Islamic finance is a trillion dollar industry and has become a part of the global financial system. The industry represents around 1.6 billion Muslims worldwide as well as non-Muslim investors seeking to diversify their portfolio. Institutional and private investors look to tap into a market that may reach a staggering $5 trillion, according to forecasts by rating agency Moody's. France has skilfully anchored into this dynamic terrain but the question really is - What does France need to do to tap completely into this market and become the capital markets' centre for Islamic financing in the western world? Islamic finance is guided by Shariah laws primarily derived from the Qur'an. One of its fundamental tenets is that money has no traded intrinsic value and is merely a medium of exchange. This framework not only applies to Islamic banks but also to business and life in general. The prohibition of Riba (usury), Gharar (uncertainty) and Maysir (speculation) are integral to Shariah. However, merely making money with money without any visible and tangible underlying investment is frowned upon. Therefore, the product structures in Islamic finance all have an underlying asset, such as a commodity, share in an enterprise, etc., and is based on risk and reward sharing among all parties involved. The drive for compliance to Shariah led to the establishment of financial systems that did not operate on interest but on a profit-and-loss-sharing scheme that financed trade and other enterprises at that time. This marked the emergence of a fundamentally different financial concept that has evolved into Islamic finance. France has long been positioned as one of the vanguards of financial innovation and this has paved the way for changing the regulatory environment. For French organizations, this industry potentially represents a major source of liquidity and finance. The industry offers investors a means of achieving differentiation through diversification, helping them gain a foothold in new markets. In 2007, Christine Lagarde, minister of economy, asked the Parliament and the Treasury to assess and develop France's infrastructure to attract Islamic Finance. That year, Paris EuroPLACE, an organization that promotes the French capital's financial district formed an Islamic finance committee to make propositions addressing the legal, fiscal, and regulatory hindrances to the industry. Two years later, a Sukuk (a form of Islamic financial securitization similar to bond) working group was created with lawyers, tax specialists, Shariah advisors and many French banks to develop a Sukuk structure under French law. France's main objectives this year are to issue a Sukuk in Paris under French law, translate the AAOIFI Shariah standards to French and issue its first license for an Islamic financial institution that is compliant under both national and European law. Creating a regulatory environment friendly to the issuance of a license would allow France to provide Sharia compliant investment and commercial banking products denominated in foreign currencies to investors throughout Europe. These aspirations are not far from reality considering France has unparalleled access to a broad investor base and strong political will shared by all players across the French financial community. The quality and liquidity of the French asset management market are key advantages to ensuring success of Sukuk issuance. In addition, major French banks have expanded their Islamic finance offerings internationally in response to a growing demand. This demand coupled with a local market of over 5 million Muslims and access to a high net worth Muslim investors globally, provides a healthy environment for the growth of Islamic finance in France. A number of reforms have been adopted to advance Islamic finance in France. In mid-2007, the French Financial Market Authority (AMF) issued a recommendation for Shariah- compliant funds and a year later, it published a statement approving the listing of Sukuk in France. The Euronext Paris soon followed, creating its own Sukuk-listing segment. This would not only guarantee the reliability and security of Euronext's market but it would also support issuers with experienced listing teams. In early 2009, France introduced tax status adjustments for Islamic finance contracts on Murabaha (type of money market instrument) and Sukuk transactions. Recently, Paris Europlace signed an agreement with AAOIFI paving the way for greater cooperation to drive the development of Islamic finance in France. This year, Qatar Islamic Bank signed a memorandum of understanding (MoU) with Banque Populaire Caisse d'Epargne, France's second largest banking group, in order to gain access to the French retail banking and small medium-size business markets. This MoU would promote cooperation between the two banks in France, and try to build a lasting partnership. An independent report projected that France could potentially attract 10 percent of the trillion-dollar industry. France is the fountainhead of innovation and achievement in the global financial community. The historical and political links of France with the Middle East give France the opportunity to hold a unique position in the Islamic finance industry. The future for Islamic finance in France is therefore indeed encouraging. – The writer is the secretary-general of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the international organization that develops and issues standards on accounting, auditing, governance, ethics and Shariah for the global Islamic finance industry. __
