Eager to attract Middle East investment but uneasy about linking faith and finance, the French parliament has opted for some legislative sleight-of-hand to pass a law allowing the issuance of interest-free Islamic “sukuk” bonds. The move is part of France’s two-year drive to create a new European hub for Islamic finance, whose value globally is estimated at $1 trillion. But instead of introducing a separate bill, which would attract attention to it, the governing UMP party tucked the proposed change of French trust law into a larger bill on financing reform for small and medium-sized companies. And it chose to do this by introducing it as an amendment in the second reading of the bill — the one that usually gets fewer headlines.

(Photo: French National Assembly, 15 Sept 2009/Charles Platiau)

Sounds confusing? That seems to be exactly what the legislators wanted. As my colleague Tamora Vidaillet wrote here in an earlier post entitled “France courts Islamic finance, as long as it’s not too obvious,” bankers, politicians and goverment officials are clearly uneasy about promoting Islamic finance in France. “There is a clear sense of apprehension over how Islamic finance would fit into French society, where the policy of laïcité – the strict separation of church and state — tries to keep anything religious out of the public sphere as much as possible,” she wrote. “Many admit that French companies and banks may hesitate to do anything that uses the label Islamic as this could highlight sensitivities over social and cultural divides.”

The opposition Socialist Party opposed and attacked the change. “We are introducing Islamic law into the French legal framework. This deeply shocks us, it is unacceptable.” said Socialist MP Henri Emmanuelli. “When Muslims are rich, we try to attract them. When they’re poor, we expel them.”

Another Socialist deputy, Jérôme Cahuzac, said: “We don’t create fiduciary regimes for Jews, Catholics or Buddhists. France sends soldiers to Afghanistan to prevent people from dying under sharia law. But when big money is involved, we forget all that … In the second reading, we discovered an amendment we cannot accept. This subject is too delicate to be voted furtively.”

(Photo: Malaysia’s Bank Islam — a brand name considered unthinkable in France, 13 Jan 2009/Bazuki Muhammad)

On the far-right, the anti-immigrant National Front party denounced the law as the latest “communitarian peril” it said threatened the French Republic, along with approvals for construction of mosques, the serving of pork-free school lunches, the introduction of women-only hours at municipal swimming pools and the officially sponsored creation of a Muslim Council.

The idea behind this law is that investors from the Middle East might be more inclined to invest in French projects and companies, especially small and medium-sized ones, now that they can do this in ways that are sharia-compliant.

France’s first sukuk bond, originally expected in October, has been delayed but should be issued later this year or early in 2010, according to Mohammad Farrukh Raza, managing director of Islamic Finance Advisory & Assurance Services (IFAAS). He said the delay was caused by a “a number of challenges from the sharia and legal point of view” but gave no details.

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In researching an article on what lay behind government plans to develop France as a European hub for Islamic finance, I was struck by the uneasy atmosphere surrounding the subject. On the one hand, the government sees it as a way to attract Middle Eastern money and wants to push the idea. But on the other, there is a clear sense of apprehension over how Islamic finance would fit into French society, where the policy of laïcité – the strict separation of church and state — tries to keep anything religious out of the public sphere as much as possible.

(Photo: Eiffel Tower in Paris, 20 Nov 2007/Mal Langsdon)

The bankers, lawyers, government officials and Islamic finance specialists trying to get Islamic finance off the ground in France speak publicly about the bright prospects they see for the market. France has the biggest Muslim population in Europe at over five million. The government is pushing the idea hard. There is a huge need for financing of future projects.

But privately, many admit that French companies and banks may hesitate to do anything that uses the label Islamic as this could highlight sensitivities over social and cultural divides. Ever since the French Revolution, France has upheld the idea that its people are all individual and equal citizens and not members of regional, ethnic or religious minorities. Stressing membership in a sub-group is considered divisive. The French frequently point to the multicultural approach taken in Britain and the United States as the source of political and social problems — such as ethnic or religious “ghettoisation” and “identity politics” — that they want to avoid.

Given this outlook, some French fear the Muslim community here is seeking to nurture its own identity in a way that sets them apart from ordinary French citizens and undermines the unity of the nation. The way in which Muslims openly speak about religion, rather than keeping their faith to themselves, looks to these French as a challenge to the principle of laïcité.

