According to current projections, in 2025 about one third of the worldwide population will be of Muslim faith (2.5 billion); 65% of Muslims live in Asia (with a very strong presence in India and China) and approximately 40 million live in the EU alone. Islamic finance is growing worldwide at rates equal to 15-20% per year and, according to the latest surveys, in 2014 it has reached an overall value of 1.9 trillion dollars.

More in general, the Muslim economy (the so-called “halal industry”, from “halal”, opposite of “haram”, this meaning the prohibition to engage in unethical conduct, which includes gambling, production and use of alcoholic drinks, of pork meat, pornography, etc.) is growing by 10% and has a value of approximately 2,300 billion dollars per year.

Italy, with the presence of about 1.5 million of Muslim residents and its geographic position that makes it a natural bridge between Europe and the Arab world, could be able, with a minor effort, to take advantage of this opportunity, also in consideration of the increasing interest on the part of investors of emerging countries, and in particular those of Muslim faith, in sectors where know-how and Italian excellence have created greater value. Indeed, the Gulf countries represent a fertile area for each business carried out in the field of excellence. In addition, the collapse of the oil market over the last years has increased the awareness among the governments of the area of the need for diversification of their economies.

Over the last years Qatar has certainly been the GCC country most active in Italy, with investments in the real estate sector (in Costa Smeralda and Porta Nuova in Milan), luxury hotels (Four Season Florence, Hotel Gallia-Milan, Hotel Aleph-Roma Boscolo Group, Westin ExcelsiorRome), transports (Meridiana), fashion (Valentino and Pal Zilieri trough the fund Mayhoola controlled by the royal family of Qatar and more precisely by Shaikha Mooza, the wife of the Emir of Qatar).

Further examples of investment in Italy concern: the Abu Dhabi fund AABAR that owns 5.042% of Unicredit; the Abu Dhabi fund Mubadala that acquired years ago 100% of Piaggio; the Bahrain sovereign fund Mumtalakat, that has recently invested in KOS, a company leader in Italy in health and social care (it is the first investment of Mumtalakat in Italy); and finally the sovereign fund KIA (Kuwait Investment Authority) that has entered the Italian Strategic Fund, of which also Qatar Holding is a part, with 500 million dollars.

In addition to the GCC sovereign funds and investment funds mentioned above, there are Saudi private industrial groups such as Saudi BinLadin Group, Al Hokair Group which invested or are about to invest in the real estate sector in Italy; while important Islamic banking groups, such as Al Baraka banking Group (ABG) of Bahrain, are considering a possible entry in Italy, owing to the more and more growing and insistent demand by the Muslim community residing in Italy for Sharia compliant investment instruments and banking institutions.

Investments in niche sectors (renewable energies, medical - health care sector, design of systems and equipment for the Oil & Gas sector, green economy) along with the sectors of infrastructures, tourism, food & fashion and real estate represent a source of opportunities that Italy may offer to investors of the Arab world in the framework of the aforesaid need for diversification of their investments. With regard to the foregoing, Dinar Standard, a strategy research and advisory firm in various markets of Islamic economy and finance, has identified some sectors in which the Islamic world is mainly interested:

