Islam has an ancient and illustrious history in southern Europe. With the region struggling under the weight of its debt burdens and facing imminent economic crisis, could its close geographic and cultural links with the MENA region provide a much-needed escape route?
Islam has had a fundamental influence on the culture and history of the Mediterannean basin, particularly in Spain and Portugal. The Arabs and Moors of Al-Andalus crossed the Straits of Gibraltar into the Iberian peninsula in 711 and for almost seven centuries the Andalusian empire dominated the region, stretching at its peak over Spain, Portugal, southern France, the Balearic Islands and Sicily in what is often referred to as a golden age of learning and religious tolerance.
Following their departure in 1492 however, Islamic influence waned in the region and today little remains of its legacy beyond a rich history of art and architecture. However the recent economic and financial challenges facing these countries, especially Spain and Portugal, have led to a growing interest in Islamic finance as an alternative financial system and a valuable source of investment.
Economic challenges
Spain’s central bank this week forecast a contraction of 1.5% for 2012, compared to previous estimates of 2.3% growth. The figures take the country back into recession, and raise further concerns that the country would be unable to control its spiralling debt.
Government austerity measures, falling demand and unemployment of over 21% have contributed to the plummeting economy, and the new right-wing government recently announced that the 2011 public deficit accounted for 8% of GDP — far above the 6% target previously agreed with the EU, and leading to spending cuts of EUR8.9 billion (US$11.5 billion) and tax increases of EUR6.3 billion (US$8.2 billion). The news presages a tough 2012 for the country amid fears that it will be dragged yet deeper into the Eurozone debt crisis.
Portugal too has experienced a sharp contraction, with a debt load that exceeds its GDP, and is currently slashing spending and raising taxes in an attempt to meet the terms of its EUR78 billion (US$98.9 billion) EU/IMF bail-out plan. Standard & Poor’s (S&P) last week cut the country’s credit rating to junk (‘BB’) with a negative outlook, citing “deepening political, financial, and monetary problems within the Eurozone,” as well as “sustained external financing pressures on Portugal’s private sector, and what these may imply for growth performance”. S&P also warns that: “The debt restructuring process in Greece could further alienate potential investors in Portuguese government debt.” Portuguese markets have tanked, with government bond yields soaring to record levels and investors fleeing the country’s bonds, and many players believe that a restructuring within the next five years will be unavoidable, with potentially disastrous implications for Europe’s shaky banking sector.
So what growth prospects can possibly exist amid such gloomy conditions? One of the few lights in the darkness surrounding the Iberian economic situation is the opportunity potentially offered by Islamic finance: both through Middle East investment and particularly from the geographic and cultural links the region has with the burgeoning markets of North Africa.
Spain looks to the Gulf
Spain has over 1 million resident Muslims, many of whom are recent immigrants from North Africa and the Middle East, and the government has been looking to Islamic finance as a method of promoting investment from Islamic countries for some time. In May 2009 the Halal Institute in Cordoba under the Spanish Islamic Commission announced an agreement with the Sa Nostra building society of the Balearic Islands to launch an Islamic current account. In March 2009 the Instituto de Empresa business school (IE Business School) launched the Center for Islamic Economics and Finance (CIEF), in collaboration with King Abdulaziz University in Saudi Arabia, to promote Islamic banking and finance in Spain. In November 2011 this was re-launched as the Saudi-Spanish Center for Islamic Economics and Finance (SCIEF). In 2010 the Madrid Stock Exchange also hosted the first conference on Islamic finance in Spain to explore the “solutions Islamic finance offers for public and infrastructure projects through public-private partnership”.
Spain is struggling with Islamophobia and racism issues which are impeding the growth of Islamic finance, particularly due to high-profile immigration controversies which have repeatedly descended into violence. Depsite numerous initiatives to get Islamic finance off the ground, limited progress has therefore been made in the banking sector. For example Banco Santander, Spain’s biggest banking group, generated zero net income from the Middle East and Asia in the first half of 2011.
