Islamic Finance in Europe Professor Rodney Wilson Banca d’Italia Seminar on Islamic Finance Rome, November 11 th 2009

∂ Outline The current environment for Islamic banking in Europe Retail banking: Islamic Bank of Britain Shariah compliant asset managers –Bank of London and the Middle East –European Islamic Investment Bank –(European Finance House) –Gatehouse Bank Limitations of Islamic banking in Europe Future prospects for Islamic finance in Europe

∂ The current environment for Islamic banking in Europe Retail –Recession has adversely affected Muslim communities in Europe –Rising job insecurity and unemployment –Reluctance to take on additional financial commitments: de- leveraging Asset management –Significant capital losses with equity investment, although recent gains –Commercial real estate market remains very depressed –Exits from private equity often problematic –Little sukuk activity

∂ Retail banking: Islamic Bank of Britain Profile –Founded 2004 –AIM listed –Majority stake Qatari private shareholders –48,000 customers BranchesNumber London4 Birmingham2 Leicester1 Manchester1

∂ Retail banking: Islamic Bank of Britain Financials, June 2009 –Deposits increased by 9% to £172 million –Home Purchase Plan accounts for asset growth to £14.4, double December 2008 figure –Loss of £4.6 million for 6 months to June 2009 compared to £3.1 million loss for same period to June 2008 –Income from Islamic financing transactions fell from £2.4 million for 6 months to June 2008 to £0.8 million for same period to June 2009 –Costs under control, but returns on financing have slumped

∂ Bank of London and the Middle East Profile –Founded August 2006 –Owned by Boubyan Bank of Kuwait which has recently been taken over by National Bank of Kuwait Focus –Treasury services for Islamic financial institutions –Corporate banking –Private banking and wealth management –Investment banking

∂ Bank of London and the Middle East Financials –In first half of 2009 overall loss £9.8 million from a total operating income of £17.5 million –Loss largely accounted for by impairment charges with respect to 3 clients –Value of assets fell from £867 million in December 2008 to £783 million by June 2009

∂ London based Islamic banks: financial indicators, 2009, £ million AssetsCustomer deposits Shareholder equity Losses IBB EIIB ,8 BLME Gatehouse

∂ Limitations of Islamic banking in Europe Retail banking –IBB has high fixed costs in relation to customer numbers –Lack of economies of scale and scope –Conventional banks offering Islamic products have cost advantages as no need to establish new branches or IT systems –Most British Muslims continue to use high street banks –Many Muslim families have low incomes –Deposits and financing for very small amounts from East Ham and Whitechapel branches of IBB

∂ Limitations of Islamic banking in Europe Investment banking –Wholesale Islamic banks such as EIIB, BLME and Gatehouse too small to be involved in major M&A activity –Focus on accepting deposits from other banks, including their Gulf based parents –Treasury activity largely involves commodity murabaha, a more expensive alternative to an Islamic money market –Attempt to build wealth management business, but much competition, including from long established conventional banks

∂ Shari’a compliant fund management Screening –Sector screens –Financial screens Early European Islamic funds –Kleinwort Benson, 1986 –Flemings Oasis Fund, 1996 Current fund offerings –HSBC Amanah Luxembourg and Dublin based funds –Asset management by Aberdeen and Pictet –Oasis Dublin based Crescent Global Equity Fund –Deutsche Bank Islamic Equity Builder Certificates –Scottish Widows Islamic Global Equity Fund –Mutual Shariah Baby Bond

∂ Future prospects for Islamic finance in Europe European single market –National regulation remains, but banking passport –FSA most pro-active, but Banque de France supportive Islamic capital markets –UK Treasury and FSA have made legal changes to facilitate sukuk issuance –No UK sovereign sukuk, but aim to encourage corporate sukuk –Legal changes introduced in France, including provision for trusts as special purpose vehicles for sukuk