The outlook for the European economies has improved in recent months and the European Commission is now predicting growth in the Eurozone of 1.6% for 2011. Germany is the best performer with solid export growth driving the economy forward by 2.4%, while the projection for France is 1.7%. The major weakness is in the smaller peripheral Eurozone members, notably Greece, Ireland and Portugal. Although the overall growth figure of 1.6% looks modest in comparison to China and India, as it is from a much higher base and seems sustainable. The major threat to growth is higher oil prices as a result of the popular uprisings in the Middle East. As Islamic finance plays a very limited role in Europe, and most of the activity is in the UK which is not a Eurozone member, it is unlikely to provide much of an alternative to conventional finance. European banks continue to be risk averse which has a small negative effect on growth, but investors from the Middle East may also now be more risk averse about investment in Europe, especially with the freezing of assets of the Gadaffi, Mubarak and Ben Ali families. More significantly, the assets of the Libyan sovereign wealth fund have also been blocked. Of course these asset holdings were not specifically Shariah compliant, but given the uncertainties in the Middle East, and particularly in Bahrain, which is an important centre for Islamic finance, investments in Europe are more likely to be liquidated than increased.
PROFESSOR RODNEY WILSON
There are two ways for Islamic finance to help revive the economy of Europe. Firstly, governments should look to do more sovereign Sukuk. This could be especially easy in Germany as they have experience with Saxony-Anholdt. Second is to pass laws that would allow for the opening of Islamic banks that cater to the European Muslim population. This Muslim population in Europe is said to be around 7%, and are mostly likely “unbanked”. MONEM A SALAM: Director of Islamic investing and deputy portfolio manager, Saturna Capital
Poor economic growth discourages financial intermediation, whether conventional or Islamic in nature. So to suggest that Islamic finance can help “cure” economic malaise could be misleading. In practice, regional governments need to support business and consumer confidence so that the economic momentum begins to churn at an incrementally higher rate. This may be difficult because of the size of the European market, along with the global backdrop. Where Islamic banks can play a meaningful role is to use the current downturn as a forum in which to raise awareness and education about their competencies. This effort need not be a zero-sum game with the conventional institutions. Rather, Islamic banks can use the vacuum created by this environment to build a franchise for their products and services, many of which are misunderstood by the marketplace. Especially at the wholesale level, firms may be looking for financing options in ways that they have not explored in the past. We argue that one of the constraints on Islamic finance in general is the absence of a large hinterland. We see an opportunity in Europe for Shariah compliant institutions to be more forthright in their strategic planning, taking advantage of the current lull to develop new client segments. DOUGLAS CLARK JOHNSON: CEO, Codexa Capital
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