Islamic finance

F e b r u a r y 2 0 0 9
Contents
05 Study presentation and summary

08 The principles of Islamic finance

10 Islamic financial markets

23 Islamic insurance (takaful)

26 Islamic banking activity in Europe

38 Conclusion
 I s l a m i c f i n a n c e

Preface
elcome to the first annual Efma-Solving Efeso

W 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 Patrick Desmarès

Head of financial services Secretary general
Solving Efeso Efma

3
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

4
 I s l a m i c f i n a n c e

Study presentation
and summary
Origin and objectives of Islamic finance
The origins of modern Islamic finance date back to the 1970s.
Its aim is to develop financial products and banking services compatible with
Shariah law.
Quite apart from its religious roots, Islamic finance has been distinguished since its
inception by its attachment to the real economy. In addition, the emphasis is placed
on profit from entrepreneurial risk while prohibiting speculation, the remuneration of
money in the form of interest, and unequal sharing of profits and losses.
Far from being confined in its development to particular geographic areas or
communities, Islamic finance is very much part of the globalisation of financial
exchanges.

Study objective and approach

Consultants Solving Efeso has carried out research and assignments on the theme of
Islamic finance.
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, a model that is
gaining ground.
A questionnaire was circulated to banks to gauge their level of interest in this issue.
This summary brings together the results of the questionnaire and of research work.

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, real estate, equities) is
around 700 (1) .
Islamic finance has enjoyed massive growth since the beginning of the decade, 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.
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, fuelling growing demand for this kind of product.
More important, however, is the desire on the part of investors to diversify their holdings
by investing in their local economy.

(1) Islamic Development Bank, 33rd Annual Report 1428H (2007-2008)

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An alternative system?
Islamic finance is built on a profit-sharing, cooperative model and its close links to the
real economy merit careful attention in this period of financial crisis. Analysis shows,
however, that the model has not been able to withstand the current storms, although
the mechanisms and causes have not been clearly understood.
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, rather, different interpretations of these principles as they relate to finance,
reflecting a link between the religious and the economic spheres.
In consequence, this link between religion and the economy raises its own questions
in secular countries. While Islamic finance calls into question the universality of the
conventional economic model, it also reminds us that the economic sphere cannot be
divorced from a cultural model. The study of this model is as much a subject for the
social and human sciences as it is for applied mathematics.

Aspects of the Islamic model: finance, 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, but their products are basically destined for offshore
customers. In 2006 Gordon Brown, then Chancellor of the Exchequer, spoke of making
the United Kingdom the European gateway to Islamic finance, and the UK was the first
European country to pass laws to that effect. France is aware of having lost ground to
make up, and has officially announced its intentions of lifting the excess fiscal burdens
on Islamic finance.

Insurance
A market still in its infancy but enjoying strong growth thanks to Islamic finance, which
provides the instruments it needs to develop.

An Islamic banking offering in Europe: is it feasible?

Islamic banking is a radical innovation in Europe, currently spearheaded by France and
especially the United Kingdom, 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.

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 I s l a m i c f i n a n c e

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).
Currently the UK is the only country where active Islamic retail banks are to be found,
with five establishments including the Islamic Bank of Britain, the first Islamic financial
institution to be approved in Europe in 2004, and HSBC via its Islamic window, HSBC
Amanah.
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, 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.

Study content
The study addresses the following issues:
- the underlying principles of Islamic finance;
- the factors leading to the development of an alternative financial model or forming
part of an "ethical" segment of a global model, particularly in the light of the current
financial crisis;
- Islamic insurance;
- the radical innovation represented by Islamic retail banking in Europe.

7
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.
Prohibition of interest (riba): the payment or receipt of interest on a financial transaction is forbidden;
making a profit on the exchange of money is unethical.
Sharing of profit and loss: the parties to a financial transaction must share the rewards and the risks.
Prohibition of uncertainty (gharar) and speculation (maysir): financial contracts must not be subject to
random events, but risk as such is not forbidden.
Tangible assets as backing: financial transactions must be based on a real economic activity.
Investment in ethical activities (halal): investment in sectors such as gambling, tobacco, alcohol, arms
or in any company in breach of the fundamental principles of Shariah (highly leveraged companies,
conventional financial sector) is forbidden (haram).
In addition, almsgiving (zakat), one of the pillars of Islam, implies that part of the profits will be redistributed
in the form of charitable donations.

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.
Only Malaysia has its own central Shariah Board; otherwise, it is up to institutions to set up their own
Shariah Board whose legitimacy will be determined by the reputation of its members.
The existence of different Islamic legal schools means that opinions may vary between Shariah
pronouncements on a particular product category.
Many operations transacted in Malaysia are not considered Shariah-compliant in the Gulf states, for
example. Conversely, the predominantly Ibadite Sultanate of Oman bans Islamic finance, and a fatwa
issued by the influential Al-Azhar University declares interest permissible under certain conditions.
This lack of standardisation and the possibility of a fatwa overturning an existing certification expose
institutions to reputational risk. 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, Bahrain), the General Council for Islamic Banking and Finance Institutions
(GCIBFI, Bahrain), the Islamic International Rating Agency (IIRA, Bahrain), the Islamic Financial Services
Board (IFSB, Malaysia) and the Islamic Liquidity Management Centre (ILMC, 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. (2)»

(2) Anouar Hassoune, « La finance islamique globale connaît une croissance vertigineuse mais fragmentée »,
in La Finance islamique à la française, directed by Jean-Paul Laramée, Secure Finance, Paris 2008

8
 I s l a m i c f i n a n c e

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. It is perfectly possible for many conventional institutions, relying on competencies either internal
(Islamic Business Unit) or external (specialist firms), to have the Shariah compliance of their Islamic
products certified by a Shariah Board.
Islamic banks, however, must have an internal Shariah Board which certifies that all the bank's transactions
are Shariah-compliant.

