Italy is Close to Islamic Finance
By Prof Stefano Loconte and Francesca Paulon, Loconte & Partners
Has anybody ever considered the link between faith and finance? This unusual bond characterises the Islamic world, where there is no separation of ‘church’ and ‘state’. As a matter of fact, Islam does not subscribe to a secular model whereby religion plays no role (or a minor one), on the grounds that Islam is an Arabic term which means ‘submission to God’s will’. The faith level permeates all aspects of life of the so called homo islamicus, also laying down clear principles and guidelines for business and financial dealings.
For practicing believers, being compliant to the Shari’a duties, meaning all the commands deriving from the Quran and the traditions of the Prophet, is therefore unavoidable. Islam encourages trade and business activity, but all the commercial transactions must follow these rules. In the financial field there are four key principles determining the compliance of the transaction to the Shari’a: the prohibition of interest (riba), which marks the main difference between Islamic and conventional finance; the prohibition of excessive uncertainty (gharar), requiring as much clarity as possible in the contractual terms (such as the subject matter, the price, the deferred periods if any); the subject matter must be permissible (halal) under the Islamic law (prohibited activities, so called haram, would be e.g. alcohol sale, gambling, adult entertainment) and last, Islamic finance requires all the transactions to be asset-backed.
All these principles and prohibitions outline an economic and financial framework far from the Occidental finance industry. But nevertheless, during the past decades Islamic finance has also shown a remarkable growth in Western countries. Although its development in Europe is linked also with the spread of Islamic people, it is worth noting that Islamic finance has really reached its peak mostly in non- Muslim countries. The most important examples are the United Kingdom and Luxembourg. With a Muslim population of about only 4.8% and 2.3% respectively, these two countries have become the European headquarters of Shari’a compliant product offers, due to their relevant roles as financial centres. ‘The bigger the Islamic community, the higher the Islamic finance products demand’ is therefore an incorrect assumption. The key factor affecting the Islamic finance industry is the level of the financial centre development, which could be well summarised in the flexibility and opening of the political and institutional context to the Quran’s requirements.
The flexibility of the legal framework is the cornerstone to attracting investments from the Middle East world. The reason lies in the fact that a financial transaction, in order to respect all the principles and prohibitions highlighted above and be considered Shari’a compliant, is required to follow precise contract structures.
As we said before, the riba prohibition entails the need to find a permissible way in which financiers can make a return on their capital. The most commonly used structure is the Murabaha contract, a widely-used sale transaction between customers and banks. The buyer approaches the bank to acquire goods; the bank purchases them from a supplier and then resells the same goods to the borrower at an agreed mark-up, mainly for deferred payment. The seller (bank) must inform the buyer (borrower) about the precise acquiring cost and the profit margin is negotiated between them. Of course the repayment is usually in instalments.
It becomes clear that a structure as such aims to pursue the same economic result of the equivalent conventional loan instrument (for example it replaces both Italian unsecured and mortgage loan instruments), but it is created following a much more complex contract scheme which inevitably entails fiscal hindrances set out in double taxation when compared to the conventional equivalent transaction.
Under Italian civil law, a Murabaha operation consists of two purchase agreements or a contracting agreement and a purchase agreement. As a direct consequence, under Italian tax law these two different transactions are to be individually taxed (especially for indirect taxation), disclosing a penalising tax treatment.
It is self-evident then that strong support from the domestic legal and regulatory framework, in order to avoid tax inefficiencies, is necessary.
During the past ten years several European countries, such as the UK, France, Ireland and Luxembourg, have been captured by the Islamic finance industry and they have set up regulatory interventions in order to make Shari’a compliant investments attractive.
In Italy, the development of the Islamic structures is approaching a breaking point. A law proposal which aims to remove the double taxation hindrance, considering the whole transaction structure as a single financial operation explicitly assimilated to the corresponding conventional one, is now under discussion in Parliament.
In the above scenario, considering the size of the Islamic finance phenomenon – an industry that is growing globally at more than 15 per cent per year and as set forth in a Standard & Poor’s study will reach three trillion dollars in 2018 – it is clear how important it could also become for international law firms.
Although the Middle East’s wealth is in the hands of a few individuals, they are strongly showing their interest in investing in Western countries and – stressing the point of how important the Islamic finance industry is and how far it can go – it represents a great opportunity to offer legal, tax and wealth planning consultancy to Muslim high wealth worth individuals.
Prof. Avv. Stefano LoconteLoconte & Partners, Bari, Italy
T: +39 080 572 2880
Stefano Loconte is founder and managing partner of the Loconte & Partners. He was admitted to the Italian Bar and has rights of audience/representation before the Italian High Court. He is a Law and Tax Consultant at the Ministry of Labor. Moreover Mr. Loconte, was appointed counsel to the Chair of the VI Permanent Commission - Finance of the Italian Chamber of Deputies - Hon. Maurizio Bernardo in order to coordinate the working group on taxation of trust and islamic finance.
He is speaker at numerous conferences and author of numerous articles published in newspapers and specialized magazines and he is also Professor and holder of the chair of Tax Law, International Tax Law and Trust Law at the Faculty of Economics and Law and at the School for Legal Professions at the University LUM “Jean Monnet” Casamassima (BA), as well as teacher on Tax and Trust Law at leading Italian business school “Wolters Kluwer Italia-IPSOA” and “Sole 24 Ore”.
Published: September 2017 l Photo: Gregory Lee - Fotolia.com