Islamic Banking in Italy: Regulatory issues Mohamad Bakkar 17 MARCH 2008 PALAZZO MEZZANOTTE – BORSA ITALIANA MILAN
Content of Presentation • Introduction • Regulatory Challenges • Conclusions
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Introduction An effective legal infrastructure is essential for the development of any type of sector in any country, especially in the Islamic finance sector which is currently enjoying a renaissance 3
Notable Facts and Figures • Islamic funds in global financial institutions are approximated to a total of US$1.3 trillion • Islamic banking assets worldwide are ranging between US$200 billion and $400 billion • Annual growth: 10%-20%
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Current Situation in Italy • Banking regulation does not allow banks to offer Islamic banking services • Tax regulation does not permit competitiveness of Islamic banking services • Project of opening first Islamic bank in Italy: a 100 million Euros institution Shareholders: Middle Eastern banks 6
Challenges in Italy Islamic Banking understanding by clients Clear basic understanding of Islamic contracts
Competition with conventional banks
Regulatory and tax issues Trained and skilled Islamic Bankers
CHALLEN GES Islamic Banking Control by regulators : Shariah Governance
Arabic Terminology
Exchange of surplus liquidity/funds between conventional and Islamic Banks
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Islamic Banking Framework • EU Regulation • Islamic Banking Law
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EU Regulation • Does EU Regulation on Financial Services allow Islamic Finance? • Definition of deposit/Contradiction with principle of Profit & Loss Sharing • European “passport” 9
EU Regulation • Do we need a new EU Regulation on Islamic Finance? • Harmonization
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Islamic Banking Law If ITALY does not have the tax and regulatory framework to deal with the basic products, ‌ than ITALY will not be in a position to fully participate in any emerging market of associated securities or derivatives equivalents (SUKUK Market). 11
Islamic banking law • Definition of Islamic Bank: Islamic bank is the bank whose Article of Association comprises the undertaking not to breach, in the operations it carries out, the provisions of Islamic Law (Shariah), and not to pay or receive interest.
• Definition of Deposit: Profit & Loss sharing principle 12
Islamic banking law • Definition of products: Murabaha, Musharaka, Mudaraba, Ijara, Istisna… • The application of Islamic modes of financing requires Islamic banks to assume at some stage the ownership of the underlying asset before transferring it to the client. 13
Islamic banking law • Shariah Advisory Board: A Shariah Advisory Board must be established by each and every Islamic bank, Islamic window & Takaful operator
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Shariah Advisory Board Reviews and certifies the permissibility of products offered by Islamic Bank Ascertains that investments and projects in which the Islamic Bank has participated are Shariah compliant Observes that the Islamic Bank is managed in accordance with Islamic principles 15
Tax barriers • Double stamp duty or registration tax • VAT on Murabaha mark-up
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Double stamp duty or registration tax 2
Islamic Bank
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Office price =1.000.000 €
Client 7%
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7%
VAT=20% = 20.000€
Murabaha = Extra VAT ? 20% VAT on mark up= 2.000 € Client
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PB + mark-up = 120.000 + 10.000 =130.000 €
PC = (SP +mark-up) + VAT on markup = 132 .000€ 18
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Islamic Bank 3 Item
Cost price =100.000 € Seller
VAT=20% = 20.000€
SP = Cost price + VAT = 120.000 €
Central Bank • Authorization of Islamic Banks • No authorization for Islamic Windows • If Central Bank is a financial regulator and not a religious one, than who will control? • Shariah Supervisory Board at Central Bank 19
Shariah Supervisory Board • an independent body of specialized jurists (scholars) in Islamic commercial jurisprudence. • the Board may include a member other than scholars, who should be an expert in the field of Islamic financial institutions • the duties of the SSB are: directing, reviewing and supervising the activities of the Islamic financial institution in order to ensure that they are in compliance with Islamic Shariah rules and principles. 20
Shariah Supervisory Board • Sole authoritative body to advise Central Bank on Islamic Banking and Takaful • “a priori & “a posteriori” control: “a priori”: accept Shariah Advisory Board “a posteriori”: co-ordinate the activity of Shariah Advisory Boards 21
Dispute Resolution • Jurisdiction • Applicable law
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Jurisdiction The SSB of Central Bank will be referred to by the court or arbitrator in disputes involving Shariah issues in Islamic banking & finance In the case of the arbitrator, the SSB’s resolution “shall be binding” upon the arbitrator (obligatory) In the case of the court, the SSB’s resolution “shall be taken into consideration” by the court (advisory)
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Applicable law • Clauses of contracts: reference to Shariah principles & choice of law of the land • Validity of clause (English experience): Rome convention National law Shariah rules are not identified
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Conclusions European Strategy to introduce Islamic Finance to European customers Enacting Islamic banking amendments to tax law
law
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Ensure optimal Shariah governance of Islamic Financial Institutions 25
Conclusions ďƒźEuropean Islamic Center for Reconciliation and Arbitration for the Islamic finance industry ďƒźA specialized branch to deal with Islamic financial transactions at the Chamber of National & International Arbitration of Milan 26
Italian Passport ? I hope soon
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GRAZIE MILLE !
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For further information kindly contact:
Mohamad Bakkar PETRUCCI & ASSOCIATI STUDIO LEGALE E TRIBUTARIO Via Lanzone 31, Milano Tel : +39.02.88891711 Fax : +39.02.88891777 www.petrucciassociati.it mbakkar@petrucciassociati.it 29