By the start of 2016, the global Islamic financial services industry had, according to the IFSB, exceeded an overall total value of US$1.88 trillion. In Europe, Islamic finance continues to grow, particularly in Western Europe where real estate remains highly attractive for investors. According to property firm JLL, around 60% of all Gulf investment into the UK and Germany is now carried out on a Shariah compliant basis. SHAKEEL ADLI and PAULA WILSON delve further.
Review of 2016
There have been a number of significant developments in Europe in 2016 that are likely to impact 2017 and beyond. In April, the Islamic Fintech Alliance was launched by eight founding members of crowdfunding platforms with the aim of facilitating the adoption of fintech among Muslims across Europe.
In the UK, the decision to leave the EU has caused the value of the pound to steadily fall. This has been good news for investors, including Islamic investors such as Rasmala which acquired Abbvie House, a 55,958 square feet grade A office building located in Vanwall Business Park, Berkshire, for GBP24.5 million (US$30.49 million).
Meanwhile, Germany’s sovereign Sukuk issuance of US$1 billion is expected by the end of 2016 (although this had not yet been completed at the time of writing). German real estate also remains an attractive proposition for Shariah compliant investors with Natixis Pfandbriefbank having provided a five-year GBP90 million (US$112 million) Shariah compliant facility in May 2016 to a London-based investment company, the proceeds of which were used to part-fund the acquisition of an office building in Frankfurt.
In France, which has Western Europe’s largest Muslim population, while the penetration of Islamic finance has not been as great as in, for example, the UK, 2016 has seen some notable growth and innovation, demonstrated most recently by SAAFI, an insurance and Islamic finance specialist, which launched its iFIS Islamic Gold Dinar Savings Plan for the French market. Major French financial institutions such as BNP Paribas, Societe Generale, Calyon and Crédit Agricole also all continue to remain active in the international Islamic finance market. In Central and Eastern Europe, the picture is less rosy and there has been very limited activity.
Preview of 2017
Looking ahead to 2017, the impact of the aforementioned developments and the new Shariah compliant products that will emerge remains to be seen. Perhaps other Shariah compliant financial institutions will launch pension schemes in the UK or elsewhere (as Al Rayan in the UK has done) or crowdfunding platforms will begin offering Shariah compliant products throughout Europe.
In terms of regulation, the Islamic Finance Council UK and the International Shari’ah Research Academy for Islamic Finance are urging governments and Shariah compliant financial institutions in Europe and beyond to implement a mandatory independent audit of Shariah compliance in Islamic finance. It is hoped that this will lead to a greater degree of accountability.
It will be interesting to see how this, as well as the regulation of Shariah compliant financial institutions, develops over the next year or so.
In the UK, the government intends to invoke Article 50 of the Treaty on European Union by March 2017, although this timing may be delayed following the High Court ruling that parliament must give approval before Article 50 is triggered. It remains to be seen, perhaps as early as March 2019, what impact Brexit, and the run-up to Brexit, will have on the UK’s dominant position on Islamic finance, although commentators have pointed out that challengers such as Luxembourg have a long way to go if they are to compete with the UK’s hold on the market.
In Germany, KT Bank (which became the country’s first Islamic bank when it launched in 2015) expects its customer base to include around 20,000 business and private customers by 2017. Three more Islamic banks may be joining KT Bank in Germany soon, as the Central Bank of Iran announced earlier this year that Parsian Bank, Sina Bank and Middle East Bank plan to open branches in Munich.
In addition, the world’s largest Islamic financial market, the Iranian Securities and Exchange Organization, and the German financial regulator, BaFin, have agreed to jointly develop areas that benefit their respective capital markets. The collaboration may lead to exciting Shariah compliant cross-border opportunities.
In France, Paris in particular remains a very attractive market for Shariah compliant real estate investment and the expectation is that the growth that France has seen in recent times will continue into 2017.
Islamic finance in Central and Eastern Europe could also come to the fore in 2017. However, this will depend on the extent to which the governments in this region encourage the take-up of Shariah compliant structures and products, be it through tax, regulatory or other incentives.
2017 should be an exciting year for Islamic finance in Europe, as the impact of constitutional developments such as Brexit, technological developments such as fintech and regulatory developments such as the call for an external audit of Shariah compliance becomes more and more apparent.
Shakeel Adli is a partner and the head of Islamic finance at international law firm CMS. He can be contacted at [email protected]. Paula Wilson is an associate in the same law firm and assisted in the drafting of this report. She can be contacted at [email protected].