Islamic Finance in France

In December 2007, Paris EUROPLACE, the organisation that promotes the city’s role as a financial centre, established the Islamic Finance Commission. Since then, the French financial markets regulator, the Autorité des marchés financiers (AMF), has issued two positions allowing Shari’ah compliant investment funds and sukuk listings. As such, the Bourse de Paris (Paris stock exchange) has created a sukuk segment and four tax regulations (relating to murabahah, sukuk, ijarah and istisna’) have been published that confirm a parity of tax treatment with conventional financial products.

In recent years, the French regulatory authorities have taken a number of steps to encourage Islamic finance in the country. The first initiative, which involved significant tax and regulatory changes aimed at boosting Islamic finance in France, was announced in July 2008. More specifically, these changes were related to the admission to listing of sukuk on a French regulated market, the tax treatment of Islamic financial transactions and, to a lesser extent, reforms of the fiducie (French trust). Under these changes, compensation paid by sukuk issuers is, for tax purposes, treated just like the interest on a traditional bond offering and is deductible from taxable income. In addition, the compensation paid to non-resident sukuk investors is exempt from withholding tax in France, regardless of whether an offering is governed by French law or the laws of another country.

In July 2010, the French government made certain amendments to its laws in order to facilitate sukuk issuances. The amendments removed double stamp duty, the payment of a capital gains tax on property and streamlined the regulations governing estate agents. In June 2011, France witnessed the introduction of the first Islamic deposit scheme operated via the Islamic window of an existing conventional bank.

Following this successful launch, an Islamic home finance product, a 10-year murabahah contract, was introduced. This was met with strong demand due to the fact that home financing has been a key expectation of French retail clients. Currently, there are plans to launch a similar Shari’ah-compliant deposit scheme aimed at small and medium-sized enterprises.

The French tax authorities are also planning to issue additional guidelines dealing with other Islamic finance concepts, including musharakah and mudarabah, in the near future.

There are presently six Shari’ah-compliant funds in France with total assets under management of USD 147.2 million, which are split relatively evenly between money market (47%) and equity (53%) assets.

Going forward, Islamic finance appears to have good potential to develop further in France. Over the years, the country has established favourable trade flows with a number of close neighbours with large Muslim populations, including Morocco, Algeria and Tunisia. A significant proportion of the French population originates from North Africa, and this has been driving domestic demand for Islamic finance.