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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It doesn’t seem much to cheer about but Societe Generale investors breathed a sigh of relief when second-quarter net profit only fell 63 percent.

The investment banking unit may have taken a 1.2 billion euro hit but higher profits from its international retail banking and consumer credit businesses offset the damage and kept the group in the black.

In today’s doom-laden markets that was something to celebrate - and the shares jumped more than 6 percent.

It has been the year from hell for the venerable French bank, still in the shadow of the world’s worst rogue trader scandal and struggling - like its peers - with the global credit crunch.

In January, it revealed 4.9 billion euros of losses following rogue deals by junior trade Jerome Kerviel, forcing a 5.5 billion euros rights issue and making SocGen a takeover target in the eyes of many.

Magistrates are still studying what went wrong and who knew what about the Kerviel

affair. But SocGen may be back from the brink.

SocGen CEO Frederic Oudea, in any case, doesn’t favour a merger. ”In this environment, throwing yourselves into big deals is very risky,” he told reporters.

And echoing comments from HSBC this week, he argued the universal banking model remains viable and will emerge as the “winner” from the current credit crisis.

Attention turns next to BNP Paribas, France’s biggest listed bank, which reports second-quarter earnings on Aug. 6.

(Reuters photos: SocGen branch in Paris; Jerome Kerviel)

A dramatic last-minute hitch to plans for France’s EDF to buy British Energy leaves managements, shareholders and especially the British government in a quandary.

It was a 12 billion pounds ($24 billion) deal that was supposed to relaunch Britain’s nuclear energy programme. Everyone had been told to expect it. In fact, the collapse of talks came too late for French newspapers, several of which had been briefed on the deal and splashed it prominently on their front pages on Friday.

In end, however, big insitutional investors persuaded British Energy to reject EDF’s offer as low-ball, despite the best endeavours of the British government, with a 35-percent stake. 

So what happens next? Talks are continuing and British business minister John Hutton says he remains convinced an EDF takeover makes sense; yet the gulf between the EDF and British Energy boards on price is clearly substantial. British Energy says there can be no certainty of any deal.

It is yet another headache to spoil Prime Minister Gordon Brown’s summer holiday, as his popularity slumps to a record low .

(Reuters photo: A sign is seen on the security fence of British Energy’s Heysham nuclear power station)