(Photo: Employee at an Islamic bank in Malaysia, 13 Jan 2009/Bazuki Muhammad)

Not every charge of laïcité violation is necessarily valid. As one analyst put it: “You can see in so many papers that Islamic finance is a threat to laïcité , which is a complete nonsense. It proves that the people who write about this know nothing about Islamic finance. It has nothing to do with religion. It is making financial transactions according to a set of rules … these rules are ethical because they are Islamic.”

One expert admitted that the label Islamic would “not help” when French companies were deciding whether to raise cash by issuing Islamic bonds or conventional ones. Another said it would be “absolutely crazy” to call an institution conducting such business an Islamic bank. The Idea that a bank branch would have a giant sign reading “Banque Islamique de Paris” or something similar is so outlandish as to not even come up in conversation.

“The crux of the problem is that nobody wants it except for the Muslims and the Muslims have no power in France. They are not organised enough and have no lobbying power to see Islamic retail banking see the light of day,” said one industry specialist on condition of anonymity.

For Islamic finance to really take off, France will need to embrace not only the less visible wholesale banking side but the highly visible retail services too. The cash-heavy Middle Eastern partners whose money France aims to attract may well want to see neighbourhood bank branches offering Islamic mortgages in their shop windows and advertising them in the local media. Some might want their own branches, with their names emblazoned over the bank entrance, maybe in Arabic as well as in French.  They will probably think that French banks offering Islamic finance should be as open about it as those in Britain.

(Photo: Islamic Bank of Britain branch in London, 21 Sept 2004/Toby Melville)

Will they understand that one way not to convince the French is to urge them to do things the British way?

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Is diversity of opinion boon or bane for Islamic finance?

Market participants gathered for a conference at Thomson Reuters’ London headquarters earlier this week discussed the need for more convergence in the industry estimated to be worth $1 trillion.

Of particular focus was the role of sharia scholars who rule on whether investment products are in line with Islamic teachings.

“Sharia scholars who sit as advisers have a crucial role to play in retaining public confidence,” Rifaat Ahmed Abdel Karim, secretary general of the Islamic Financial Services Board, an international standards-setting body for the industry, told the forum.

Beyond commonly agreed principles such as the emphasis on shared profit and the prohibition on usury, divergent opinion has emerged among these scholars on issues ranging from financial derivatives and deferred payment contracts.

Last year, the issuance of sukuk or Islamic bonds was hit when the top scholar of an influential industry body declared that about 85 percent of sukuk was un-Islamic.

“(In this case), the market was kept in the dark, unaware of how to respond. The industry needs a sharia governance system that is reliable and effective,” said Karim.

But whether authorities can or indeed, should, move towards some common regulatory ground remains to be seen.

One sharia fund manager I spoke to pointed out that diversity of opinion is seen as a blessing within Muslim tradition.

“Even when it comes to religious customs, there are differing Muslim interpretations, so I don’t see how this would be any different," he said.

"We accept that the FSA (Financial Services Authority) in the UK and the SEC (Securities and Exchange Commission) in the U.S. are different regulatory regimes so why can’t we accept this in Islamic finance as well?”

Articles about Islamic finance are usually long on finance and short on Islam. Knowing that the various schools of Islam can interpret and apply sharia in different ways, I recently wondered how this looked in the financial sector, especially since Islamic banking has spread in recent years and non-Muslim institutions and investors were getting into the business. A conference on Islamic banking in France brought several sharia scholars to Paris, so I took the opportunity to interview them for the news story posted here.

While the financial side wants as much standardisation as possible, the scholars insist it would be un-Islamic to impose rules that apply fully around the world. So rulings from the sharia boards of financial institutions can differ, although the existence of voluntary standards — such as those worked out by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) in Bahrain — has helped to harmonise them. Also, the fact that individual scholars sit on several sharia boards at the same time brings a certain conformity.