Financial contracts used in Islamic finance

There are 14 types of contract that can be used to structure Islamic financial instruments, the most
important being:
Variable income profit-sharing instruments
Mudaraba is similar to a trust: one party provides the capital, the other party the labour.
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.
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.
Ijara is similar to a leasing contract.
Salam is a cash payment in advance for goods to be delivered later.
Istisna is a forward purchase on instalments of an asset to be delivered on completion.
These contracts are used in financial operations and can be used to structure loans, investments, Islamic
bonds (sukuks) or Islamic insurance (takaful).

9
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. 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.
The stakes had changed. With banks needing to respond to increased demand for
investment products compatible with the religious beliefs of investors and savers in the
Gulf, a new form of rivalry emerged, prompting both local and global players to develop
Islamic financial products. Ernst & Young calculates that between 70% and 90% of
Muslim investors prefer Islamic investments. 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. France, in turn, began amending its laws at the end of 2008, estimating
the potential volume of assets that could be attracted at €100 billion(3). Banks in
Luxembourg and Switzerland are looking for ways to meet this demand.
Assets under management on Shariah-compliant principles are estimated at
$700 billion and are growing constantly. Banks play an essential role, holding
$500 billion of these assets on their balance sheets.
The main investment vehicles are equity funds, real estate funds, private equity and
Islamic bonds (sukuk). 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,
which offers the clear advantages of a pragmatic model based on tangible assets and
risk-sharing. The cooperative model of takaful is being encouraged as a way of promoting
the development of insurance in Muslim countries, since the standard insurance model
is incompatible with Islam.
The emerging model of Islamic finance is still under construction. It raises questions as
to what prospects it may offer as an alternative or complement to conventional finance.

(3) ParisEuroplace, Elyés Jouini & Olivier Pastré, Enjeux et opportunités du développement de la fi-
nance islamique pour la place de Paris, 2008.

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 I s l a m i c f i n a n c e

Islamic finance and Islamic banks worldwide

Europe
< 10 billion $
World < 1,0 %
North America
< 5 billion $
Kuweit 27,0 %
Southeast Asia
South Arabia 26,0 % & Iran, Pakistan,
110 billion $
Soudan, Turquie
United Arab Emirates 12,0 %
380 billion $
Qatar 12,0 %
State of Bahrain 6,2 %
Malaysia 11,5 %

Figure 2
Source : S&P, séminaire AGEFI, 26/06/2007)

1.2 to 1.7 billion Muslims worldwide

Top 15 countries by
sharia-compliant assets
Rank 2007 Country Sharia-compliant assets ($m)
1 Iran 154 616
2 Saudi Arabia 69 379
3 Malaysia 65 083
4 Kuwait 37 684
6 Brunei 31 535
5 UAE 35 354
7 Bahrain 26 252
8 Pakistan 15 918
9 Lebanon 14 316
10 UK 10 420
11 Turkey 10 066
12 Qatar 9 460
Figure 1

Figure 3

14 Bangladesh 4 332
Source : Questions internationales, « islam, islams », 15 Egypt 3 853
n°21 septembre-octobre 2006
Source : The Banker

11
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, 31/12/2007).

The Shariah-complaint nature of equities makes them instruments

of choice for Islamic finance
Equities are, by nature, highly compatible with Shariah (attracting no interest, sharing of profits and losses,
backed by tangible assets). As a result, there are no real specific differences between Islamic and
conventional finance as regards equity funds, apart from the specific allocation of assets, which may not
be invested in companies whose activities are prohibited under Islam or which are leveraged beyond a
certain threshold.
In common with socially responsible investment (SRI), Islamic funds apply ethical selection criteria to
their investments.

Islamic indexes
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, the Dow Jones Group designed a range of indicators covering Shariah-compliant companies: a
global Islamic index geared to geographical concerns (Europe, Asia, USA, etc.), sectors (technology,
telecommunications, etc.) or management style (small and large caps).
These indexes act as benchmarks for the funds launched by banks and list the equities of companies
engaging in Shariah-compliant activities.
Excluded on principle from the indexes are all companies engaging in: the production and sale of alcoholic
products, pork-based products, financial services (banking, insurance, brokers), defence, games of chance
and pornography.
Once they have successfully passed through this initial filter, companies are subject to another principle
of Islamic law: the ban on credit. Only companies with debts totalling less than a third of their market
capitalisation are considered.

12
 I s l a m i c f i n a n c e

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 following points are to be highlighted.
The Shariah index has held up better against the subprime crisis (2007).
This outperformance is due to asset allocation:
- 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.

Performance (5 years)
180

Comparative performance of the S&P 500 160

Shariah index and the conventional index 140

120
Observation period: from: Performance over the
Figure 4

26/12/03 to 26/12/08 observation period 100

S&P Shariah + 3% 80

S&P Price - 12% 60

40

Figure 5
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

S&P 500 (Dec-08) S&P 500-Shariah (Dec-08)

Telecommunications
services Telecommunications
Materials M
3,83% Utilities services
2,93% 4,19% Materials C 2,22% Utilities Consumer
I Consumer discretionary
Information 3,88% 0,87%
discretionary 7,29%
technology
8,40% C Consumer
15,27% I Information staples
technology 10,39%
Consumer C
21,49%
staples
I 12,88%
Industrials
11,08% E Energy
20,05%
E
Figure 6

Figure 7

Energy Industrials
I
13,34% 12,09%
Health care H F Financials
H Health care 0,29%
14,79% Financials F
21,43%
13,29%

