Exclusive Q&A On Islamic Finance
With Didier Bruère-Dawson
Posted: 16th April 2015 09:561. Can you talk us through the regulatory and tax landscape in relation to Islamic finance in your jurisdiction?
The French legal and tax landscape surrounding Islamic finance was started in 2007 when Paris Europlace founded the Islamic Finance Commission. This was followed by the French financial markets regulator passing rules to allow Shariah compliant funds and sukuks listings. In 2010 the Paris stock exchange created a sukuks section. Same year tax administration issued guidance relating to murabaha, sukuk, ijara and istisna’a. This created tax parity with non-Islamic finance products and interestingly the compensation paid to non-resident sukuk investors is free from tax in France irrespective of whether a sukuk is ruled by French law or foreign law.
All in all, the French authorities have created a welcoming climate for Islamic finance as well as a favourable network of tax treaties.
2. Have there been any recent legislative changes or interesting developments?
French tax authorities are planning to issue new guidelines concerning the Islamic finance products salam, musharakah (daa’ima and/or mutanakissa) and mudarabah. This provides a description of these Islamic products with regards to French legal and financial concepts in order to ensure their acknowledgement (for example, mudarabah is close to private equity business in some aspects) and ensures tax parity with non-Islamic finance products.
3. Why is it important for your state to develop its status as an Islamic international financial centre?
When the Luxemburg and UK governments both issued sukuks they raised 200 M€ and £200 million pounds respectively. Given the cash needs of the French state and the difficulties in the industry and finance sectors, we shouldn't ignore that funds raised by this tool could be invested for these purposes. The sukuk issued by British government used an ijara structure (same as those issued in 2004 and 2014 respectively by German lander Saxe Anhalt and the Luxembourg government) where investors receive a share of the agreed rental income of central government offices – and it was oversubscribed by 11.5 times. The French government could duplicate this scheme for many of its assets as an alternative to sale and prohibited state aids. French officials forecast that France could attract 120 Billion US $ in Islamic assets by 2020, this seems a reasonable expectation given that Islamic banking assets exceed 2 trillion US$.
So rather than positioning Islamic finance in a religious light, we should present it as an alternative tool, linked to tangible assets in the real economy and built upon ethical principles. These principles of fair exchange and of shared risks can be understood by Muslims and non-Muslims alike.
4. Can you talk us through the prospects and challenges surrounding sukuk issuance?
The first French sukuk was issued in 2011 with aim of investing in the food industry. France has demonstrated that Islamic finance is welcome and there is a market place for it, but also that French players could play abroad (in 2013 Societe Generale launched 300 M US $ sukuks in Malaysia).
However, the volume of Islamic finance is fairly weak in France compared to European rivals like the UK, Luxemburg and Ireland. So why is it so challenging to develop Islamic finance in France given the favorable diplomatic, legal and tax framework and the fact that France is home to more than 6 million Muslims?
Beyond the deep-rooted principle of secularity that makes it more difficult for people to admit that a financial activity could be led by religious concepts, the key reason is a lack of direct government engagement. In order to ensure the success of Islamic finance in a country where Muslims are a minority, in addition to a favorable tax and legal frameworks there must be a commitment of government via sovereign sukuks. This has been the case in Luxemburg, UK, Hong-Kong and South Africa. For example, in October 2014, Luxemburg issued an AAA rated 200M € sukuk and hence positioned its country (home to 50 Shariah compliant investment funds) as a leader for Islamic finance. Similarly in 2014 the South African government issued a 500 M $ sukuk oversubscribed 4 times.
However this may change. In 2015 the G 20 group has included sukuks as an infrastructure-financing tool in its annual agenda. This is a move that could spur the use of project-based sukuks throughout the world. Developing countries spend about 1 trillion US $ per year on infrastructure, and according to the World Bank and IMF, the same will continue through 2020. Sukuks could help cater to this need and given its historical connections; France could be a major player in this industry.
5. How is takaful insurance practised in your jurisdiction and what are the preferred models?
There is no global takaful solution in France and currently takaful solutions exist only within three life insurance contracts: "Salam Epargne et Placement" by Swiss Life/Noorassur; "Amane Executive Life" by Vitis Life; and since 2015 “Ethra'a Takaful Famille" by FWU AG.
These Shariah compliant life insurance contracts do not contain either death claim payment or life annuity and were validated by the Independent Committee of the Islamic Finance in Europe. Rather than pure insurance, these are contracts of capitalization with tax leverage. Savings are invested in Shariah compliant investments (avoidance of industries that promote low ethical values, sharing of risks, support of productive economic ventures and avoidance of interest-based economic transactions etc.). This is all fiscally advantageous whilst offering the possibility to stipulate that benefits go to a third party.
