Retail obstacle as France pushes Islamic Finance

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France's quest to create a European hub for Islamic finance could yield results for wholesale banking and Islamic bonds, but secular concerns may put the brakes on retail banking.

Since launching a drive to develop Sharia-compliant financing and draw Middle Eastern capital to France around two years ago, Paris has made large strides on the legal and fiscal front, with much of the framework already set.

Expectations are growing that it might be a matter of months before a firm or local authority issues France's first sukuk bond, which pays no interest but offers returns on underlying physical assets, and licences Islamic banks.

The country's tiny Islamic finance market has so far largely involved Sharia-compliant property deals, a far cry from neighbouring Britain, which has spent the past five years positioning itself as a major Islamic banking centre.

Whether the size of the French market can really top €100bn euros ($144bn) in time, as suggested by two French professors in a 2008 report, is debatable.

But analysts believe there will be a stream of Sharia-compliant property or corporate financing deals and some sukuk issues over the coming two years in a country which has over five million Muslims, Europe's largest such community.

Islamic finance is derived from Sharia, or Islamic law, and is valued at a global $1 trillion. It avoids interest-based financing and advocates ethical principles with a fair distribution of profits and losses between venture partners.

"On the retail side, I think there is a very big question mark," said Anouar Hassoune, senior credit officer with Moody's. "Otherwise 18 months is doable in terms of concrete activity and it could go quicker than that."

Britain has some 22 banks, including five that are fully Sharia compliant, that are active in the Islamic market and 18 Sukuk issues there raised $10bn up to February 2009, according to International Financial Services London.

In addition, there are an estimated 17 banks that have set up windows in the UK to provide Islamic finance.

But a campaign, driven by economy minister Christine Lagarde, to build on ties with the Middle East and tap deep pockets in the region to finance French firms and projects is showing promising signs.

The government has created a framework for the French AMF market regulator to approve investment funds that abide by Sharia principles, paving the way for Muslim and other retail investors at home to pour cash into French interests.

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