Europe is proving to be an ideal place for the Islamic finance development: just think that in the old continent the connection between economy and religion is still very strong.
During 2017, 90% of savers who opened fixed-term bank accounts at Al Rayan Bank were non-Muslims. Al Rayan is an Islamic bank in the UK serving over 80,000 customers across the country. It is also the largest and oldest bank in the country that follows precepts of Shariah, the sacred law of Islamism. Islamic finance sector today has exceeded 2500 billion dollars in turnover at a global level. By 2021 it is expected to reach 4,000 billion dollars. It all began after the Second World War in the Middle East when the possibility of a financial system observing Muslim religious principles emerged.
How does interest-free finance work?
The activities of this system must respect the economic and financial requirements of the Koran. Central pillars of this system consist in the fact that it is necessary to donate part of the earnings to charity (zakāt), that it is not possible to obtain interests on loans (prohibition of ribā) and that it is necessary to make socially responsible or lawful investments (ḥalāl), not risky (gharār) and not speculative (maysir). Moreover Islamic finance doesn’t allow investments in goods and activities prohibited by Sharia law, such as those related to tobacco, arms trading, alcohol and gambling. Finally, wealth derived from investments must be distributed fairly.
The most important Islamic financial instrument is sukuk. It can be considered as a bond in the Islamic finance. Unlike bond, it must correspond to a certain project (usually a real estate or infrastructure project). While a conventional bond is a promise to repay a debt, where a pre-established yield is guaranteed, the sukûk is made up of the ownership of a share of an investment, asset or debt. The profits are equal to the profits that project generates.
Sukuk respects the principle of profit and loss sharing. Furthermore investors assume the business risk, this does not happen for the investors in traditional bonds where they appear as creditors. As an expert on the subject, Federica Miglietta, professor at the University of Bari, explained to Affari & Finanza, “the sukuk resembles an obligation for the structure of the flows: there is a constant income paid at defined intervals, like the coupon flows. At the same time it is similar to the shares because the investor has the right to a return only if the asset has actually an income, which with the bonds does not happen”.
In the absence of interests, the institutes of Islamic finance must find a way to secure a flow of returns. This is done through other financial services:
- The murabaha the bank itself buys goods on behalf of a customer and then resells them to him at a higher price.
- The ijarah means ‘to transfer the usufruct of a particular property to another person in exchange for a rent claimed from him.’ In this case, the term ‘Ijarah’ is analogous to the English term ‘leasing’.
- Istisna’a consists of sales contracts used to finance the production or construction of goods.
- Mudaraba and musharaka are corporate investments shared by the bank and the client, with the distribution of the rents.
The European situation
The demand for Shariah-compliant financing and banking products has emerged in many European countries due to the growth of Muslim migration flows to Europe and the internationalisation of markets.
Several reasons boost the proliferation of Islamic Banking:
- The growth of commercial relations with the Middle East;
- The increase in preferences for Shariah-compliant financial solutions often close to the proposal of sustainable finance;
- The need of finding financial alternatives because of unstable markets;
- The increase in support from European governments to the Islamic financial sector;
- The increasingly presence of Islamic people and their growing income capacity.
Various European players have already begun to develop and offer Shariah-compliant products through the system of Islamic Windows. They are legally separate structures within the insitute which offer financial products and services to attract a greater number of customers and expand the portfolio of products offered.
The United Kingdom has been able to attract the most important Islamic banks thanks to the large number of Muslim residents. This is a direct consequence of the strong historical relations with various eastern countries, the notable capacities of the operators of the financial sector and the high level of internationalization of the English market.
In London many institutes have been established: Islamic Bank of Britain (IBB) and five other Islamic investment banks (the European Islamic Investment Bank, the London & Middle East Bank, the Global Securities House, the European Finance House and the Gatehouse Bank). Nowadays, IBB represents the first pure Islamic bank constituted in Europe. It addresses both the Muslim and no-Muslim communities, focusing on the inclusive and sustainable economy and offering all the principal Islamic contracts of financing: musharaka, mudaraba, murabaha, and igara.
Even traditional British banking institutions have been taken the chance. Lloyds offers a bank account for Muslim businesses in the UK and one for Muslim students. Also HSBC has created a dedicated division: HSBC Amanh covering the entire range of Islamic financial products and City represents the main centre for the investment funds: in fact in London several Islamic funds are managed.
The Italian situation
Despite our geographical position, the network of small financial institutions spread throughout the country, and the growing interest in sustainable finance, make our country a good candidate for the development of the Islamic products. Italy is one of the few countries that has not yet implemented an adequate production and distribution system for Islamic financial instruments and services.
From a legislative point of view, Italy hasn’t made progress after the draft law on the tax treatment of Islamic finance operations presented to the Parliament in May 2017.
However, Islamic finance represents an opportunity to attract new capitals. It means resources and strategic partnerships, from infrastructure to renewable energy and real estate. A regulation in this field combined with the creation of a standard offer, would fight the phenomenon of the “parallel circuits “the so-called hawalas. Hawala is a method of transferring money without any money actually moving. Today it ends up intercepting the remittances of the immigrants towards the countries of origin, to give an answer to the basic financial needs as well as, in the worst cases, to be financing vehicles for Jihadist cells active in Europe.