Islamic Finance in Italy: a €4.5 bln potential
The MPS Research Area analyses the prospects for development of Islamic financing in Italy. A potential funding of € 4.5 bln is assumed for 2015, with an estimated resident Muslim population of 1.3 mln. The United Kingdom sets the example.
Siena,19 October 2009 – Will Islamic Banking be a new engine for Italian finance? With a growing resident Muslim population in Europe and a progressive integration of Islamic workers and businesses in the European economy, Islamic Banking is turning into a potential booster for the financial system. The Research Area of Banca Monte dei Paschi has analysed the potential development of Islamic finance in Italy and assumes that potential funding may amount to € 4.5 bln in 2015, with resident Muslim population totalling approximately 1.3 mln. Against this background, the case of the United Kingdom is a model likely to be replicated in other countries of the Union.
The recent integration of Muslim communities in Europe's socio-economic fabric and the sustained growth in size of the Islamic financial market are drawing the attention of the financial world to the strong potential for development of Islamic finance, i.e. that set of financial (banking and non-banking) practices and activities that are consistent with the principles of Islamic law (Shari’a). Even though the Islamic financial market accounts for only 1% of the world's financial assets, its annual asset growth rate is 10 to 15% and, over the last five years, Islamic retail banking has recorded an average annual increase in revenues of 44%.
The scope of application of Islamic financial agreements is expanding, as well. It is in fact because of the rapid expansion of demand for these products, that a wide range of financial instruments are being developed which are specifically designed to comply with Sharia precepts: among these products, an important role is played by the Sukuks (financial certificates) which hit $ 100 bln at the end of 2008.
The distinctive features of both Islamic retail products and financial instruments include the presence of various forms of risk participation in lending and funding, the trust relationship that underlies the agreements, the ban on interest, uncertainty, speculation and immoral activities.
In particular, loan agreements include Musharaka and Murabaha financing facilities. Musharaka partnerships are similar to the Joint Ventures of conventional finance and are used to finance long-term projects. Based on this type of agreement, the Bank finances the entrepreneur's project and both the Bank and the businessman participate in its profits or losses.
Murabaha is instead one of the most popular financing instruments (accounting for approximately 75% of the total) and consists in a contract whereby the Bank purchases goods not in its own name but on behalf of the client and then sells them to the client at a higher, previously agreed cost. Payment of such price may be on an instalment or deferred basis.
ùThe study conducted by the BMPS Research Area provides an analysis of Islamic finance starting from a demographic survey of the Muslim population in Europe to conclude with the prospects for development of Islamic finance in Italy.
The total Muslim population in Western Europe exceeds 13 mln, including approx. 830,000 living in Italy. Muslim immigrants are a very important, growing market segment, currently served by 26 Islamic and conventional banks (with either regular branches or "Islamic windows") in Europe, 19 of which located in the United Kingdom and no one based in Italy yet.
It is noted that the first bank operating in accordance with Sharia principles in the UK reported over 40,000 clients and £ 153 mln worth of funding in 2008 (at 4 years from opening).
On the basis of data concerning the growth of well-established Islamic banks in the UK, the Research Area study estimates the growth potential of Islamic finance in Italy. According to the Italian Institute for Statistics (Istat), Islamic clients may grow to 1.3 mln in 2015 and, with the opening of Islamic branches or Islamic windows, a potential funding of approximately € 4,500 mln and revenues for more than 150 mln may be generated in the Italian banking system. Even though the spread of Islamic finance in Italy is still delayed by a tax and regulatory framework that is not yet fully implemented, figures are therefore indicative of its potential development in the future.