However, new progress is being made as the country recognizes the importance of the MENA region in terms of fundraising prospects. A tourism campaign entitled “I Need Spain” was recently launched, specifically targeting GCC tourists and aimed at attracting 50-60,000 annual visitors, along with the inauguration of direct flights from the UAE to Madrid. In December 2011 the Dubai International Financial Center (DIFC) responded with a seminar to boost economic and financial cooperation between the UAE and Spain, following the signing of a MoU between the DIFC and the Madrid Financial Centre (MCF) in 2010 to support and encourage investment between the two regions. The UAE is the leading destination of Spanish exports to the Middle East, at around EUR1 billion (US$1.29 billion) annually. Abdullah Al Saleh, the undersecretary of the ministry of foreign trade in the UAE, commented that: “Bilateral trade between Spain and the UAE has been growing at an annual rate of 15%, reaching an impressive AED2.5 billion (US$680.6 million) in the first six months of 2011, with the UAE exporting goods worth AED88 million (US$23.9 million), re-exporting AED226 million (US$61.5 million) and importing AED2.1 billion (US$571.7 million).” The Spanish ambassador to the UAE, Gonzalo de Benito Secades, also noted that: “Foreign investments have also progressed well in recent years, with the UAE being the first foreign country investing in Spain in 2009.”
Portugal takes first steps
Despite its ancient tradition of Islamic influence, Portugal has in recent history had minimal interaction with Islam. According to the National Statistical Institute the 1991 census recorded less than 10,000 Muslims in the country, although the Islamic Community of Lisbon now suggests numbers of around 40,000. As a result, Portugal has seen limited interest in Islamic finance to date. However, following its recent economic and financial woes, there is a gradual move in the country to consider the industry as an alternative means of fundraising. In a recent interview with iSfin (a network of Islamic Finance Lawyers) Luis Branco, the finance partner and head of the Islamic finance team at Portuguese law firm Morais Leitao (MLGTS), explained the strong potential for Islamic finance in the country.
“At this point in time in Portugal, with difficulties in terms of liqudity, and our main banking institutions facing problems… there’s been an effort made by the authorities, by the government, but also by private entities, of accessing and approaching our friends from North Africa, and from the Gulf… We see that investments coming from that area are probably something that we are going to increase in the near future. There is a defined policy from our authorities to look at the relationships with those countries.”
Branco points out in the interview that Portugal has the advantage of an extremely flexible legal framework which can be easily adapted and adjusted to accommodate Islamic products, so that “it will not involve any dramatic changes to our legislation”. Although he notes that the tax aspect is always more difficult, even here he believes that there will be no significant barrier, because the Portuguese governnment “understands the importance of creating a friendly framework for this kind of investment,” and is in fact actively seeking Islamic investment.
He also highlights the growing activities of Portuguese companies in the Arab world. “In North Africa we have several companies that are doing business in Morocco… in Algeria for many years we have had construction and design companies working for the Algerian authorities. Libya now is in a difficult situation but since it opened more to foreign relations we’ve had a very interesting presence there: for example we have a bank that has a significant participation in a local bank there, and many other Portuguese banks are looking into that market. In fact, I know that currently there are at least a couple of banks that are making in-depth studies for creating a presence or at least having some kind of relationship with the Gulf countries, and also with Turkey, and with the Arab-Islamic world in general.”
The importance of Africa
Following the Arab Spring, North Africa now presents one of the most exciting potential markets both globally and for Islamic finance in particular. With their strong links and geographic proximity to the region, Spain and Portugal are in pole position to leverage this oportunity.
Relations with Africa are one of the core pillars of Portugal’s development strategy. Since 1985, the country has maintained bilateral cooperation with the African Development Bank (AfDB) in the form of financial contributions including a Technical Cooperation Fund and two Multidonor Trust Funds, as well as contributing significantly to debt relief under the Enhanced Heavily Indebted Poor Countries (HIPC) and Multilateral Debt Relief (MDRI) initiatives. Portugal also has widespread private sector investment in the continent. In 2009 Banco Espirito Santo (BES) established its subsidiary BES Africa with a capital of EUR50,000 (US$66,500), to coordinate its equity investments in the continent and encourage economic growth and cultural affinities. Its main influence is in Angola, where is is the third largest bank with 51.49% of BES Angola.