13
Examples of funds
SGAM AI
SGAM AI Baraka is a financial product offered by Société Générale, through its subsidiary BFCO (Réunion).
SGAM AI Baraka index is an index of 30 stocks selected from the 2,400 Dow Jones Islamic Market World
Index stocks.
The pick of 30 stocks is aimed at outperforming the benchmark index.
BNP Paribas
Launch in 1996 of one of the first Islamic funds (Caravan Fund).
Launch in 2006 of BNP Paribas Equity Optimizer (based in Luxembourg).
Launch in 2007 of the first fund compliant with both Shariah and French law matching the Easy ETF DJ
Islamic Market Titans 100 index.
Deutsche Bank
Deutsche Islamic Equity Builder Certificates (equity fund).
Crédit Suisse
CS Sicav One Equity Al-Buraq I (equity fund).
HSBC Amanah
HSBC Amanah Pan-European Equity Fund (equity fund).
Pictet et Companie
Al Dar World Equity fund (equity fund).
UBS
UBS Islamic - Global Equity (diversified equity fund).

Number of Islamic funds

800
706
700
600 539
500
414
400
319
300 233
183
200 126
102 105
Figure 8

100
0
2000 2001 2002 2003 2004 2005 2006 2007 2008

Source : Fakala Zawya / Rooz & Company

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 I s l a m i c f i n a n c e

Islamic bonds (sukuk)

Exponential growth cut short by the financial crisis
From virtually zero in 2000, issuance of Islamic bonds or sukuk grew sharply to reach
a level of some $100 billion by end 2007. It seemed as if nothing could stand in the
way of this juggernaut of growth, 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.
The sukuk market felt the full force of the 2008 bond market crisis, however, even
though Islamic bonds had absolutely nothing to do with the subprime crisis, given that
a sukuk is not based on interest rates and must be backed by an underlying.

A global but relatively illiquid market

Malaysia, which has an extensive legal framework for Islamic finance, is the leading
issuer of sukuk traded over the counter.
The listed sukuk market is expanding and now accounts for 25% of issues. Dubai and
London are the two main quotation centres, but other financial centres are following
suit, especially in Europe: Luxembourg, Frankfurt, etc. France is encouraging Euronext
down this road. The secondary sukuk market is very illiquid, however, with most securities
held to maturity.

Local and global sukuk volume issues

4 1

100

30
Issuing (billion US$)

Amount (billion US$)

80

20 60

40

10

20
Figure 9

0 0
2001 2002 2003 2004 2005 2006 2007 2008

Local sukuk issues "Global sukuk" issues (US$) Amount

Source : Bloomberg

15
 Value of sukuk listed per stock market Number of sukuk listed per stock market
(amounts in M$)
18 000
16 470
20
16 000 19
18

14 000 16
14
12 000 11 347

10 000 9

8 000 6 793
3
6 000 4 950 2 2
4 233 1 1 1
3 961
4 000

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166

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Figure 11
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(with duplicates) in Paris Europlace, Enjeux et opportunités du développement

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Figure 10

de la finance islamique pour la place de Paris, December 2008.

Source: DIFX, February 2008 data, including domestic and international issues
(with duplicates) in Paris Europlace, Enjeux et opportunités du développement
de la finance islamique pour la place de Paris, December 2008.

H1 2007 sukuk top bookrunners

Source: Islamic Finance Information Service (ifis.securities.com).

(amounts in M$)
Standard Chartered Bank 425

Citigroup 426

Credit Suisse 433

National Bank of Abu Dhabi 433

HSBC Amanah 540

AmInvestment Bank Bhd 611

Goldman Sachs International 625

BNP Paribas 650

Deutsche Bank 908

Figure 12

Barclays Capital 1 758

CIMB Islamic 3 329

16
 I s l a m i c f i n a n c e

Mechanism
Unlike equity funds, which are by nature Shariah-compliant as long as not invested in
prohibited activities, sukuk rely on specific financial contracts in order to comply with
the five principles of Islamic finance mentioned earlier (prohibition of interest, sharing
of profit and loss, prohibition of uncertainty, backing by tangible assets, permissible
activities). In particular, the backing of a tangible asset entitles the holder to receive
part of the profit generated by an underlying rather than interest.
Of the many contracts that exist in Islamic finance, Ijara, Musharaka, Mudaraba and
Murabaha are mainly used for the issuance of sukuk.
As with any Islamic financial instrument, a Shariah Board must certify the sukuk as
Shariah-compliant.

Sukuk and securitisation

It should be stressed that the mechanisms of securitisation are essential and permissible
for the structuring of sukuk. 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).
Sukuk whose remuneration and redemption are based essentially on underlying assets
and which are therefore, by construction, similar to asset-backed securities.
As is the case with conventional securitisation, sukuk issues may be structured into
different asset classes: "equity", "mezzanine", "senior", etc.
The sukuk can then be rated according to the quality of the counterparty (for asset-
based sukuk) or according to the characteristics of the underlying assets in the case of
asset-backed sukuk.
Appearances aside, there are many points of convergence with conventional financial
instruments. Where the sukuk clearly differs is not so much in the absence of an interest
rate —a feature echoed, to a degree, in other mechanisms— as in the formal obligation
of being based on tangible assets.

17
 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, the German
Land of Saxony-Anhalt became the first ever non-Muslim issuer of a sukuk.
In the case of an Al-Ijara sukuk, an SPV issues the sukuk, takes in the funds and uses
them to buy the underlying assets. These assets are then leased to a third company
which makes periodic lease payments. In the case of the Saxony-Anhalt issue, the Land
was both the originator of the sukuk and the lessee.

