Italian cooperatives looking for financing

Italian cooperatives are a major component of the national economy, operating in many sectors, and in some of them (as well as in some regions) have a very large market share.

The cooperative model based on the ‘one head, one vote’ principle is fully recognized by Article 45 of the constitution which includes a direct reference to cooperation, stressing in particular both the mutual and social aims of cooperatives as well as the exclusion of private speculation purposes.

The general regulation of cooperatives is provided by the Civil Code, where they are considered a particular type of companies. Other general and particular rules are contained in separate Acts.

Cooperatives are conceived by Italian law as entities running an enterprise in the interest of their members as consumers, providers or workers. This organizational objective is referred to in Article 2511 of the Civil Code under the definition of cooperatives companies as those having a variable capital (the so-called ‘open door’ principle) and a ‘mutual purpose’. The law now states that cooperatives can choose between two regimes: a regime with the limitation to distribute their profi ts and mutual obligations (the so-called ‘predominant mutuality’) or a regime characterized by the same obligations, but in a lighter form (‘nonpredominant mutuality’). Predominant mutuality means that the cooperative runs its business mainly in favor of its members, or avails itself in doing so of the labor force provided by its members, or of their contribution of goods and services.

Among other restrictions, cooperatives with predominant mutuality cannot distribute profits at a rate that exceeds the rate of return of postal bonds (which are similar to treasury bonds) by more than two percentage points. Non-distributed profits must flow into a reserve, which cannot be distributed neither during the life of the company nor in the case of dissolution. These limits imply that the profits that can actually be distributed are extremely low, making cooperatives in effect not for-profit organizations.

Cooperatives are market leaders, among others, in the agro-industrial business, and in particular, in the food and agriculture sector, where they account for approximately two-thirds of the relevant total turnover.

Some of these companies are looking to finance their development outside of the usual banking channel and are tapping the debt capital market. Caseificio Quattro Madonne, a producer of the famous parmesan cheese, issued in 2016 a seven-year maturity EUR6 million (US$7.37 million) minibond at a 5% yearly rate, secured by a pledge on the cheese, and a short-term one-year maturity minibond at a 4.5% yearly rate in 2017. Both minibond facilities are listed. Other agriculture and food cooperatives active in the business of fruit, tomatoes and tomato sauce, as well as frozen vegetables, to name a few, are willing to enter the debt market following this example.

Since the ‘mutual purpose’ and the business of most of these cooperatives appear to be aligned with the principles of Islamic finance, Islamic investors could consider financing these companies using Shariah compliant minibonds to sustain their development and also with a view to expanding their business in the GCC markets.

This article was first published in Islamic Finance news Volume 15 Issue 12 dated the 21st March 2018.