In 2008, the then French minister of the economy, Christine Lagarde, announced that: “We wish to make Paris a better market for Islamic finance, particularly in this background of crisis, credit excess, volatility and cupidity.’ Since then, numerous transactions in France, particularly in the real estate market, have been financed by Islamic products (generally offered by foreign banks and governed by foreign laws). However for the time being, most of the investors, acting through Islamic finance products in France, are not French residents.
Islamic finance started to emerge in France toward the end of the millennium and, to date, no specific set of rules concerning Islamic finance has been issued. The concepts of Islamic finance, though, can be implemented in France and foreign institutions may enter into the banking, insurance or capital markets on the condition that they are licensed to operate (unless they can rely on the European passport). Indeed, the French legal system is quite Shariah friendly. The concept of contractual freedom facilitates the transfer of the core concepts of Islamic finance. Therefore, no specific amendments to French regulations appear necessary to accommodate Islamic transactions. However, the French tax regime still needs to be adapted to Islamic transactions, for instance, with respect to transfer taxes incurred in Ijarah arrangements.
Review of 2016
At the beginning of 2016, Azurite Courtage created Takaful insurance products for French residents, adding to the already existing Shariah compliant products in the French market. Moreover, Noorassur, a company that used to offer online Shariah compatible products, has now opened several offices around the country; Noorassur offers Takaful insurance products (the protection can cover the Hajj) and Shariah-compatible savings (for weddings, studies, pensions and such).
A recent reform of the French contract law (Ordinance n°2016-131 dated the 10th February 2016 reforming the French Civil Code), which entered into force on the 1st October 2016, has reaffirmed and specified some of the core concepts of French civil law, such as good faith (‘bonne foi’) and, like the Haram principle, the existing rule of ‘public order’. This reform also introduced a new rule, in line with the Maysir principle, according to which a court can force the parties to an agreement, the enforcement of which has become substantially unaffordable for one of the parties, to renegotiate the agreement in order to find a new economic balance; otherwise, the parties can agree to terminate the contract.
Also, the reform reasserts that any civil contract will need to have content that is certain (‘contenu certain’) or at least determinable (by indicating the quantity or the quality of the goods), which is a rule ‘ad valitatem’ (for example, a court would rule that a purchase contract that does not sufficiently determine the elements of the purchase is null and void). All of the aforementioned principles have common values with Islamic finance rules and allow the reaffirming that Islamic transactions have good roots for growing in France. More particularly, Mudarabah can be implemented under French law through a limited partnership, Musharakah through a joint venture-type arrangement or a partnership company, Ijarah through a leasing transaction and a Wadiah can take the form of a deposit agreement governed by the Civil Code. Murabahah, however, is treated under French law as a credit transaction, and thus particular attention must be paid to the compliance of the financier with the regulations for financial institutions, credit transactions and the package securing the repayment. Furthermore, Shariah funds make up a significant part of ethical funds in France and the French government, as well as the Financial Markets Authority, has promoted Sukuk type securities to attract Islamic investors.
Preview of 2017
With nearly six million French Muslim citizens, France is one of the European countries with the biggest growth potential in terms of Islamic retail banking. French residents are more and more active in the Islamic finance market, for instance, some ‘VIP-customers’ working in the sport or media industries. In view of this, various foreign Islamic banks are considering the establishment of a direct subsidiary in France, more particularly in the context of Brexit.
Professionals of Islamic finance in France are suggesting the implementation of several reforms such as greater publicity, establishing legal and fiscal certainty for Islamic finance instruments, a stock exchange index of Islamic funds created by the NYSE Euronext similar to the US’s S&P Shariah indices, or a strategy for the collection of savings, making it easier for Islamic finance institutions to obtain banking licences. The creation of such a welcoming Shariah business environment is a challenge for the French market. The integration of Islamic finance training in the French higher education system is also crucial and is currently provided in particular by the prestigious University Paris-Dauphine. With all this potential, there is no doubt that the French market is really a windfall for Islamic investors.
Jean-Baptiste Santelli is a partner at De Gaulle Fleurance & Associés. He can be contacted at [email protected].