Head Lessor
The State through Ministry of Finance & LIMSA
Originator = borrower

Advance Head 100-year Head-Lease

Lease Rental of Assets
5-year Sub-Lease
Special Purpose Vehicle (SPV) of Assets Sub-Lessee
Stichting Sachsen-Anhalt Trust The State through Ministry of
Dutch Foundation Sub-Lease Finance & LIMSA
Rentals
Sukuk Funding $ Six Monthly Coupon
100 million + Principal
Figure 13
Sukuk Holders
Investors

18
 I s l a m i c f i n a n c e

Sukuk and the financial crisis

Certain factors inherent in Islamic finance absolve it from any responsibility for the spread of the financial crisis.
Although sukuk are, by virtue of their structure, 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, the same cause would
not produce the same effects. With regard to the mechanisms by which the financial crisis spreads, 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, such as CDOs
containing ABSs and other CDOs.
This same principle has served as protection for Islamic funds, which are not permitted to hold securitisation instruments.
The prohibition of interest does not allow Islamic banks to rely on leverage, unlike the conventional banks which wrote back
into their balance sheets the credit risks transferred to the markets by financing the hedge fund industry.
With a reduction of 62% in the volumes issued in 2008 (13.8 billion in 2008 compared to 37 billion in 2007), however,
sukuk were still not spared by the crisis in the bond market.

High exposure to reputational risk

Despite great efforts at standardisation, sukuk are heavily exposed to reputational risk due to the lack of standardisation
affecting Islamic financial products. Their compliance with Shariah, even if certified by a Shariah Board, may be called into
question by other scholars.
In September 2008, 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. He referred in particular to the principle of sharing profits and losses, which
is opposed to any form of capital or income guarantee. As the Secretary General of the AAOIFI regretfully noted subsequently,
this announcement could have played a part in the collapse of the sukuk market at the end of 2008. This recent affair,
which serves to highlight the uncertainties associated with financial innovation, is a timely reminder that nascent Islamic
finance is a model still under construction.

Dow Jones Citigroup Sukuk Index

115,00

110,00

105,00

100,00

95,00

90,00
Figure 14

85,00
7/01/08
21/01/08
4/02/08
18/02/08

3/03/08
17/03/08
31/03/08

14/04/08
28/04/08
12/05/08
26/05/08
9/06/08
23/06/08

7/07/08
21/07/08
4/08/08
18/08/08

1/09/08
15/09/08
29/09/08
13/10/08
27/10/08

10/11/08
24/11/08
8/12/08
22/12/08
5/01/09

Source : http://zawya.com/sukuk/

19
Outlook
A new financial model?
Certain characteristics of Islamic finance offer safeguards. But can Islamic finance really offer itself as
an alternative model, one that is independent of conventional finance?
The performances of Islamic investment funds have shown a very strong correlation with conventional
finance (see above). Furthermore, the impact of the bond market crisis on sukuk, instruments specific
to Islamic finance and unrelated to the subprime crisis, has also shown Islamic finance to be part of the
global financial system.
To a certain extent, while the lower level of sophistication of Islamic finance has proved to be one of its
virtues, it is also one of its weaknesses in that it limits the depth necessary to a financial system. At the
same time, efforts towards standardisation must also be pursued to improve liquidity. At present, the
central banks, the interbank market and the money market do not have all the tools needed in order to
function properly.
The question that arises is therefore not so much the independence of the Islamic model, but how it fits
in with the conventional model.
This is by no means to call into question the growth prospects for Islamic finance, 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, Singapore).

The Gulf states, powerhouse of Islamic finance

Modern Islamic finance came into existence in the 1970s, fuelled by the first oil boom. Its earliest
theoreticians promoted the profit-sharing and cooperative principles best suited to supporting the
development of local economies. In view of the disappointing early results, however, Western financial
institutions remained the vessels of choice for investing oil revenues.
The current decade is seeing resurgence in Islamic finance, encouraged by a new rise in oil revenues.
Islamic finance is still strongly correlated with oil prices and conventional finance, and there is every
likelihood that its growth will slow and fall short of earlier forecasts made for 2009. The current situation,
however, is radically different from that of the 1970s, since Islamic finance is now part of the process of
the Gulf states' preparation for the post-oil era.
This shift is being achieved through the creation of a new economic territory, firmly committed to
globalisation: the Gulf Cooperation Council, a common market comprising Saudi Arabia, Kuwait, the
United Arab Emirates, Bahrain, Oman and Qatar. At its most recent summit, in December 2008, all the
member states with the exception of Oman reiterated their aim of launching a common currency in 2010.
The growth of Islamic finance and its industry (financial markets, banks, standardisation institutions, rating
agency, expert firms, etc.) must be put to work on developing infrastructure, real estate, tourism and
opening up economies to overseas investors. On a par with the development of airline companies in the
Gulf states and the creation of hubs to capture air traffic and tourism, financial hubs are being created

20
 I s l a m i c f i n a n c e

in Dubai, Doha and Bahrain through which finance, particularly Islamic finance, must necessarily flow.
Gulf stock markets are vying to become the international market of record, not only for regional business
but also for global trade in their time zone.
The specific characteristics of Islamic finance also position regional institutions as key players, offering
them a more level playing field on which to compete with Western banks and institutions.
Western and Middle Eastern actors have a common interest in working together: Western interests are
looking to the Gulf to drive future growth, while Gulf interests have the liquidity necessary to finance
external growth. Reciprocal acquisitions of equity stakes between Western and Gulf stock markets in
2007 and 2008 illustrate how closely the financial systems are interlocked. Far-reaching changes in the
international banking and finance landscape are ongoing, with Western banks' massive financing
requirements undermined by the financial crisis. 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.
Islamic finance, 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, can thus count on a powerhouse likely to ensure
sustained growth for the future.