  • Food and Beverage: the overall consumption of food products by the Islamic population has reached $1,292 billion in 2013, and is expected to increase up to $2,537 billion by 2019, that is to say approximately 21.2% of the global expenditure ceiling. The main consumers were Indonesia ($97 billion), Turkey ($168 billion), Pakistan ($108 billion) and Iran ($97 billion).
  • Fashion: Consumption in the clothing sector has increased up to 11.9% in 2013, reaching $266 billion. Moreover, it has been forecasted that such amount may double by 2019. Countries with the greatest interest in such sector were Turkey ($39,3 billion), United Arab Emirates ($22,5 billion), Indonesia ($18,8 billion) and Iran ($17,1 billion).
  • Tourism: in 2013 the amount spent in activities connected to tourism was about $140 billion (excluding Hajj and Umrah, that is to say the Islamic canonical pilgrimage to the Mecca). It is forecasted that by 2019 such amount may reach $238 billion.
  • Media, recreational and cultural activities: Also in this sector the overall expenditure has increased, reaching $185 billion in 2013. It is expected to reach $301 billion by 2019. Once again the countries with the greatest interest in the recreational and cultural sector were Turkey ($30.3 billion) and Indonesia ($9.4 billion).
  • Pharmaceutical and cosmetic market: The overall consumption of drugs and cosmetics is certainly lower compared to the other sectors (only $72 billion in 2013), even if it is forecasted that it may reach $103 billion by 2019. The greatest consumers remain Turkey ($8.9 billion), Arab Emirates ($5.9 billion), Indonesia ($4.9 billion) and Iran ($3.7 billion).
  • Real estate market: Islamic finance has always used real estate properties to structure its financial transactions. At the beginning of the nineties, attention was mainly focused on prestigious hotels and buildings, while from 2010 until today, by reason of an increase of investments provided by Islamic funds and banks, various financial transactions have mainly concerned commercial buildings of a different type. Nowadays about 10% of the financial resources in Islamic funds is invested in the real estate market and part of such investments have already concerned Italy, even if their growth is expected in the near future.

The opportunities: the Islamic bank, interventions on tax regulation and issuance of sovereign sukuk

The opening of the Italian market to Islamic finance does not require, at least in an initial phase, a complex intervention to amend the legislative framework. The offer of services and products that are typical of Islamic finance may already take place, in theory, also on the basis of the legislation in force. Consob, in a legal journal of 2014, wrote that Islamic finance is not incompatible with the Italian regulation of financial markets since it is based on a set of objective rules that are divorced from ethical or religious connotation, and that the most common Islamic financial products can be easily recognised in the particular type of “transferable security” under Article 1, paragraph 1-bis, of the Italian Consolidated Financial Act and, hence, even in that of “EU financial instruments” under Article 93-bis of the Italian Consolidated Financial Act, which includes transferable securities.

On the other hand, from a civil and corporate law point of view, besides the possibility to recognise the typical contracts of Islamic finance in some codified contracts governed by the Italian civil code (such as, by way of example, joint ventures), it is possible to make recourse to Article 1322 of the Italian civil code that allows the conclusion also of atypical contracts “provided that 6 they are directed to the realization of interests worthy of protection according to the legal order”.

For the reasons explained above, Italy may become Islamic Finance friendly through a limited number of focused initiatives, which are better described below.

The Islamic bank

A first proposal concerns the possibility that an Islamic bank could be authorized to operate in Italy essentially through three models: (i) that of the pure Islamic bank, operating according to the principles of Sharia; (ii) that of a branch or subsidiary of a conventional bank, specialized in the offer of Sharia compliant financial products; or (iii) through an “Islamic window”, inside conventional banks, offering Islamic financial products.

To achieve the implementation of one of this models in Italy it is necessary to provide an answer to some specific characteristics of the Islamic bank relating, by way of example, to security of deposits, rather than to the requirement, that concerns all banks, to invest a part of their liquidity in the so-called “high quality liquid assets”. This could be successfully realized through an harmonisation process that involves also national authorities in order to elaborate uniform solutions at European level, taking into account on the one hand that, following the entry into force of the Single Supervisory Mechanism, the final competence to grant the authorization to carry out the banking activity rests with the European Central Bank, and on the other hand that there are retail Islamic banks already operating in other European countries such as the United Kingdom and Germany.

The presence of an Islamic bank in Italy would be an advantage on the one hand for Italian enterprises, which would have the chance to access new and alternative financing opportunities in addition to the ordinary ones already offered by conventional finance, and on the other hand for consumers, not only of Muslim faith, who appreciate the financial services of an ethical bank.

Interventions on tax legislation

A second intervention concerns tax legislation, and is aimed at implementing the so-called “level playing field”, therefore at putting Islamic finance, from a taxation point of view, on the same level as conventional finance, by way of example by removing double taxation otherwise applicable to contractual structures typical of Islamic finance that are based on the purchase and subsequent resale by the lender of a specific asset, such as a real property.

