The first French sukuk

As France attempts to launch its nascent Islamic financial sector, its first Sukuk issues finally appeared last summer. Since the first declarations by the Minister of the Economy in 2008, fiscal adjustments concerning Islamic financial instruments have made slow but sure progress, but the development of Islamic products has been very gradual.

However, there has been some progress in the area of Islamic retail banking. In June 2011, Chaabi Bank, The French subsidiary of the Moroccan Banque Populaire Group, opened an Islamic window offering Islamic deposit accounts for private customers. Around 500 new deposit accounts are opened every month, mostly by new customers. This is a satisfactory figure for a small bank with only 17 branches in France.

The first example of house purchase funding appeared in December 2011, a ten-year Murabaha contract launched by 570 Asset Management and Chaabi Bank. This type of funding is important for the Islamic retail bank market, since the funding housing is a priority for their Muslim clientele. In coming months, Chaabi Bank also hopes to launch a deposit account for SMEs, to respond to the latent need of this section of its clientele for Islamic banking products.

Finally the summer of 2012 saw the launch of two new Islamic financial products, French Sukuk for both individuals and institutional investors, giving French companies an alternative solution in their search for new sources of funding.


The question of the adoption of Islamic financial transactions in France was answered by finding existing law articles in French legislation that can be made compliant with Islamic finance principles without changing the law and by making few adjustments. Since the declaration of the Minister of the Economy, at the 15th edition of Paris Europlace Forum on July 2008, regulatory and tax adjustments have been made. Since then, tax instructions needed for the issuance of Sukuk, Ijara, Murabaha and the Istisna under French law have already been published. The objective of these instructions is to clarify the legal framework for Islamic finance in France. Each tax guideline defines one instrument with an existing French legal concept. At the same time, each Islamic finance product is referenced through a connection made with one or several conventional banking or financial products. In this case, banks and regulators can determine for each Islamic transaction the relevant banking regulation; accounting; tax treatment and prudential requirements.
As such, the French tax administration issued an instruction in February 2009 to define the legal concepts and clarify the tax treatment applicable to Sukuk (Statement of practice 4 FE / 09). The purpose of these instructions was to determine if these instruments are taxlike debt or equity products. This instruction provides for the deductibility of the sums paid by the Sukuk issuer under the same conditions as with loan interest. In order to attract foreign investors, the legislator has also provided for the absence of deduction at source on the sums paid to French Sukukholding non-residents. In August 2010, the Sukuk transactions guideline was updated by the French tax administration (former guidelines published on February 25, 2009). The intent of the French tax authorities is to limit the tax costs related to Islamic transactions. In this way, the objective is to treat Shari'ah-compliant products similarly to traditional financial transactions for French tax law purposes. This guideline clarifies the tax regime applicable to the Sukuk, taking into account the conditions under which this instrument can be assimilated to a loan, debt security or bond.

Even if the cited guideline clarified the tax treatment of Sukuk, the question of the legal framework and especially the purpose vehicle (SPV) applicable was also raised. This instrument enables the separation between the legal owner of a tangible asset and its beneficiary who will use Sukuk to finance this asset. But French law does not recognize this property duality. The French administration originally intended the amendment of the legal regime of the fiducie, the equivalent of the Anglo-Saxon trust. An amendment to credit access law for SMEs was introduced in February 2009 in order to simplify the scheme of the fiducie (temporary transfer of ownership). This amendment was adopted in September 17, 2009 by the French Assembly. Nevertheless, the French Constitutional Court ruled against this law in December 2009 stipulating that this amendment hasn't any connection with the subject of the law. Since then, the idea of participatory requirement was dropped in favour of the structure of a mutual securitization fund (fonds commun de titrisation). This solution has the advantage of giving investors share ownership, which is consistent with the principles of Islamic finance.

Last summer two Sukuk were issued in France for Shari'ah-compliant investments, backed by genuine assets and refusing speculation on derivatives and virtual instruments. The first Sukuk was issued to finance an investment in a growing market in the food sector in France, halal catering. The second is in the area of solar panels and finances an ecological, economically responsible investment.


