DUBAI: The European Central Bank and the Malaysia-based Islamic Financial Services Board (IFSB) are conducting a joint study on policies affecting Islamic finance in Europe, the IFSB's top official told Reuters.
"We are doing a joint study with Europe's central bank which brings together European scholars and regulators to examine a broad set of policy and regulatory issues in relation to Islamic finance in Europe," said IFSB secretary-general Jaseem Ahmed.
The IFSB is one of the main bodies setting standards globally for Islamic finance.
"What we are seeing is a strong public policy stance emerging, which I think is essential for Islamic finance to flourish on the continent. This is happening both within and outside the euro zone," Ahmed said.
An ECB spokesman confirmed to Reuters that the study was underway at the level of a research paper. He did not give an expected release date.
The study will be complemented on April 9 by the IFSB's annual forum, which will be hosted by the Bank of Italy in Rome. The forum attracts regulators and market players from the Islamic finance industry, which grew to $1.55 trillion in assets globally in 2012, according to consultants Ernst & Young.
The last time the 184-member IFSB held a forum in Europe was in Paris in 2009; since then the euro zone crisis has increased interest in Islamic finance, which follows religious principles such as a ban on interest and pure monetary speculation.
"There is broad recognition that relying only on an excessively leveraged and debt-fuelled financial system has great risks. There is a corresponding stress on equity financing in the post-crisis environment," Ahmed added.
"I think the global crisis has really brought Islamic finance to the front, if not yet the centre, of the stage."
In November 2009 Mario Draghi, then governor of Italy's central bank and now president of the ECB, called the growth of Islamic finance a "welcome development", adding that it raised some "intriguing questions" for financial markets.
Draghi's successor at the Bank of Italy, Ignazio Visco, will be joined at next month's IFSB forum by officials from the ECB, Italy's finance ministry and other central bankers to discuss the "European challenge", according to the forum's schedule.
REGULATORY SUPPORT
Partly because it has the support of cash-rich Islamic funds from the Gulf, Islamic finance fared relatively well during the global financial crisis, and it is expected to keep growing; 150 new Islamic financial institutions will be needed globally by 2020 to satisfy demand, according to consultancy Oliver Wyman.
The IFSB has taken steps elsewhere to win regulatory support for Islamic finance. In October, it signed an agreement with the Asian Development Bank, which would see the ADB encourage member countries to adopt IFSB standards.
The Italian central bank doesn't have a specific standing group studying Islamic finance, but it follows industry trends and developments on a regular basis, according to a Bank of Italy spokesman.
The Bank of Italy's research department noted in a paper in 2010 that the industry could be hampered by problems including governance structure, regulation, a lack of monetary policy instruments and liquidity management.
The experience of Mediofactoring, a fully owned subsidiary of Intesa Sanpaolo, Italy's biggest retail bank, which explored Islamic financing options but did not go ahead with a deal, shows that companies in Europe can find Islamic transactions uneconomic without regulatory support.
"We have tried but it was very difficult to put in place a structure that was fiscally efficient," Mediofactoring's chief executive Rony Hamaui, who will be a speaker at the forum, told Reuters.
"Unfortunately in Italy very little is being done in Islamic finance...We talked to the Treasury regarding sukuk (Islamic bonds), but for the government it is not a major focus."
Sukuk will be one of the major themes in the IFSB forum; Islamic bonds have gradually moved into the mainstream as a viable funding option for both governments and corporates. Over $121 billion worth of sukuk were issued around the world in 2012, according to Thomson Reuters data, up from around $85 billion in 2011.
So far, the closest which Europe has come to issuing a sovereign sukuk was in 2009, when Britain prepared its first-ever issuance, which would have been a rare AAA-rated issue in the industry.
"Four years ago we worked on structuring the UK's sukuk issuance, but the UK postponed the issue due to a view that the transaction would not provide value for money," said Farmida Bi, European head of Islamic finance at Norton Rose in London.
"The UK Treasury has made it clear they are not going to revisit this issue for now."
But British regulators have introduced legislation facilitating Islamic finance, which could serve as a reference for other European countries.
"Where the UK's approach to Islamic finance is helpful is in creating a level playing field, where there are no tax or regulatory incentives or penalties for Islamic transactions, thus creating a pragmatic way of dealing with it," Bi said.
( The Star Online / 12 March 2013)
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com
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