Equity stakes acquired 2007-2008

Investment Corp Dubai

(sovereign fund)

Qatar Investment 19,99 %

Nyse
merger
Euronext Authority Dubai Borse Nasdaq merger OMX
(Sovereign fund)

20,6 % 66,66 %
25 % 75 % 15,1 % 33,33 %
Figure 15

Doha Stock Exchange London Stock Exchange Nasdaq Dubai

21
 Investissements du fonds souverain Investment Corp Dubai dans le secteur financier
Emirates NBD, conventional bank with Islamic window
Dubai Islamic Bank, Islamic financial institution
Borse Dubai
Commercial Bank of Dubai, conventional bank
Union National Bank, conventional bank
National Bonds, Islamic financial institution
Noor Islamic Bank, Islamic financial institution
National Bank of Fujairah, conventional bank
HSBC Middle East Finance Company, conventional bank with Islamic window
Shuaa Capital asset manager

Gulf cooperation council

Private sect
Area PIB / deposit
Population
(km2) inhabitant
(US$ Mds)

South
Arabia 2 149 690 27 000 000 13 723 125
Kuweit 17 820 2 500 000 31 591 53
Qatar 11 437 885 000 62 293 13

State of
Bahrain 665 700 000 20 860 10
United Arab
Emirates 83 600 3 750 000 37 531 46
Oman 309 500 3 200 000 14 031 10
Figure 16

Gulf
G Cooperation Council (GCC) Countries

22
 I s l a m i c f i n a n c e

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.
With $2.6 billion in annual premiums, the takaful market is still in its infancy but is growing at an annual
rate of 20%, thanks particularly to the growth in Islamic finance which is providing the instruments
necessary for its development.
Retakaful, the equivalent of conventional reinsurance, has only developed to any significant extent in the
last few years, as a result of the obligation imposed on Islamic insurers to give retakaful priority call on
their premiums. Takaful Re Limited, the first company dedicated exclusively to reinsurance, was founded
in 2005.

Takaful companies in the world

Number of Takaful companies Takaful co's & windows In formation Total

Middle East 41 16 57
Africa 19 2 21
Figure 17

Asia Pacific 40 1 41
The rest 24 1 25
Total 124 20 144

Source : Magazine Banque Stratégie n°257 - mars 2008

Takaful geographic breakdown

Middle East
7% 1% Southeast Asia
Africa
Others
Figure 18

50%
42%

Source : : ICMIF in Banque Stratégie, n° 257, mars 2008

23
A cooperative model
In a takaful contract, the participants pay in a sum of money which will be used on a cooperative basis
to indemnify members against loss or injury.
Islam is not opposed to conventional insurance per se, however certain rules must be followed as regards
primarily riba (interest) and haram (unethical investments).

Comparison of takaful, cooperative insurance and conventional insurance

Takaful Cooperative Conventional
insurance insurance
Contract Donation and/or Cooperative contract Contract of exchange
cooperative contract

Company liability Payment out of funds Payment out of funds Payment out of funds
taken in; if insufficient, faken in taken in; if insufficient
funds may be out of equity
borrowed without riba

Insured party Payment of contributions Payment of contributions Payment of premiums

responsibilities

Equity Participants' funds Capital paid in Capital paid in

by participants by shareholders
Figure 19
Investment Shariah compliant No restrictions other No restrictions other
conditions than prudential than prudential

Source : Paris Europlace, Enjeux et opportunités du développement de la finance islamique pour la place de Paris, décembre 2008.

24
 I s l a m i c f i n a n c e

Mudharaba and Wakala

Takaful Mudaraba
In the Mudaraba Model, the insurer acts as the entrepreneur and the insured as the providers of capital.
This is a model encountered primarily in Malaysia.
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).
Losses are assumed by the insured as capital providers, subject to the entrepreneur having performed
his part.
Takaful Wakala
In the Wakala model, which is found primarily in the Middle East, the relationship is that of principal
and agent.
The takaful insurer acts as the agent of the insured in managing the takaful fund. The risks are carried
by the fund and any operating surplus belongs to the participants. 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.
Distinction
The difference between these two models of Islamic insurance lies in the way any profits are distributed:
In the wakala model, all technical profits revert to the insured. The company receives only the management
fees in payment.
In the mudaraba model, all technical surpluses are shared between the insured and the company.
Takaful products are sold by Islamic institutions or by Islamic windows within a conventional institution.

Growth subject to the development of Islamic finance

The first takaful insurers were basically small local establishments. Recent years have seen major global
groups, particularly Western groups (Axa, Score, etc.), moving into the market by way of takaful windows,
profiting from their expertise in conventional insurance.
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 Islamic Financial Services Board (IFSB), based in Malaysia, is working towards greater standardisation.

25
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.
Profit-Sharing Investment Account (PSIA)
The distinctive element of these time deposit accounts is that any returns depend on the bank's
performance and, in the event of losses by the bank, may be negative. This characteristic exposes Islamic
banks to liquidity risks linked to the possibility of massive withdrawals. The banks use mechanisms involving
provisions and reserves to smooth yields in order to reduce this risk.
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. After much discussion, 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. Other examples of tax friction, particularly regarding purchase/sale
transactions, have been removed in both the UK and France.

Loans
Fixed-income contracts such as murabaha, salam, ijara or istisna make it possible for financial institutions
to offer a wide range of personal loans.
Profit-sharing contracts such as musharaka or mudaraba are more often used in the structuring of capital
lending and PSIAs.
Regulatory restrictions, which have been lifted in the UK and partially lifted in France, penalise Islamic
lending in most European countries as a result of tax friction. 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).

Payment means
Cash cards, credit cards, Visa and cheque cards are all available in Islamic versions with flat-rate fees.