But, as Mufti Barkatulla told me, there are not enough young scholars entering the field. A sharia board needs a minimum of three members and can have up to 10, depending on its workload, he said. The problem is that acquiring the needed knowledge can take years. Barkatulla himself was a sharia judge at London’s Central Mosque for 30 years, mostly ruling on family issues such as divorce, before getting involved in Islamic finance five years ago. Like him, Sheikh Nizam Yaquby of Bahrain, another scholar at the Paris conference, continues to decide such family cases in addition to his work in the world of finance.

In my story, Mufti Ahmed Said Louqman Ingar from Reunion, the French Indian Ocean island, explained how Islamic financing products there needed approval by local scholars before clients would trust them. Jérôme Pignolet de Fresnes, a French banker with experience in Islamic finance in Reunion, said his bank gets two sharia rulings for its new products, one from a local and one from a foreign sharia board. “We try to take the lowest common denominator so everyone can accept the product,” he said.

The non-story at the conference was the question of Islamic retail banking in France. The government is adjusting local regulations to allow French financial institutions to compete with London in the lucrative Islamic bond market. But although bankers outside France often point to its 5-million-strong Muslim minority — the largest such group in Europe — as a natural market for Islamic retail banking, a Finance Ministry official said there was no demand for it there and so no plans to accommodate it.

At a time when many critics are calling for tighter regulation of the worldwide financial industry, Muslim scholars are saying that Islamic finance cannot be more tightly controlled for theological reasons. The Islamic finance industry has long been marked by divergent interpretations of Sharia, or Islamic law.

(Photo: Traders at Saudi Investment Bank in Riyadh, 8 Oct 2008)

Now, amid calls for standardisation, the scholars say the Islamic concept of ijtihad — reasoning to reassess  sharia in light of modern developments– bars any tighter regulation or coordination of this $1 trillion industry.

It’s rare that religious scholars get to dictate terms to business, but this might be one because Islamic finance is expressly built upon the principle of sharia compliance.

Here’s a report from Frederik Richter, a correspondent in our Bahrain bureau:

Scholars reject strict Islamic finance standards

MANAMA, Nov 10 (Reuters) - Islamic scholars on Monday cautioned against enforcing legal standards in the Islamic finance industry, even though the lack of standardisation is widely seen as an impediment to growth.

Scholars said at the conference of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) that legally binding norms would challenge the Islamic concept of ijtihad, or reasoning, that continuously re-assesses sharia, or Islamic law, in light of modern developments
This would make the industry more vulnerable to risks, they argued.

“There should not be sharia standards except in the form of reasoning, which gives different windows to solving problems,” said Mohamed Saeed al-Booti, professor at the University of Damascus and member of AAOIFI’s board of trustees.

(Photo: AmIslamic Bank in Kuala Lumpur, 11 Aug 2008)

Scholars said introducing binding legal standards for the industry would limit the diversity in Islamic banking products that they say has helped the industry weather the global financial crisis.

Sharia scholars play an important role in Islamic banking as they advise banks on whether specific loans and investments  comply with sharia, which bans interest and prohibits investments in certain areas such as gambling and alcohol.

The $1 trillion Islamic banking industry has ridden the boom in Gulf Arab oil earnings, but is struggling to reconcile vastly different interpretations of Islamic law.

Regulators and industry practitioners said legally enforced industry standards are badly needed to increase investment certainty and lower transaction costs.

“Western banks and lawyers find it difficult to understand how to enforce a contract that one group of Islamic scholars opposes and the other doesn’t,” said Neil Miller, partner at international law firm Norton Rose.

He added the industry needed to discuss how to address this issue without moving away from its diversity, which he said has been valuable to the sector.

The Islamic finance industry has grown rapidly as Muslims around the world seek investments that comply with their religious beliefs. A tripling of oil prices over the past five years has flooded the Islamic finance sector with petrodollars, accelerating that expansion. So what are the issues facing the industry now? Of special interest for this blog are questions about how religious principles and business practices interact. For example, is some Islamic banking too Islamic for its own good? Do some types of murabaha contracts actually violate sharia law?

These religious issues and major deals in Islamic finance have been discussed during a Reuters industry summit on Islamic finance this week. There’s a conference website here with text reports plus video interviews with leading players in the world of business by Islamic principles.

For a quick overview, here are some of the top quotes from participants.