Islamic Finance in Europe Professor Rodney Wilson Banca d’Italia Seminar on Islamic Finance Rome, November 11th 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 Branches Number London 4 Birmingham 2 Leicester 1 Manchester

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 Assets Customer deposits Shareholder equity Losses IBB 197 172 21 4.6 EIIB 278 2.7 163 14,8 BLME 782 5.0 247 9.8 Gatehouse 54 1.3 37 8.5

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