26
 I s l a m i c f i n a n c e

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. They have their own internal Shariah Board.
Islamic financial institutions may be Islamic from the outset or Islamised.
In many Gulf states, two distinct licenses are granted to conventional financial institutions
and Islamic financial institutions.
There are close on 300 Islamic institutions and subsidiaries in 75 countries: in the
Middle East and South East Asia, but also in countries with Muslim minorities
(Singapore, United Kingdom)

Positioning of the main Islamic banks in the Gulf

Assets
volume ß NCB
ß SAMBA
ß National Bank of
Kuwait
ß National Bank of
Abu Dhabi ß Al Rajhi Bank
ß Emirates Bank
International
$ 30 Mds

ß Abu Dhabi Commercial

Bank ß Kuwait Finance House
ß Qatar National Bank ß Dubai Islamic Bank
ß Gulf International Bank
$ 15 Mds
ß Sharjah Islamic Bank
(ex NBS) ß Arcapita Bank
ß Commercial Bank of ß Abu Dhabi Islamic Bank
ß Emirates Islamic Bank ß Gulf Finance House
Kuwait ß Qatar islamic Bank ß Bank Albilad
(ex MEB) ß Unicorn Investment
ß Commercial Bank of ßAl Shamil Bank ß Masraf Al Rayan Bank
ß Internation Bank of Bank
Qatar ß Bahrain Islamic Bank Kuwait ß Boubyan Bank
ß Gulf Investment House
ß Dubai Bank
Universal Historical Islamical Conventional Islamical Investment Islamical young
Figure 20

Regional Establishments Establishments

Banks recently islamized
New imputs

Source : S&P 2007 / Zawya / R & D Solving

27
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, books, information systems);
shariah Board;
dedicated and exemplary senior managers;
investor protection against fraud and negligence;
compliance with Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) standards.
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. In the Middle East, some
local players have opted for total Islamisation of their structure in order to underscore their legitimacy.

Conventional banks
Conventional banks without an Islamic window are unable to offer a full certified Shariah-compliant
universal banking offering. There is, however, nothing to prevent conventional banks from creating and
distributing certain Islamic products such as investment funds or loans. Both Société Générale and BNP
Paribas, for example, offer a Shariah-compliant fund even though they do not have an Islamic window.
This should be seen in context, since an Islamic window is only really necessary in countries which grant
two distinct licenses for banking activities. Unlike the other Gulf states, for example, Saudi Arabia makes
no distinction between conventional and Islamic banks, even if some institutions have chosen to be fully
Islamic.

What positioning to adopt?

In the end, it is the customer who decides on whether the product or institution is sufficiently compatible
with his religious convictions. 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, Muslim communities are drawn from very different traditions. Muslims from North
Africa or South East Asia will undoubtedly have their own specific evaluation criteria.
While financial products, 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, the Shariah
compliance of an Islamic retail banking offering will undoubtedly be more dependent on the opinion of
local religious leaders.

28
 I s l a m i c f i n a n c e

Examples of European banks' positioning

HSBC Universal Islamic banking and finance offering via its Islamic subsidiary HSBC Amanah,
Amanah operating in the United Arab Emirates, Malaysia and the United Kingdom.

Islamic banking offering and distribution of "alburaq" products of the Arab Banking
Lloyds TSB Corporation International Bank (ABC, Bahrain), mainly in the United Kingdom.

Société SGAM AI: Creation of Islamic financial products (funds)BFCOI: Retail distribution of
Générale Shariah-compliant products (investment funds) in Réunion.

Standard Islamic banking and finance in Malaysia, Indonesia and the Middle East via its Islamic
Chartered window, Standard Chartered Saadiq.

Islamic Business Unit in Bahrain responsible for developing Islamic financial

Calyon products.Banking offering in Saudi Arabia in the Saudi Fransi world (Commercial, AM,
brokerage, insurance, etc).

Islamic Business Unit in Bahrain responsible for developing Islamic financial products
BNP Najmah (funds and corporate banking).

Deutsche Islamic financial products offering in the Middle East.

Bank
Private banking and asset management from Switzerland and bases in Dubai and
Figure 21

UBS Bahrain Full integration of specialist subsidiary NORIBA and creation of an Islamic
window within the group.

29
 Muslims in Europe
As with most religious groups, statistics on the Muslim population are
based for the most part on unofficial estimates. All the sources agree,
however, on a population of between 12 and 15 million Muslims out
of a total population of 466 million people living in the European
Union.

EU population: 466 million

Country Estimated Muslim population
France 6,000,000
Germany 3,000,000
United Kingdom 1,600,000
Spain 1,000,000
Netherlands 950,000
Italy 830,000
Belgium 400,000
Austria 340,000

Figure 22
Sweden 300,000
Denmark 270,000
Source : BBC News (mars 2008)

It should remembered that Muslim communities, just like others, are

not uniform and are made up of a complex mix of religious followings
and cultural traditions. Very different migration routes and integration
processes have left each Muslim community with its own distinctive
features.
In France, the Muslim population originates primarily from the
Maghreb and Africa.
Muslims in the Netherlands generally trace their origins to what is now
Indonesia, and Muslims in the UK tend to have origins in South East
Asia, in particular Pakistan and Bangladesh.
Answers to the question of how Islamic banking activities will develop
will no doubt differ from one country to another, and from one group
to another.

