Paris woos Islamic investment to tackle credit crunch
French Finance Minister Christine Lagarde (photo) is leading a governmental drive to attract investment from Muslim countries, in a bid to turn Paris into the European capital of Islamic finance and help France battle the credit crisis.
The French government announced on Wednesday that within the next two weeks it will be pushing through new tax legislation to make it easier for French firms to attract Islamic financing as the country battles the global credit crunch.
Another tax reform, currently under review by the constitutional council, could allow Islamic “sukuk” bonds to be issued in France and the opening of Islamic retail banking services to French Muslims in 2010.
In the wake of the financial crisis and G20’s call against opaque derivatives trading, French authorities are looking to tap into new sources of credit and offer investors an ethical alternative to traditional investment tools.
With a ban on charging interest and estimated assets worth $700 billion, according to Moody’s rating agency, Islamic finance could be what French authorities are looking for.
Besides implementing legal reforms, Paris argues that Islamic finance and traditional French finance have long shared an opposition to excessive risk-taking.
“The principles we’re fighting for are very well inscribed in Islamic finance,” declared French Finance Minister Christine Lagarde, during a major Islamic Finance Summit organised on Wednesday by The Economist Intelligence Unit.
Bank and borrower bonds
Islamic "sharia" law works by prohibiting "riba" - the payment of interest. An Islamic bank purchases the product for the client instead of loaning him the money.
The bank and the client are in equal partnership, both sharing profit and loss with no fines or interest payments. The borrower pays off the loan in instalments with a fee for using the product until the total amount is repaid to the bank.
However, the bank asks the borrower for strict collateral in a bid to protect itself from default.
The emphasis that Islamic finance places on partnership, as well as the system's preference for tangible assets, would provide a better link between the financial system and the “real” economy, according to Lagarde.
Sharia-compliant funds are also deemed more transparent as they’re required to keep a strict track of their investments to avoid financing “immoral” activities, such as gambling or alcohol businesses.
Paris vs London
The French government hopes to turn Paris into the main Eurozone financial hub for Islamic finance by easing the flow of sharia-compliant investments.
“The onus is actually on Paris to level the playing field against competitors like London, Hong Kong, and Singapore,” said Rushdi Siddiqui, a financial analyst and global head of Islamic finance at Thomson Reuters.
France also hopes that the resilience of its banking system during the financial crisis and its longstanding ties with the Arab world will give it a competitive advantage in attracting Islamic funds.
French firms operating in Gulf countries such as Saudi Arabia, Bahrein or the United Arab Emirates have been quietly tapping into local Islamic financing for years.
“We used Islamic financing before, but it has now become a key element. We have about 1.1 billion dollars of Islamic financing in our portfolio,” explains Karel Breda, head of acquisitions, investment and financial advisory MENA (Middle East North Africa) at French utility giant GDF- Suez.
Analysts say that a smaller amount of sharia-compliant funds reaches French firms in Paris, but that most investment deals are done discreetly as companies compete for financing sources.
On the downside, Islamic banks have not proved immune to the global economic downturn. Some analysts argue that their investment capacity is overestimated.
The collapse of the real estate sector, especially in Dubai, has led to a sharp slump in their profitability and could further reduce Islamic investment in foreign markets like France.
“Islamic banks would like to invest outside but they are already overwhelmed by huge infrastructure projects in their home market,” warns GDF Suez’s Breda.