Friday, April 27, 2012

Islamic finance, inventory and outlook



According to Bloomberg, the bond sharia (sukuk) in the Persian Gulf reached a record in four years, to $ 7.3 billion, an increase of 62% over one year.

If the development of Islamic finance in the Middle East explodes, with assets that will reach $ 990 billion in 2015 against 416 billion in 2010, what about Europe and especially in France? The Old Continent can take advantage of this growing source of funding? And what are the opportunities in terms of investment products for Western banks?
The main principles of Islamic finance

Born in 1963 in Egypt, Islamic finance has grown under the influence of Persian Gulf oil monarchies. Its foundations are based on the application of Sharia in areas of finance, through the five key elements:

  •     prohibition of riba,
  •     prohibition of gharar,
  •     backing of any funding to a tangible asset,
  •     investment only in halal activities,
  •     sharing of profits and losses.
Outlook and Opportunities

The crisis again gives an appeal to Islamic finance. Gulf countries, followers of sharia-compliant products, are among the few countries which, thanks to their oil and gas windfalls, have excess liquidity they can put out of their home markets. Today, Islamic finance represents a market of 1,000 billion for about 300 institutions worldwide. Islamic financial assets are expected to grow 15% to 20% per annum to reach 1,100 billion at end-2012. Deutsche Bank believes that even the entire industry could double its assets to 1800 billion in 2016. Thus, market liquidity has attracted the interest of Goldman Sachs who has just created a sukuk program of $ 2 billion.

Moreover, the interest of Islamic finance lies in the changing demographics. In twenty years, the number of Muslims to rise from 1.6 billion to 2.2 billion (or about a quarter of the world population). In Europe, they represent 58 million people in 2030 [1], or about 8% of the population. A rapidly growing customer base as France (6.8 million Muslims in 2030 [2]) obviously wants to win by developing products and solutions for Islamic finance. Moreover, the Muslim population is not only interested in those activities. Indeed, faced with a difficult economic environment, Islamic finance increasingly concerned the international community because of its ethical and religious dimension, its socially responsible philosophy and its anchoring to the real economy. It is intended also to all socioeconomic strata of society. It also allows a more equitable distribution of wealth and prevents excessive leverage.

Finally, in times of crisis, Islamic finance is better than resist. Assets continued to grow with double digit growth. It is therefore a source of cash that Western banks could, if any, benefit. Ibrahima Ndiaye, chief operating officer of the Mutual Savings and Credit (Islamic MECIS) in Senegal, note that only banks that practice Islamic finance have escaped the economic crisis of 2007-2008. Luxembourg Finance Minister Luc Frieden said the high resistance of Islamic finance products in the current global crisis. As for Jacques Santer, former Luxembourg Prime Minister and current member of the Executive Committee of UniCredit, he does not hesitate to assert that "Islamic finance has a role to play in the stability of global finance."

The remaining challenges

If the interest of Islamic finance is well established, it is clear that France is lagging behind compared to its neighbors. Indeed, the Luxembourg Stock Exchange was the first European presence in the market for Sukuk Islamic bonds by scoring in 2002. Sukuk with 16 sides and 37 investment funds Shariah-compliant, Luxembourg is the leading European center for Islamic finance. For its part, the United Kingdom is the first European country to have hosted an Islamic retail bank, the Islamic Bank of Britain, created in September 2004. Finally, in 2004, the German state of Saxony-Anhalt had already issued sukuk amounting to $ 149 million.

Regulatory side, the French law already contains numerous provisions to accommodate Islamic finance: prohibition of usury, coaching the game, respect for morality. In 2010, Economy Minister Christine Lagarde had tried to amend the Civil Code to allow a sukuk holder, to rely on a proprietary asset-holders. But the legislative amendment was rejected. Since, intentions to adapt French law to make it compatible with the precepts of Islamic finance have been ignored.

Finally, in the Hexagon, institutions face many barriers in retail banking. According to Jean-Paul Laramee, secretary general of the French Institute for Islamic finance, employees should be trained by hundreds if not thousands, to learn the precepts of Islamic finance. In addition, banks are still investigating the economic model most suitable: distribution of Islamic agency dedicated? Creating a new brand exclusively focused on Islamic finance? Commercialization of Islamic finance products which would then be distributed in traditional networks? Besides doubts about the potential market size still remain. Anwar Hassoune, economist at Moody's in Paris, finally believes that "French banks do not engage in product offers Shariah-compliant because of their fears about the possible endangerment of their brand equity."

In conclusion, Islamic finance, considered obsolete and uncreative there is still so long, today appealed to its ethical principles, its ability to withstand the crisis and its assets in growth over the past ten years. Development prospects in France, with a large Muslim population, are real. Nevertheless, some legal barriers and a lack of enthusiasm of French banks in France are lagging behind its European neighbors. However, French banks have a certain expertise, but not in retail banking. BNP Paribas was the first to market in 2006 an ETF (exchange traded fund) Sharia compliant and Societe Generale in 2008 launched a fund structured products based on murabaha to La Reunion. However, it was not until June 2011 that the first Islamic deposit account was launched in France by Chaabi, a bank under French law since 1972, a subsidiary of Banque Populaire of Morocco.