30
 I s l a m i c f i n a n c e

Overview by country
Royaume-Uni
Since 2004, when the Financial Services Authority (FSA) gave its approval for the launch of the Islamic
Bank of Britain, the United Kingdom has thus far been the only European country with an Islamic banking
offering aimed at the country's Muslim communities.
Political commitment
"No obstacles, 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,
with the stated objective of establishing the UK as the European gateway for Islamic finance and the most
attractive marketplace for Middle Eastern capital. 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.
The FSA has also encouraged the parallel development of Islamic retail banking to promote banking take-
up among British Muslims and avoid the phenomenon of banking exclusion on the grounds of religious
beliefs.
Islamic retail banking
Islamic Bank of Britain (IBB): an Islamic financial institution (the first and only fully Islamic retail bank),
approved in 2004, 8 branches.
HSBC and Lloyds TSB are the two biggest conventional banks providing an Islamic banking offering:
- HSBC via its Islamic subsidiary (Islamic window), HSBC Amanah;
- Lloyds TSB via its range of Islamic accounts and its distribution of alburaq products from the Arab Banking
Corporation International Bank.
National Savings & Investment is also authorised to distribute Shariah-compliant financial products for
individual savers.

Islamic Bank of Britain 2007 2006 2005 2004

Customer deposits (£m) 135 83,9 47,7 2,1
Customer financing assets (£m) 15,8 10,4 4,5 0
Figure 23

Customers 42,000 30,814 14,023

Accounts 64,000 51,032 25,403

31
 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.
European passport
To date, only BMLE seems to have taken advantage of the European
passport entitling it to offer investment services across the whole of
the European Union. It is the case, however, that local regulations
and tax law in most EU countries currently limit the competitiveness
of Islamic products.

Financial indicators for UK-based Islamic banks.

2007 data, £ Sterling
Banks Assets Customer deposits Equity Profit (loss)
IBB 164,936,827 134,640,612 24,825,309 (6,917 ,004)
EIIB 316,848,322 2,771,980 180,919,407 (4,476,781)
BLME 297,720,601 5,601,432 179,402,020 697,786
Figure 24

Total 779,505,750 143,014,024 385,146,736 (10,695,999

Source : Pr. Rodney Wilson, in Echanges, novembre 2008

32

La France
Pioneering players and the biggest Muslim population in Europe
France has a number of pioneering players in Islamic finance, starting
with BNP Paribas and Calyon which began developing Islamic products
in the 1980s. Since 2004, SGAM has also offered Shariah-compliant
funds developed with the assistance of SGAM AI (UK).
Although France has the largest Muslim population in Europe, there
is not a single Islamic retail banking product on offer in mainland
France. The launch of Islamic products in Réunion in February 2008
by Société Générale through its BFCOI subsidiary, as part of a public
offering approved by the AMF, is an initiative that deserves a mention.
In a country where the principle of secularism holds a central place,
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.
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), "47% of Muslims living in France were
interested in savings accounts and 55% in loans based on Islamic
principles". The survey estimates that currently some 500,000 people
of Muslim origin "would be very interested in Shariah-compliant bank
loans".
Two French banks replied to the Solving/Efma questionnaire, reflecting
a market still in its infancy.
France beginning to legislate
On the strength of its expertise, France now aims to catch up the UK's
lead and make Paris an attractive marketplace for Islamic finance and
capital.
There have certainly been any number of political initiatives since
2007, and changes to regulations in order to accommodate Islamic
finance (and hence banking) are under way.
I s l a m i c f i n a n c e
France keen to catch up
with the UK
June 2007: a Senate report underlines the
fact that France has fallen behind the United
Kingdom.
2007: the AMF grants its first approvals for
Shariah-compliant funds.
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.
July 2008: the AMF rules on the possible
listing of sukuks on a regulated French
market.
2nd half of 2008: Christine Lagarde
announces a series of regulatory adjustments
in favour of Islamic finance. 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.
End 2008: three Islamic banks reportedly
apply for approval in France: Qatar Islamic
Bank, Kuwait Finance House and Al-Baraka
Islamic Bank (Bahrain).
December 2008: first adaptation of the tax
framework: sukuk and murabaha.
33
2009: start of Islamic banking activities?
The question now is undoubtedly not so much whether an Islamic banking offering will be
launched in France, but rather what form it will take. The lifting of tax frictions, designed
to remove the constraints on the competitiveness and profitability of the Islamic model in
France, could now make it possible for:
- Islamic banks in the UK to offer their products and services in France thanks to the
European passport;
- Islamic financial institutions to propose an Islamic banking offering by way of distribution
partnerships;
- Islamic financial institutions, particularly in the Gulf states, to move into the market,
mainly through acquisitions, since they have the resources to pursue external growth.
French banks, with dense networks in one of the most heavily banked markets in Europe
and undeniable expertise in Islamic banking, are well placed to play a major role in the
development of halal banking.
Some of the possibilities that could be envisaged are:
- the distribution of certain Islamic products through the conventional network (loans,
savings, insurance);
- the creation of Islamic windows with a universal Islamic banking offering.
Germany
Germany's demographic situation is similar to that of France, with a large Muslim population
likely to support the development of Islamic retail banking.
Germany differs from France on two headings, however.
The German government has not demonstrated the strong political commitment to Islamic
finance that would be capable of removing the barriers to its development.
In addition, Germany's Muslim population, largely Turkish in origin, is less sensitive to the
issue of Islamic finance.
German banks also have considerable expertise in Islamic finance and have developed
Islamic products and services, some Corporate and others aimed at a wealthy Muslim
offshore customer base. Deutsche Bank, Commerzbank and Dresdner Bank all have Islamic
windows in the Middle East and in Indonesia.
Deutsche Bank has set up launches of sukuk issuance programmes and developed a
range of retail financial products in conjunction with Saudi Arabian banks.
Only one German bank replied to the Solving/Efma questionnaire.