6. What new issues arise from cross-border transactions?
Firstly, in comparison to strong results over past two years, the first quarter of 2015 was relatively low in terms of sukuk issuance worldwide. Thomson Reuters Zawya Islamic Sukuk Monitor claims that issuance was less than 50% that of the first quarter 2014. This could be a sign that sukuk legacy is coming to an end but it seems more likely that current political instability may be feeding hostility towards Islamic finance because of confusion. It could explain why a Middle Eastern national bank is envisioning replacing the word "Islamic" by "international" for non-Muslims countries. We can't ignore this situation.
Secondly, in most cross-borders deals there is a dispute resolution clause referring to UNCITRAL model law and arbitration. But there is uncertainty about Sharia’s role in this and how it could impact international arbitration including difficulties in enforcing arbitral awards. Such uncertainty could hamper these deals, but many states with majority Muslim populations have enacted modern arbitration laws recognizing the parties’ autonomy. Dubai and Qatar have also established separate common law jurisdictions (Dubai International Financial Centre and Qatar Financial Centre) that actively promote arbitral centers. Both of the above could help resolve issues between parties and ensure that decisions are enforceable.
7. What key trends do you expect to see over the coming year and in an ideal world what would you like to see implemented or changed?
The first significant Islamic finance trend in France may be in real estate. Due to the mismatch between their financial capacity and domestic market offering, Middle East investors are expected to invest over 180 Billion US $ in real estate outside the Middle East over the next decade. Historically 80% of outflows were invested in Europe and mainly in London (3 times outflows invested in Paris). But considering the London market saturation, analysts expect Paris to benefit from next outflows. French targets are interesting from financial perspective: investment returns yield caps on Paris real estate is more favorable than London.
The French market is Islamic finance friendly from tax and legal perspective, and an ordinance enacted on March 12 2014 (implemented July 2014) made French restructuring law more attractive to creditors / investors. This will attract sovereign wealth funds to France, but also high net worth individuals who will need Shariah compliant structures.
Given the above, outflows from Middle Eastern investors focused on French real estate are expected to be five times those of the previous decade. The first Shariah compliant REIT was established in 2012 and La Francaise AM created OCPI Charia fund for the largest Islamic bank and financial institution of Kuwait in 2013. No doubt other vehicles will be set up in the year to come with purpose and aims of investments in French real estate market.
Second trend, perhaps more modest, might be in retail. France has Europe's largest Muslim community, 41% of who comply with Shariah but retail Islamic finance in France is in its infancy. The offer is limited to a few mubaraha solutions for real estate financing and deposit accounts, plus three family takaful solutions. Firstly secularity is at source of the delay and will remain an obstacle unless Islamic finance is positioned as a global ethical and socially responsible investing finance tool versus a tool dedicated to Muslims. This is how Guidance Residential (member of Barwa group) expanded successfully in the USA since subprime crisis. Secondly the Islamic finance market is relatively underdeveloped in the countries of origin of many French Muslims (Morocco, Algeria and Tunisia). Since Morocco enacted an Islamic finance framework in 2015, we may see takaful insurance and personal loans expand within the Moroccan population in France via Moroccan banks like Chaabi, BPC, BMCE or their French branches. Crowd funding is yet another brand new tool where Islamic finance may expand in the retail sector. Its legal framework had been clarified in October 2014. In 2014 , funds raised are 3 times those raised by 2012 .There was some success with some platforms (Aoon , 570 Easi , Easi up) and even though amounts are relatively small this new fundraising tool could give young Muslim entrepreneurs alternative to risk-adverse traditional banks.
Didier Bruère-Dawson represents various groups, investment funds and investors as part of their investments and divestments in various industry and services sectors in major real estate programs in France and abroad, while structuring and restructuring investments, but also by managing the risks and issues linked to insolvency and pre insolvency proceedings.
His transactional and litigation expertise in M&A, project financing and the acquisition of ailing businesses, distressed M&A, debt structuring and restructuring, but also in Islamic finance is well recognized.
Didier Bruère-Dawson holds a post graduate degree (DEA) in Business and Economic Law (Paris-II University, 1988), a master’s degree in Management (Paris-I University, 1986) and he is a graduate from the Institute of Higher International Studies (IHEI - Institut des Hautes Etudes Internationales Paris-II University).
In 2013, Didier Bruère-Dawson was named “Insolvency and Restructuring Lawyer of the Year” by Lawyer Monthly.
Didier Bruère-Dawson lectures on Islamic finance at UCL university in Louvain (Belgium) since 2015.
Didier can be reached at +33 (0)1 56 64 00 00 or by email at email@example.com