Italy is the world’s ninth-biggest economy, an economy which is mainly based on services and manufacturing. In particular, the country is specialized in manufacturing high-quality goods and its backbone is mainly made up of SMEs. The country is divided into a highly industrialized and developed northern part, where approximately 75% of the nation’s wealth is produced and a less developed and more agriculture-dependent southern part.
As with almost any European country, Italy suffered the consequences of the economic and financial crisis; during the period from 2008 to 2015, Italy’s GDP decreased significantly and it will take a few years before the same, pre-crisis, levels of wealth will be reached again. However, after years of recession, the economy is now recovering. Such a positive trend is confirmed by the forecast of the 2017 GDP growth, which is assumed to be at a rate of 1.4%.
To support and expand the positive recovering trend, the Italian government has recently approved the country’s draft budget for 2017, which was sent to the EU Commission to get its green light according to EU rules, and which is based on measures such as the reduction of the corporate tax rate for small businesses and the increase of public investments. However, the expansive fiscal policy reflected in the draft budget will trigger an increase of the debt to GDP ratio, which is forecasted to be 2.3% in 2017, ie 1.8% higher than the limit set by the EU. Indeed, being part of the EU and the eurozone, in setting its fiscal policy Italy must comply with the limits established by the EU. However, the Italian government has recently asked the EU to accept such a ratio on the basis of the costs which Italy is bearing as a result of the assistance given to thousands of immigrants escaping from the wars in the Middle East and North Africa and also as a result of the recent earthquakes in central Italy.
Review of 2016
Looking back to the Islamic finance-related events in the last 12 months, a first step taken to make the Italian tax framework Islamic-friendly was the appointment of a working group of tax experts by Maurizio Bernardo, the president of the VI Finance Committee of the Chamber of Parliament, with the aim, inter alia, of implementing the so-called ‘level playing field’, therefore putting Islamic finance, from a taxation point of view, on the same level as conventional finance, in particular by removing the double taxation which may affect those contractual structures based on the purchase and subsequent resale by the lender of a specific asset like Murabahah and Ijarah.
Furthermore, in consideration of the growing Muslim community in Italy, which has now reached some 1.8 million residents, and of the interest shown to the country by Islamic investors, the possibility of setting up an Islamic bank has also been discussed. This could happen in the form of a retail bank, providing bespoken financing Shariah compliant banking products to the general public or, alternatively, in the form of a commercial and investment bank, acting as a bridge between Middle East investors and Italian SMEs. In particular, the bank could in the latter case, inter alia, advise Islamic investors in the purchase of controlling and minority interests in Italian Shariah compliant companies and businesses, advise Italian Shariah compliant companies in their expansion into Islamic and Halal markets by entering into commercial agreements, joint ventures and amalgamations, advise Italian Shariah compliant companies and businesses on IPOs, secondary offers and private placement of shares by researching actively Islamic investors as well as arrange Shariah compliant financings in conjunction with equity investments.
The Bank of Italy, which is the Italian banking supervisory authority, has been approached, in order to discuss how to set up such an Islamic bank in Italy. Indeed, such a goal could be reached (i) through a fully-fledged Islamic bank operating according to the principles of Shariah; (ii) by authorizing the set-up of a branch or subsidiary of a conventional bank, specialized in offering of Shariah compliant financial products; or (iii) through an Islamic window, inside conventional banks, offering Islamic financial products.
Preview of 2017
Looking ahead to the upcoming year, it is hoped that the working group appointed by Berardo could come up soon with a clear and definitive proposal that will put Islamic finance on a level playing field with conventional finance from a taxation prospective.
Further to the aforementioned initiative, other ongoing projects include one with regards to the structuring of Islamic mini-bonds. The idea derives from the Italian law reform process started in 2012, which aimed at simplifying the legal and tax framework for the issuance of bonds and similar securities (known in the market with the non-technical name of ‘mini-bond’) by unlisted companies like SMEs. Indeed, the structuring consists of working on the aforementioned legislation to elaborate on a product that, because of its profit-sharing nature, complies with Shariah.
With respect to the possibility of establishing an Islamic bank in Italy, it is worth noting that it would be easier to reach this goal if a harmonization process involving the national regulators takes place, with a view to elaborating on uniform solutions at the European level, taking into account that on the one hand, following the entry into force of the single supervisory mechanism, the final competence to grant banking licenses within the eurozone rests with the European Central Bank, and on the other, that there are retail Islamic banks already operating in other European countries such as the UK and, most notably, as far as the eurozone is concerned, Germany.
Finally, it is worth mentioning that Italy could easily, in line with what has already been done in the UK and Luxembourg, issue sovereign Sukuk, through the amendment of the actual legal framework, following the model already used in the past for the securitization of public real estate assets. In particular, a pool of assets belonging to and used by the public administration could be identified and transferred to an SPV issuing Sukuk, and then leased back to the selling entities based on Ijarah. Sovereign and semi-sovereign Sukuk could be particularly useful to finance public projects and infrastructures considering the high level of indebtedness of the country and its regions and municipalities and could eventually open the door for the use of such instruments in the private sector.
Taking into account the initiatives carried out by other European countries, it is clear that Islamic finance is a sector with huge potential for Italy as well. There are many initiatives pursued on a spontaneous basis, and sometimes not properly coordinated among them, to promote Islamic finance in Italy, but the general environment does not yet appear to be ready to ‘open the door’ to this alternative and ethical form of financing. Probably, for this to happen, it is necessary that the decision-makers at different levels take a strong view that this is actually an opportunity for the country that deserves to be pursued, and politically and technically endorse its implementation like what is happening in other countries within the EU.