Islamic Finance in Europe Professor Rodney Wilson 38th General Assembly CICA Dubai, November 12th 2008

Outline Role of Islamic finance in Euro-Arab banking relations Early Islamic trade finance operations of major European banks Shariah compliant liquidity management in Europe Sukuk issuance and trading in Europe Islamic retail banking in Europe∂ Islamic wealth management in Geneva Islamic investment banking Shariah compliant fund management Future prospects for Islamic finance in Europe

Role of Islamic finance in Euro-Arab banking relations Euro-Arab banking relationship – Penetration of European banks into Arab World from 19th century – Gulf and Saudi Arabia resistance to riba based finance

London and Paris as gateways for Arab banking to Europe – Euro-Arab joint venture banks from 1970s ∂ – Trade finance and treasury facilities using murabaha

London as Europe’s first Islamic financial centre – – – –

Retail Islamic banking for UK Muslim community and visiting Muslims Islamic Bank of Britain from 2004 European Islamic Investment Bank HSBC and Lloyds TSB Islamic services

Early Islamic trade finance operations of major European banks Post 1974 oil price trade boom with Gulf – Take-off of European exports to the oil exporting countries

Dealings with Islamic banks from the Gulf – Dubai Islamic Bank from 1975 – Kuwait Finance House from 1977 – Bahrain Islamic Bank from ∂1978

Trade finance – Islamic bank as payee of exporter, not importer – Letters of credit potentially redundant with murabaha

Forward financing facilities – Full advance payment at a discount with salam – Deposits to guarantee a future price using arboun

Shariah compliant liquidity management in Europe Conventional liquid asset holdings – Inter-bank deposits on an interest basis – Treasury bills paying interest

Shariah compliant liquidity management using murabaha – Deposits accepted on a murabaha basis ∂ – Deposits used for trade financing using London Metal Exchange – Share of mark-up on trading transaction paid to depositor bank

Shariah compliant liquidity management through debt instruments – Use of bai’ dayn debt contracts in Malaysia rejected by Gulf shariah scholars – Salam sukuk as an acceptable asset backed alternative to treasury bills

Sukuk issuance and trading in Europe Saxony-Anhalt sukuk – – – –

€100 million raised in July 2004 Ijara structure corresponding to a floating rate note Arranged by Citigroup Global markets Issuer German Federal State of Saxony-Anhalt

Al Safeena sukuk – – – –

Finance of Very Large Crude Carrier, ∂ Venus Glory $26 million raised in London ABC Islamic Asset Management and Abu Dhabi Commercial Bank arrangers Norton Rose advised on ijara structure

Sanctuary Building, London – Taib Bank and Dominion Asset Management – $261 million raised in 2005 – Ijara structure with return linked to LIBOR

Potential European sovereign sukuk Turkey – – – –

Possibility of sovereign sukuk raised in September 2005 Could complement conventional bond and note issuance Legal changes required including trust law for SPV Likely to be € denominated

United Kingdom – Treasury Secretary Ed Balls proposed sterling sovereign sukuk in 2006 ∂ – Issuer will be HM Treasury – Consultative document produced in November 2007 with responses in June 2008 – What will be the structure? Ijara favoured – What assets would be used as backing? – Pricing consistent with other sovereign debt instruments and below LIBOR – Aim to provide benchmark for sterling corporate issuance

Islamic retail banking in Europe Islamic Bank of Britain – Established 2004 and now has branches in London, Birmingham, Leicester and Manchester – Offers shariah compliant current and savings accounts using mudaraba structure with profit share linked to notice period – Islamic treasury accounts for fixed time periods using murabaha transactions to provide a fixed mark-up return – Cash advances through tawarruq

Al Buraq, Arab Banking Corporation

∂ – Shariah compliant mortgages – Marketed through Bristol and West, a Bank of Ireland subsidiary – White labelled by Islamic Bank of Britain

Lloyds-TSB – Diminishing musharaka mortgages – Current and savings accounts

HSBC Amanah – Current and savings accounts – Ijara based mortgages

Islamic wealth management in Geneva Dar al Maal al Islami – Established in 1981 by Prince Mohamed Bin Faisal – Focus on asset management for institutional and high net worth investors from the Middle East and South Asia – Variable performance record from investment in emerging markets

UBS

∂ – Conventional and shariah compliant wealth management for Gulf clients – Established Noriba Bank in Bahrain, but subsequently consolidated into UBS to exploit brand recognition – Opened a branch in Dubai International Financial Centre in 2006 – Offers structured Islamic investments including certificates based on foreign exchange rate positions – Succession planning and trusts for high net worth clients

Islamic investment banking European Islamic Investment Bank – – – – – –

Established London in March 2006 AIM listed and regulated by FSA Treasury and capital markets Asset management Corporate finance and advisory ∂ Limited capital and resources compared with mainstream investment banks

French investment bank involvement in Islamic finance – – – –

Société Générale Caylon, investment banking subsidiary of Credit Agricole BNP Paribas Refinancing and syndications

Shariah compliant fund management Screening – Sector screens – Financial screens

Early European Islamic funds – Kleinwort Benson, 1986 – Flemings Oasis Fund, 1996

Current fund offerings – – – – – –

∂

HSBC Amanah Luxembourg and Dublin based funds Asset management by Aberdeen and Pictet Oasis Dublin based Crescent Global Equity Fund Deutsche Bank Islamic Equity Builder Certificates Scottish Widows Islamic Global Equity Fund Mutual Shariah Baby Bond

London based Islamic banks: financial indicators 2007, £ sterling Assets

Customer deposits

IBB

164,936,827 134,640,612

EIIB

316,848,322

BLME

297,720,601

Total

Shareholder equity

Profits (Losses)

24,825,309

(6,917,004)

2,771,980

∂

180,919,407

(4,476,781)

5,601,432

179,402,020

697,986

779,505,750 143,014,024

385,146,736

(10,695,999)

The Banker 500 list, October 2008 Assets $m HSBC Amanah

Rank

Profits $m

ROA %

15,191

10

N/A

N/A

1,196

85

3.4

0.4

DMI Trust

830

101

50.1

6.1

EIIB

648

112

-5.1

-0.9

IBB

337

127

-14.1

-4.9

European Finance House

94

201

N/A

N/A

Gatehouse

15

244

-8.9

N/A

BLME

∂

Future prospects for Islamic finance in Europe European single market – National regulation remains but banking passport – FSA most pro-active, but Banque de France supportive

Potential for European agro-industrial ventures – Most food processing activity inherently halal – Opportunities for shariah compliant venture capital in bio∂ technology

Triangular benefits – Hypermarket chains such as Carrefour have significance presence in GCC and their suppliers might welcome Islamic investment – Shariah compliant funding into Europe in food processing could result in offset investments in the GCC and desirable technology transfers