The French legal system is Shari’a friendly because it observes the concept of contractual freedom (as long as there is no contradiction with French public order Law). This facilitates the drafting and implementation of the core concepts of Islamic finance. Secondly, the Rome Treaty (amongst others), signed and ratified by the French parliament, is enforced by French judges, hence it is possible to enforce cross-border transactions referring to a foreign law that incorporates Shari’a guidelines. Moreover, certain Islamic finance concepts can be implemented in France without difficulty because they are similar to French legal concepts. For example, wadiah can be structured through a “fiducie” (a kind of French trust) or a deposit agreement, and ijarah can be structured through a leasing agreement and so on and so forth. Finally the French authorities, parliament and government have warmly welcomed Middle Eastern investors in France and have issued several regulations since 2006 with the aim to clarify and stabilise the environment. Some of these guidelines are mandatory, (the guidelines issued by 2008 concerning the trade of sukuks in France for example), whereas others relate to Islamic products tax regime (the ijarah tax regime according to the July 2010 decree). These guidelines add to the wide range of tax and investments protection Treaties to which France is a party, ensuring a secure and stable investment environment with avoidance of double taxation. This explains the success of Islamic finance in France including via crowd funding, in expansion in 2014. As mentioned above, when structuring an Islamic finance scheme in France it should be in compliance with the French Law relating to public order. This is true whether it relates to a transaction fully or partially located in France, this includes involving at some point a French party or passing through French financial conducts. For example, discriminatory conditions relative to religion for services provided to bank/fund clients and/or between investors in a Undertakings for the Collective Investment of Transferable Securities-UCIT fund are not permitted. Also, when conducting business in France or with French citizens, entities should be in compliance with the French financing system. This means acquiring a licence in order to run a financial business as well as complying with a number of rules related to raising funds.
Traditionally France is deeply attached to the concept of secularism or “laicite” and is reluctant to embrace a strong religious or ethnic stance. However, one could argue that Shari’a compliant crowdfunding could be a useful tool to help young French Muslims fund start-ups, improving their integration in an environment with high unemployment. Additionally, it may encourage a better understanding of Shari’a principles beyond the Muslim community and the recognition of Islamic finance as a contributing factor to French economic growth. Given the current economic situation, France can simply not shy away from the growing market that is Islamic finance.
This lack of Shari’a scholars is unfortunately not regional or national, but worldwide. France, with the United Kingdom, pioneered in this domain with the Islamic Finance Qualification, followed by the IFESI diploma in 2008 and the Islamic finance diplomas of Strasbourg and Dauphine universities in 2009. Other high quality courses are taught in French institutions such as Sciences Po Paris, IAE Paris and Toulouse, Sup de Co Lille, etc. However, this shortage will not be addressed in the immediate future. Becoming a Shari’a compliance officer is a long-term investment, often requiring a PhD in Fiqh, another in economy or finance, followed by a few years of practice in a bank or in a private equity investment fund. The question is not so much the quality or quantity of teaching in France, but the need for financial institution to hire more people with this specific skill set in order to complete their training. Thus, creating a virtuous circle, with Islamic finance feeding the French System that will in turn, feed Islamic finance with its knowledge.
France is home to the largest Islamic population in Europe. With French banking and insurance penetration rates among the highest in the world, French Muslims are globally some of the best served in terms of financial services. This potential market is evaluated at over ten billion euros in recent studies and represents a huge growth reserve for takaful. A Shari’a compliant insurance operator could gain leadership in both the general and family takaful markets. Crowdfunding has also demonstrated impressive growth in 2014 and represents an area for development. Rather than charging interest or a percentage of raised funds which would be a prohibited riba, the company offers an equity stake in the start-up via the crowdfunding operator. This adheres to the core risk-sharing principle of Islamic finance.
In France in 2014, Islamic finance was mainly focused on business and real estate acqusition/financing by Middle Eastern investors. French start-up NoorAssur, specialised in Islamic finance, has announced the opening of its first office in Paris and has plans to open around 20 other branches in France in 2016. NoorAssur provides savings products, fund investment services and insurance services in partnership with SwissLife but the firm sets a target to develop current accounts in 2016. The company claims its Paris’ office is the first islamic bank ever opened in France Launched in 2012, NoorAssur had been offering Shariah-compliant products online only. After opening its first office in Paris, NoorAssur announced it had plans to open around 20 other branches in France in 2016. Launched in 2012, NoorAssur had been offering Shariah-compliant products online only.
The success of the Shari’a crowdfunding sector could help build familiarity with Islamic finance beyond traditional Muslim clients; secondly, the development of takaful represents an important and growing market with related market needs: a challenge currently faced is that we must see an increase in sukuk market in order to raise funds for industries in need of restructuring, perhaps alongside BPI.
The principles of takaful are the following: a participant-owned fund, mutual guarantee, shared risk, no uncertainty nor speculation, no interest charges, investments must he Shari’a compliant and governance structures and models (wakalah or mudharabah) must be transparent and fair. In the wakalah model, the operator acts as an agent for the policyholders. The fund’s shareholders are paid up to a pre-agreed proportion of contributions by policyholders as remuneration for running takaful operations on their behalf (wakeel fees). In the mudharabah model, the operator receives a share of profit or loss from the takaful fund. In short, takaful has a similar approach to mutual insurance.
As in other fields of economics and finance, the importance of standardisation is twofold. Firstly, it helps create trust which is crucial for credit and entrepreneurship. Secondly, it aims to reduce transaction costs, necessary in order to develop mass products. In this era of globalisation, experience gained on one side of the world will be shared with the other.
The overcoming cultural barriers is an important step to be taken in the French market. As mentioned before, the French community is based on a principle secularism (“laicite”). As regards non-Muslims, it should be envisaged as a variety of ethical product. In other respects the legal grounds of the French system are very similar to those of the Shari’a and no significant adaptation would be necessary.
Cross-border transactions occasionally emerge from a willingness to optimise the resistance of a structure to the insolvency of the borrower and/or to optimise taxation. Since the financial crisis, governments are less tolerant of what is perceived as cupid behaviour and the OECD has initiated a reform of its tax treaty model. There seems to be a trend towards more state interventionism, the Alstom crisis and the decision of the French government to control foreign investments is a good example of this. This tendency needs to be taken into consideration when carrying out cross-border transactions.
The French banking system was founded on the “banking monopoly” concept, i.e. controlling the provision of credit and the creation of money through entities qualifying as “banks”. The recent financial crisis shows our economies need alternative models, perhaps based on a certain ethic of finance. In ethics lie the origins of LBO which, over the years, has been largely distorted. The principles of Islamic finance can perhaps become an alternative model for the future.