The beneficiary of the first French Sukuk is the company BIBARS SAS, holder of the Master Franchise in France of the Al Farooj fastfood concept. This Sukuk enabled the issuer to open their first halal fast-food restaurant located in Alfortville, in the form of a franchise of the Dubai chain, Al Farooj. The first tranche of funding, for €0.5m, was collected from about fifteen private investors by the financial engineering company specialised in Islamic finance, 570 Asset Management. This funding is part of a wider project including the opening of fifty or so restaurants over the next ten years. As required by Muslim ethics, these Sukuk invest in a Shari'ah-compliant sector of activity, halal food, and offer an annual expected return of 8% over five years, which is not guaranteed and which may vary depending on the performanceof the project funded.


Launched by Legendre Patrimoine, the Oraisi Sukuk were the first French Islamic certificates open to private individuals as well as institutional investors. The "Comité Indépendant de la Finance Islamique en Europe" (CIFIE) ratified the product. The activity on which these Sukuk are based is photovoltaic cells installed large roof areas in the south of France or in overseas territories. The holder of these certificates is therefore the part-owner of an energy generating system. These Sukuk are in the form of rights to the profits produced by a "Société en Participation" (SEP - undeclared partnership) or a limited company (SARL) which acquires, using the funds collected by the Sukuk, solar panels. These panels are leased to operating clean energy companies, who sell their production to the French Electricity Board (EDF). Using an Ijara contract (lease), the rent received by the partnership or company is issued to the Sukuk subscribers, who also receive a number of tax advantages. The contractual yield is 7% for an investment of €5000 in a partnership and at least 8% for an investment of €10000 in a limited company. 87% of the capital invested is guaranteed by a promise to purchase after ten years. Investors who wish to conform to the principles of Islamic finance will not subscribe to this promise, but will sell at market price or a price agreed at the time they decide to sell, and not at a price agreed beforehand. To ensure maximum profitability, the investor must keep the certificates for at least ten years before selling them by private agreement.

International French banks are very active in the sector of Islamic credit, and in particular in that of the Sukuk. They have developed an excellent knowledge of the sector in recent times. For example, in 2005 BNP Paribas Najmah received the Euromoney Award for the best Islamic Finance House. The award was given in recognition of the bank's creative solutions in issuing Sukuk and its structured murabaha. In 2007 BNP Paribas organised the second largest bond issue in Saudi Arabia, and the largest for a familyowned group, Saad Trading Contracting and Financial Services Company (Golden Belt 1 Sukuk Co BSC). In 2007, it organised a bond issue, together with Citibank and the National Bank of Kuwait, on behalf of Kuwait's National Industries Group (NIG Sukuk Ltd.) Calyon has also participated in several bond issues in recent years and has received several awards and distinctions in the field. However, these banks have still not used their expertise for bond issues in France. So far they have been content to assist Muslim issuers, eager for this kind of financing, in dynamic markets such as the Gulf countries. What is the Future for Sukuk in France? At a time when French SMEs are finding it increasingly difficult to find traditional sources of funding for their projects; at a time when the resources provided by central government to French local authorities are increasingly being squeezed, the Sukuk might provide a viable alternative. Given the example of Germany, this would appear to be the case. Although its tax system was not as developed as the French one in terms of Sukuk issues, Germany became a pioneer in the field in 2004, when it issued the first European Sukuk. At that time the German Land of Saxony-Anhalt issued an Ijara Sukuk of €100 million, guaranteed by the Federal Republic of Germany with specific buildings belonging to the Ministry of Finance as its underlying assets. The French economy is moreover a diversified one, and offers several types of assets that could be used to carry out operations in line with Shari'ah. The country also has the largest Muslim community in the European Union. It might well attract Muslim or non-Muslim investors interested in the ethical principles of Shari'ah.

The two Sukuk issues mentioned above demonstrate that actors in France are ready for such operations, and that such structures are also technically feasible. Henceforth, the question is whether other issuers will follow suit, and whether French or foreign subscribers will show interest for this type of instrument.

© Business Islamica 2012


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