The achievement of such result may require legislative amendments or simple interpretation clarifications. A working group of the Finance Committee of the Chamber has been appointed for such purpose.

Issuance of sovereign sukuk

But the real intervention that would represent for Italy the signal of an exceptional opening towards the capital market of Islamic Countries - and in particular of Gulf Countries - that would significantly favour the development of Islamic finance in Italy, would be a benchmark issuance (from 500 million to 1 billion Euro) of sukuk (investment certificates compliant with the Sharia that may be considered as the equivalent, for Islamic finance, of conventional obligations) by the Italian State.

However, differently from obligations, meant as promise to repay a debt, sukuk must incorporate a portion of right on an underlying asset and hence are the ideal instrument to finance the realization of real estate or structural projects.

More in general, such operation would attract to Italy and its enterprises - which, after the State, could more easily have recourse to this form of financing - a significant flow of capitals from those Muslim Countries that have already started to invest in Italy (Kuwait, Qatar, Emirates) or may do that (Saudi Arabia).

By way of example, the issuance could be structured within the process started by MEF through Invimit SGR, which is aimed at accelerating the divestment of the Public Administration instrumental assets that do not need to be valued and may produce income from rental return. Should it be possible to isolate within such patrimony a set of rental properties with a value close to the figures mentioned above, it would be possible to structure, as diversification compared to the recourse to the fund instrument, a transaction for the issuance of sovereign sukuk, similarly to what already done, in the EU area, by the United Kingdom and Luxembourg, and to what Germany is expected to do.

The sukuk instrument, after the issuance by the Republic of Italy, may be subsequently used by the entire public sector.

We have tried to formulate below, at level of principles and not in detail, a law proposal based on what has been done in the past with regard to the securitization of public real estate:

I. The Ministry of Economy and Finance is empowered to set up, even by unilateral act, a jointstock company with corporate capital of 1 million Euro, having as its exclusive object the securitisation of the profits derived from the divestiture of real estate belonging to the State and other non-local public bodies currently used by the Public Administration, which will be identified by the State Property Office by own directorial decrees, and having a value equal to 1 billion Euro.

II.The Ministry of Economy and Finance, upon incorporation, shall adopt the by-laws, appoint the first members of the managing and control bodies and determine their remuneration.

III.The company, incorporated pursuant to paragraph 2, shall implement the securitisation through the issue of securities of equal value in the form of sukuk, representing undivided shares in the ownership of the purchased real estate, entering them in the liabilities side of its balance sheet, for a value equal to 1 billion Euro

IV.Securities so issued may benefit, in whole or in part, from the guarantee of the State.

V.Real estate identified pursuant to paragraph 1 will be transferred to the company for valuable consideration by means of public deed or private deed certified by notary, and leased to the transferees at market conditions.

VI.Real estate transferred to the company represents, for all purposes, assets segregated from the company ones and cannot be subject to actions other than by the holders of the securities issued to finance the purchase of such real estate.

VII.Liability for obligations to security holders will be borne exclusively by the segregated assets.

VIII.After five years from the issue of the securities, the company shall transfer the ownership of the real estate purchased to the transferor Public Administrations at the price of 1 billion Euro and use the selling price to repay the securities issued

IX.The Ministry of Economy and Finance, by one or more non-regulatory decrees, to be published in the Official Gazette, will establish the terms and conditions of the securities issued by the securitisation company, the market conditions on which the real estate being transferred will be leased by the securitisation company to the Public Administrations transferring the same, as well as the terms and conditions of the guarantee of the State under paragraph 4. The Ministry of Economy and Finance will report to the Parliament on the implementation of the securitisation transaction within three months from the date of incorporation of the company under paragraph 1.

X.Income from securities will be subject to the same tax treatment applied to periodical income normally derived from mainstream bonds.

XI.Costs periodically incurred to pay income from securities will be tax deductible for the issuing company.

XII.Taxes on the transfers of real estate to and from the securitization company will be halved in order to take into account the synallagmatic nature of the purchase and resale of the same .