Islamic finance ‘could benefit Italy after Brexit’

Islamic finance ‘could benefit Italy after Brexit’

(by Elisa Pinna)

ROME – Investors from the Islamic financial world could be the answer to Italy’s woes in the wake of the Brexit, according to participants in a recent conference organized by Nctm finance law firm. The conference was attended by Foreign Undersecretary Vincenzo Amendola, Lower House financial committee member Stefano Loconte, Maria Alessandra Frenci of the Bank of Italy, and Stefano Padovani from Nctm. This would require legislative changes, including to the tax code, to follow Islamic principles, participants said.

Muslim investors are interested in Europe due to a downturn in oil exports on declining crude oil prices, whose structural causes – beyond Saudi Arabian policies designed to the detriment of Iran – are destined to last. The business world is therefore trying to diversify geographically and by sector, with a view to the service sector and more long-term investments.

Islamic finance is growing at an average of 20% a year, moving capital in excess of two trillion US dollars. It follows its own specific rules, which at least in theory, require a strong connection between production and the real economy.

Islamic finance forbids speculation because "it is not possible to sell what is not owned". Profits must imply participation in economic risk, and charging interest is forbidden. One example is the use of Murabahah – a form of Islamic (i.e. "shariah-compliant") financing in which the buyer and seller agree on the markup for the item(s) being sold – in real estate.

Islamic lenders are forbidden to charge interest, so real estate sales are financed under Murabahah contracts in which the bank buys the property from the seller and sells it to the buyer at a higher price. The payment can be made in installments.

This would clash with the Italian tax code, under which real estate can change hands at above-market value because it includes mortgage interest.

Italy’s CONSOB stock market regulator in 2014 said Islamic finance is not incompatible with Italian rules on financial markets. Civil law also allows for atypical contracts provided they are "fulfill worthy aims according to the law".

A working group at the Lower House’s financial commission is looking into the matter.

Participants also suggested issuing State bonds following the rules of Islamic finance. Given that interest is forbidden, obligations should consist in co-ownership of the underlying tangible assets. Under the proposal, the assets would consist of State-owned real estate, bought and re-sold by a company set up for the purpose, whose participating shares would be bought by investors.

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