1. Islamic Banking in Italy: Regulatory issues Mohamad Bakkar 17 MARCH 2008 PALAZZO MEZZANOTTE – BORSA ITALIANA MILAN

2. Content of Presentation Introduction Regulatory Challenges Conclusions 2

3. 3 Introduction An effective legal infrastructure is essential for the development of any type of sector in any country, especially in the Islamic finance sector which is currently enjoying a renaissance

4. 4 Notable Facts and Figures Islamic funds in global financial institutions are approximated to a total of US$1.3 trillion Islamic banking assets worldwide are ranging between US$200 billion and $400 billion Annual growth: 10%-20%

5. 5

6. 6 Current Situation in Italy Banking regulation does not allow banks to offer Islamic banking services Tax regulation does not permit competitiveness of Islamic banking services Project of opening first Islamic bank in Italy:  a 100 million Euros institution  Shareholders: Middle Eastern banks

7. 7 Challenges in Italy CHALLENGES Arabic Terminology Trained and skilled Islamic Bankers Exchange of surplus liquidity/funds between conventional and Islamic Banks Islamic Banking understanding by clients Islamic Banking Control by regulators : Shariah Governance Competition with conventional banks Regulatory and tax issues Clear basic understanding of Islamic contracts

8. 8 Islamic Banking Framework EU Regulation Islamic Banking Law

9. 9 EU Regulation Does EU Regulation on Financial Services allow Islamic Finance? Definition of deposit/Contradiction with principle of Profit & Loss Sharing European “passport”

10. 10 EU Regulation Do we need a new EU Regulation on Islamic Finance? Harmonization

11. 11 Islamic Banking Law If ITALY does not have the tax and regulatory framework to deal with the basic products, … than ITALY will not be in a position to fully participate in any emerging market of associated securities or derivatives equivalents (SUKUK Market).

12. 12 Islamic banking law Definition of Islamic Bank: Islamic bank is the bank whose Article of Association comprises the undertaking not to breach, in the operations it carries out, the provisions of Islamic Law (Shariah), and not to pay or receive interest. Definition of Deposit: Profit & Loss sharing principle

13. 13 Islamic banking law Definition of products: Murabaha, Musharaka, Mudaraba, Ijara, Istisna… The application of Islamic modes of financing requires Islamic banks to assume at some stage the ownership of the underlying asset before transferring it to the client.

14. 14 Islamic banking law Shariah Advisory Board: A Shariah Advisory Board must be established by each and every Islamic bank, Islamic window & Takaful operator

15. 15 Shariah Advisory Board  Reviews and certifies the permissibility of products offered by Islamic Bank  Ascertains that investments and projects in which the Islamic Bank has participated are Shariah compliant  Observes that the Islamic Bank is managed in accordance with Islamic principles

16. 16 Tax barriers Double stamp duty or registration tax VAT on Murabaha mark-up

17. 17 Double stamp duty or registration tax VAT=20% = 20.000€ IslamicBankIslamicBank ClientClient Office price =1.000.000 € 2 7 % 1

18. 18 Murabaha = Extra VAT ? SP = + VAT Cost price + VAT= 120.000 € 120.000 €SP = + VAT Cost price + VAT= 120.000 € 120.000 € SellerSeller VAT=20% = 20.000€ 20% VAT on mark up= 2.000 € Item PB + mark-up = 120.000 + 10.000 =130.000 € IslamicBankIslamicBank ClientClient PC = (SP +mark-up) + VAT on markup = 132.000€ 132.000€ PC = (SP +mark-up) + VAT on markup = 132.000€ 132.000€ 1 4 Cost price =100.000 € 2 3

19. 19 Central Bank Authorization of Islamic Banks No authorization for Islamic Windows If Central Bank is a financial regulator and not a religious one, than who will control? Shariah Supervisory Board at Central Bank

20. 20 Shariah Supervisory Board an independent body of specialized jurists (scholars) in Islamic commercial jurisprudence. the Board may include a member other than scholars, who should be an expert in the field of Islamic financial institutions the duties of the SSB are: directing, reviewing and supervising the activities of the Islamic financial institution in order to ensure that they are in compliance with Islamic Shariah rules and principles.

21. 21 Shariah Supervisory Board Sole authoritative body to advise Central Bank on Islamic Banking and Takaful “a priori & “a posteriori” control:  “a priori”: accept Shariah Advisory Board  “a posteriori”: co-ordinate the activity of Shariah Advisory Boards

22. 22 Dispute Resolution Jurisdiction Applicable law

23. 23 Jurisdiction The SSB of Central Bank will be referred to by the court or arbitrator in disputes involving Shariah issues in Islamic banking & finance  In the case of the arbitrator, the SSB’s resolution “shall be binding” upon the arbitrator (obligatory)  In the case of the court, the SSB’s resolution “shall be taken into consideration” by the court (advisory)

24. 24 Applicable law Clauses of contracts: reference to Shariah principles & choice of law of the land Validity of clause (English experience): Rome convention National law Shariah rules are not identified

25. 25 Conclusions European Strategy to introduce Islamic Finance to European customers Enacting Islamic banking law and amendments to tax law Ensure optimal Shariah governance of Islamic Financial Institutions

26. 26 Conclusions European Islamic Center for Reconciliation and Arbitration for the Islamic finance industry A specialized branch to deal with Islamic financial transactions at the Chamber of National & International Arbitration of Milan

27. 27 Italian Passport ? I hope soon

28. GRAZIE MILLE ! 28

29. 29 For further information kindly contact: Mohamad Bakkar PETRUCCI & ASSOCIATI STUDIO LEGALE E TRIBUTARIO Via Lanzone 31, Milano Tel : +39.02.88891711 Fax : +39.02.88891777 www.petrucciassociati.it mbakkar@petrucciassociati.it