However, it is also moving into North Africa with a 2.77% stake in Morocco’s Banque Marocaine du Commerce Exterieur (BMCE Bank), which has a presence in 23 countries and a market cap of EUR3.6 billion (US$4.7 billion). Within the last two years the bank has also purchased 40% of Aman Bank in Libya, set up a leasing company in Algeria, and is studying the potential for commercial and investment banking activities in South Africa and Mozambique. Although Portugal’s influence remains primarily in sub-Saharan Africa, with companies including Miranda & Associados, PLMJ, F Castelo Branco & Associados, Abreu Advogados and Vieira de Almeida and SRS Advogados targeting inbound and outbound deal flows, there is little doubt that it is well set-up to leverage its existing contacts and take advantage of developing opportunities across the continent.
Spain has a closer history with North Africa, with significant private and public sector investment into countries such as Algeria, Libya and Morocco especially in the energy sector. Spanish firms Cepsa, Endesa and Iberdrola are partners alongside GDF Suez and Algerian state-owned energy company Sonatrach in the EUR900 million (US$1.17 billion) Medgaz pipeline connecting Algeria to Spain. Cepsa is also active in Morocco through Cepsa Maghreb, while Endesa owns subsidiaries including Endesa Carbono and a stake in Morocco’s Energie Electrique de Tahaddart Africa. Iberdrola has operations in Algeria, Tunisia, Egypt and Kenya, and Isolux Corsán has recently won a tender for a EUR142 million (US$184.5 million), 482km electricity line in Kenya. Spanish law firms are also active in the region, with Garrigues and Cuatrecasas Gonçalves Pereira maintaining offices in Morocco. Recently there have also been signs that investment has started to flow the other way, with the 2011 acquisition by Sonatrach of a 3.85% stake in leading Spanish utility Gas Natural Fenosa worth EUR514 million (US$668 million).
Malta as matchmaker?
It’s not only Spain and Portugal that have recognized the opportunities presented by Islamic finance. Their smaller neighbors have also grasped the industry’s potential and are also well-placed to capitalize on it. Malta in particular is attempting to position itself as an international financial center in the Mediterranean, with its financial service sector seeing growth of over 30% in 2011 and accounting for 25% of GDP. The minister of finance, Tonio Fenech, explains that the country is uniquely positioned to leverage its physical location and its close ties with the Middle East and North Africa to promote Islamic finance. “The main attraction so far has been that Malta structures put Islamic finance on a level playing field with conventional finance. This has been possible through the use of certain legislative instruments such as the Trusts and Trustees Act combined with the income tax legislation, which provide for an excellent platform for Islamic finance transactions.” The World Islamic Finance Institute was recently formed in the country, while international organizations including Al Baraka Banking Group, Kuveyt Turk Participation Bank and Ernst & Young (Bahrain) all have a presence on the island, and local banks are also exploring the possibility of linking with Islamic banks to offer Islamic finance investment products.
Africa is also a focus for Malta, which has the potential to develop into a conduit to encourage the growth of the Islamic finance industry between the twin regions of North Africa and southern Europe. Fenech believes that: “The knowledge and expertise gained in the Islamic finance sector… will allow Malta to take a leading role in the development of Islamic finance in the Mediterranean, particularly in the North Africa region but also in southern Europe.”
Reuben Buttigieg, the president of the Malta Institute of Management, agrees. “With respect to North Africa, the declarations made by various political parties are certainly encouraging. The will to turn North Africa into a flourishing Islamic finance region seems to be there. However, North Africa will need a lot of expertise if it wants to head to a solid Islamic finance industry. From this perspective, Malta will have a major role. It has a strong reputation in the financial services sector and will continue to act as a conduit of Islamic finance to North Africa (and southern Europe). This is not a new scenario from Malta as it has acted already as a gateway to Libya for various international conventional banks.”
With the European markets on shaky ground and the strong headwinds of the global markets making their position ever more precarious, southern Europe is in desperate need of a shot in the arm to boost its investment flows and increase its fundraising opportunities.
Conversely, following the events of the Arab Spring the countries of North Africa are crying out for investment and expertise to help them shore up their fledgling democracies and boost their developing economies. With their long history of association, could this truly be a match made in heaven for the two regions? — LM