34
 I s l a m i c f i n a n c e

Spain
Spain is fertile ground for the development of Islamic finance and banking. It has a growing Muslim
population that represents real potential for the retail banks and is well disposed towards halal products.
In 2007, Bancorreos (Spain's postal bank) and Deutsche Bank signed agreements on the distribution of
certified Islamic products.
Only one Spanish bank replied to the Solving/Efma questionnaire.

Netherlands
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", there has been little
substantial development of Islamic finance since then.
One failed experiment was that of Bilaa Riba, 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.
A more successful example is ING, which has expertise in Islamic finance that it is developing in Malaysia.
No Dutch banks replied to the Solving/Efma questionnaire.

Belgium
Belgium also appears to lack the strong political commitment that would encourage the development of
Islamic finance.
Belgium's Muslim community, largely Moroccan in origin, is highly sensitive to the issue of Islamic finance,
but Belgian banks feel the demand is too small to sustain any substantial development of Islamic retail
banking in Belgium.
Fortis is relatively active in the field:
- launching an Islamic fund in Indonesia in June 2007;
- acquiring a 40% equity stake in a major Malaysian reinsurer (Re Takaful);
- acquiring a stake of under 5% in Malaysian bank Maybank;
launching an Islamic SICAV (mutual fund) in 2008: Fortis B Fix 2008 Islamic Index 1.
No Belgian banks replied to the Solving/Efma questionnaire.
Local players stress, however, 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.

35
Luxembourg
There is one Islamic insurance firm, Takaful SA, specialising in life insurance with mostly British investors.
Takaful SA also has a UK subsidiary, Takaful Limited, which distributes life insurance products developed
in Luxembourg.
Luxembourg is playing an increasingly important role in the management of Islamic assets. As early as
2002, the Luxembourg stock market was the first in Europe to list sukuks.
In 2008, there were 31 Shariah-compatible funds.
One bank replied to the Solving/Efma questionnaire.

Italy
No Italian banks are engaged in the Islamic finance market, but in 2008 the Union of Arab Banks
announced the setting up of an offshoot of the European Islamic Investment Bank (EIIB, London).
One bank replied to the Solving/Efma questionnaire.

Sweden
Sweden has no Islamic banking offering despite a community of some 300,000 Muslims. Some Muslims
are attracted by the principles of cooperative banking, which provides interest-free loans.
Worth noting is the launch in October 2008 of a Shariah-compliant pension fund. This equity fund was
set up to manage pensions for Swedish Muslims.
No Swedish banks replied to the Solving/Efma questionnaire.

Denmark
In 1985, the Islamic Bank International of Denmark (Copenhagen) was one of the first Islamic banks to
set up operations in Europe. Its founding was prompted by Danish Muslim intellectuals. It has now ceased
trading, however, due to management problems.
In March 2008, four regional banks (Sparekassen Farsø, Sparekassen Vendsyssel, Sparekassen Hobro
and Den Jyske Sparekasse) launched a joint offering of Shariah-compliant home loans: Amanah Kredit
mortgages.
No Danish banks replied to the Solving/Efma questionnaire.

36
 I s l a m i c f i n a n c e

Switzerland
Many Swiss financial institutions and banks have developed Islamic products for their Middle Eastern
customers. UBS and Crédit Suisse have set up their own Shariah Boards to develop their Islamic financial
products.
In 2006, UBS fully integrated its Islamic subsidiary Noriba (Bahrain). That same year, Faisal Private Bank
was the first Islamic bank to be established in Switzerland; services provided include private banking,
wealth management and custodian banking.
Pictet Suisse bank also has a division specialising in Islamic finance.
One Swiss bank replied to the Solving/Efma questionnaire.

Other countries (Greece, Austria, Hungary)

None of these countries has engaged in any particular initiatives in Islamic finance.
One bank in each of the countries replied to the Solving/Efma questionnaire.

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, and particularly for home loans. France is the country
most often mentioned as having potential for the development of Islamic retail banking.
The number of responses to the Solving/Efma questionnaire was very small (only 10 replies).
Banks are, however, wondering whether a broad market exists. Islamic finance has as yet seen little
development in the cultures of the Maghreb and Africa, where most of the Muslims living in Europe have
their origins.
Furthermore, Islamic finance can only become a reality when the legislative framework is adapted to
overcome the disadvantages of the real economy, as the failed examples of the Dutch financial institution
and the Danish bank clearly illustrate.
In view of the results of the IFOP survey and the interest that Islamic finance generates in North Africa,
however, supply could possibly create its own demand.

Source: Isla Invest Consulting France

Source: Al Maalya, Islamic Finance consulting

37
 Conclusion
The issues of Islamic banking and finance are important not only in
financial terms but also in political and social terms. Given the huge
liquidities provided by oil revenues and a Muslim population that
accounts for a quarter of the world population, the growth drivers for
Islamic finance appear sustainable despite the slowdown in the world
economy.
The two-way flow of investment between Western countries and the
Middle East has given Islamic finance a global dimension, but the
Islamic financial model is still under construction and in the process
of standardisation by agencies in the Gulf countries and Malaysia.
Until such time as a clearer picture emerges of this future model,
Islamic finance is still a relatively restricted and illiquid market as
compared to the conventional model.
The future model or, rather, models depend on the extent to which
Islamic finance is capable of reconciling three prevailing currents:
- a social current at the grass roots, arguing for the profit-sharing
model as ideally suited to promoting development aid, particularly
in Africa, the Maghreb and Asia;
- a religious current which guarantees legitimacy according to Shariah,
even if it means curbing financial innovation;
- an industrial current, which sometimes risks undermining the specific
nature of Islamic finance when it seeks to replicate all the
instruments of conventional finance.

38
 Copyright © 2009 Efma. All rights reserved
This report not be reproduced or redistributed,
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Efma accepts no liability whatsoever for the actions of third parties in this respect.
Islamic finance
February 2009