the first sukuk offering from France, but declined to stress whether it will be a corporate or sovereign issuance. The issue could be as large as 1 billion euros probably before the end of 2009 or by first quarter 2010. The changes in the French tax laws pertain to the Murabaha tax regime, relating to taxation of the financier’s profit; to real estate sales; to local business taxation and minimum tax contribution; and to the taxation of Murabaha transactions.
The other changes pertain to sukuk and assimilated products, covering corporate income tax and tax treatment of non-residents; and tax arrangements in relation to value added tax (VAT). The changes in the tax laws bring the above Islamic financial products on par with equivalent conventional products thus ensuring equal tax treatment and a desire by the French authorities to ensure that Islamic financial products are not discriminated against in terms of taxation.
For example, according to the new law, in the Murabaha the financier’s profit from the deferment of payment granted to the purchaser is taken into account in the taxable result by spreading it evenly throughout the period during which payment is deferred. When the financier is not resident in France and his customer is legally in France, the profit is exempt from French withholding tax.
The above French sources also confirmed that France is nearer to authorizing its first full-fledged Islamic commercial bank. “The bank will most likely be supported by Qatari investors. President Sarkozy is a close friend of the Emir of Qatar and they have discussed this during visits in the past. The proposed bank would have a capital in excess of 50 million euros,” they added.
France is also interested in developing two other market segments related to the Islamic finance sector. Euronext Paris, one the largest stock exchanges in the world, is already working on an initiative to start listing Islamic investment funds and sukuk to rival the London Stock Exchange and Luxembourg Stock Exchange.
French universities and educational institutions such as INSEAD, Sciences-Po and Dauphine University are also in the process of launching degree, post-graduate research and training courses in Islamic finance, economics and business.
The French ambition is not only to become the other Islamic finance hub in Europe, in addition to London, and to develop the Islamic finance sector per se, but also to highlight that France has been re-inventing itself as a business-friendly destination for industry and professional services in recent years. Changes to the labor laws (which have effectively dismantled the 35-hour week); the R&D tax credit in Europe, which is considered to be the most favorable in Europe, are two such measures.
Islamic bankers are indeed keeping an eye on developments in Paris.
“We are keeping a close eye on the developments in France, although the French have still got a long way to go in achieving their objectives no matter what their PR might say. We have an ambitious French project under way which is ongoing and looking at France as a jurisdiction for Islamic finance to internationalize the reach of Islamic finance as a mode of finance. This project also tracks and helps with the development of Islamic finance in France, and we would extend that to any mature economy in Europe that is interested to learn from the experience in London. It depends on the ability of the market to open up there. We would keep a commercial interest there as well in the medium term. We have an interest in the infrastructural development of France as a center for Islamic finance in Europe. We also have an interest in France as a destination for investment capital. We are interested in investing in French property, confirmed Richard Thomas, CEO of Gatehouse Bank, the latest Islamic investment bank to be authorized by the UK regulator, the Financial Services Authority (FSA). Gatehouse is a wholly-owned subsidiary of Kuwaiti Islamic investment group, The Securities House.