ADVANT Nctm rafforza la compagine societaria con la nomina di Roberto de Nardis …
The first question which comes to mind when speaking about a possible Italian sovereign Sukuk issuance is: why? Why should Italy consider such a venture? The obvious first answer is: because it needs alternative financing instruments and cross-border investments to finance its growth, and in particular infrastructure and investment projects. This is quite clear if, on the one hand, one considers that to adhere to the strict rules of the EU fiscal policy, Italy cannot increase its level of indebtedness which is in the range of 130% of GDP (on the contrary it should heavily reduce it), and, on the other hand, one compares the average GDP growth in EU countries during the period 2005-15. From this comparison, it is clear that while there has been an average growth of 0.9% across the EU, Italy recorded minus 0.5%, which is the worst performance among the 28 member states after Greece.
In fact, Italy has remained trapped between the abundant liquidity which has flooded the financial markets through the quantitative easing monetary policy of the ECB, which, in keeping with the interest rate law, has indeed supported the borrowings of the country and the value of its bonds, on the one hand, and the rigidity of the EU fiscal policy on the other hand which has limited the ability of the Italian state to support the recovery of the economy by sustaining internal demand with public spending.
Looking for funds abroad, Italy should consider in particular the Islamic economies to attract capital where there is almost a perfect match between market sectors where Italy can claim absolute excellence and those where the expenditure of the Muslim population is concentrated and is growing: food and beverage, fashion, tourism, real estate, media, recreational and cultural activities, pharmaceuticals and cosmetics, etc.
It goes without saying that in order to achieve that goal, Italy would be better off developing an Islamic finance- friendly environment. In doing this, however, it does not need to start from scratch as the Italian legal framework already includes a few instruments which could be used to develop an Islamic finance industry in this country. These are particular instruments which are between debt and equity, like profit-participating bonds, based on a profit and loss-sharing mechanism; and financial participative instruments (‘strumenti finanziari partecipativi’) in particular those having an equity nature.
Another contract which comes to mind is the association in a participation agreement (‘associazione in partecipazione’) which is very similar in nature to the old Arabic Qirad contract (or Mudarabah), where the ‘associate’ is financing the business of the ‘associating party’ in exchange for a participation in the profits (and the losses).
Furthermore, there are pure equity instruments, which can be issued according to the principle of Article 2348, second paragraph, of the Italian Civil Code (“the company, within the limits set forth by the law, can freely determine the content of the various categories of shares”) such as tracking shares (azioni correlate), shares without or with limited voting rights (according to Article 2351, second paragraph of the Italian Civil Code) or a different profit- loss participation mechanism, such as preferred ranking in respect of ordinary shares should the company bear losses, which could be used to accommodate Islamic investors in the capital of companies without interfering with the management of the same and the desire of business owners to retain their full control.
Moving to real estate investments, which is the preferred choice of Islamic investors, consideration could be given to real estate funds which, depending on the nature of the activities carried out in the underlying assets and on other factors, could be certified as Shariah compliant and similarly to SIIQs (Italian REITs) and other asset management vehicles like SICAF, an alternative investment fund set up in the form of a joint stock company and raises funds through the issuance of shares or financial participative instruments.
Having said that, the question remains: why is Islamic finance not taking off in Italy? The first answer might be that there is still no level-playing field. In particular, no intervention has been made to adapt the Italian tax framework to avoid double taxation and other tax leakages for Islamic finance transactions as opposed to conventional ones.
But taxation is only one of the factors to be considered when developing an ecosystem required to build confidence in the relevant players. Indeed, Italy is not perceived as the first stop when it comes to Shariah compliant investment in Europe.
In order to change this perception a few things could be done. A first intervention would involve tax legislation, aimed at implementing the aforementioned level-playing field, removing, by way of example, double taxation otherwise applicable to contractual structures typical of Islamic finance that are based on the purchase and subsequent resale by the lender of specific assets, such as a real property, as well as uncertainty regarding the taxation of income from securities in respect to that applied to periodical income deriving from conventional bonds.
A second action could be to promote the establishment of an Islamic bank, which could fund itself among Islamic investors from Muslim countries, providing Shariah compliant financing products to Italian corporates and, probably at a later stage, to the general public. But the real intervention that would represent for Italy a sign of opening toward the capital markets of Islamic countries – in particular Gulf countries – and would significantly favor the development of Islamic finance in Italy, would be a benchmark issuance of Sukuk by the country.
Indeed, after the UK Sukuk and the Luxembourg issues which came to market in 2014, it has recently been announced that another European country, Germany, could tap the Sukuk market with a sovereign issuance of US$1 billion and a five-year maturity, although this has not yet been confirmed.
Italy could easily follow this path with a sovereign issuance with the objective of raising alternative sources of funding for its infrastructure projects and to set a precedent that demonstrates to the corporate sector that a proven platform, as well as infrastructure, is in place so that Sukuk can be issued comparably to conventional bonds, thereby paving the way for Sukuk to become an instrument of choice for Italian SMEs raising corporate finance.
The next question is whether the Italian legal and tax system is sufficiently equipped for the issuance of Sukuk without the need for further intervention. According to the well-known n.17 AAOIFI definition, Sukuk are “certificates of equal value, representing undivided shares in the ownership of tangible assets, usufructs and services or (in the ownership of) the assets of particular projects or special investment activity”. As we have seen previously, Italy has a set of instruments which in principle could be used to accommodate Shariah compliant contracts and techniques. However, none of these appears to match, at first sight, with this definition. In any case, it would appear prudent, Italy being a civil law country, to provide for an ad hoc legislative framework, as Luxembourg did with its sovereign issue in 2014.
We have therefore tried to formulate in the following, at the level of principles and not in detail, a law proposal based on what has been done in the past with regards to the securitization of public real estate:
