Bancario e Finanziario

Islamic Finance: Italy has significant potential

As well summarised by the ECB in occasional paper No. 146 from June 2013 “Islamic Finance in Europe”, Islamic finance is based on four main principles, which are all derived from the Quran and Sunna. The first is the prohibition of Riba, which means that no interest may be charged on any money lent. The second principle involves a profit and loss-sharing concept. Parties to a financial transaction must share both the risks and the rewards. The third principle is the prohibition of uncertainty or speculation. The fourth principle requires the use of asset-backing. Each financial transaction must relate to a tangible and/or identifiable underlying asset, ensuring that Islamic financial institutions and transactions remain connected to the real economy.

Islamic finance has developed significantly since the mid-1990s and has become a not negligible part of the international financial system. The total value of Islamic financial assets is estimated to have reached the figure of some USD 2 trillion.

The European market, however, with a potential customer base of more than 20 million Muslim is still largely untapped. There is a significant market growth potential since the penetration of Islamic banking products is low, because a lack of supply, whilst there is a strong demand from clients for Shariah compliant services. Governments and regulatory authorities in certain EU countries strongly support the development of the Islamic finance model. In particular, the UK and Luxembourg. The government of United Kingdom issued the first Ijara Sukuk (so called Islamic bonds) in 2014  followed by the issuance of a Euro 200m Islamic bond by Luxembourg.

Last year, Italy made an attempt to introduce a law aiming to regulate the tax treatment of certain Islamic financial operations executed in Italy. The idea was to create a level playing field for the industry in comparison to conventional finance.  A draft was introduced into Parliament. It set out the proposed tax treatment for three specific Islamic contracts: Murabaha, Ijarah and Istisna’a. It also aimed at introducing Sukuk in Italy by regulating the public offering of such securities. However, the proposal was not even debated, let alone approved. The legislature has now come to end and general elections have been called to elect a new Parliament. The fate of the proposal will depend on the outcome.

Although Italy has not yet been able to introduce a dedicated tax and legal framework for Islamic finance, and the industry has not really taken office in this country, it still remains, however, a very attractive investment destination for Islamic investors.

Indeed, Italy is the 3rd largest economy of the Eurozone and the 8th largest in the world, with a GDP of some 2 trillion dollars, coming immediately after India, but ranked before Russia. The domestic market offers many opportunities, with a population of more than 60 million. Italy represents a strategic gateway to 500 million consumers across the European Union and to 270 million in northern Africa and the Middle East. It is the main thoroughfare linking southern Europe to central and eastern Europe.

For over 30 years, Italy has been the 2nd largest manufacturing economy in Europe after Germany, and ranked between the 6th and 7th in the world.  Italian manufacturing trade surplus is the 5th highest amongst the G-20 countries, exclusive of energy and mining, with a value of 96 billion euros in 2014. Italy holds leadership positions for trade surplus in 935 products out of 5,117 marketed goods (the most detailed breakdown of world trade by industry): 1st in 235 products, 2nd in 377 products and 3rd in 323 products.

Investing in Italy means having access to unique export knowhow in leading sectors, such as machinery and automation, fashion, design, and food. Companies investing in Italy can also rely on extensive networks of SMEs and many industrial clusters throughout the country, able to supply high-quality intermediate products specifically tailored to meet customers’ needs.

Italian cities are overflowing with ancient monuments and treasures, and this – combined with its world-famous art, culture, music, food, and quality goods – gives Italy an unparalleled quality of life, which is the envy of the world.

Furthermore, after years of stagnation, if not recession, the Italian economy is now recovering. indeed, after two years of real GDP growth of around 1%, the forecast for this year has been raised to 1.5% and the economy is expected to expand at a 1.5% rate also in 2018 and 2019.

So, assuming that Islamic investors intend to benefit of the favorable outlook of the Italian economy, and to include Italy in their investment portfolio what would be the preferred asset classes?

Real estate appears to be of course the privileged choice, as recent history confirms. Islamic investors could target single Shariah compliant retail trophy assets fully rented out and therefore  producing a stable yield. However, prices in Milan and Rome, the most favorite destinations, are picking up. As an alternative closed end real estate funds, although less liquid, could be an interesting alternative provided that the investor has a medium-long term holding strategy. One of these funds has been created in order to acquire buildings owned by Provinces and Municipalities and leased to the Public Administration, which would be ideal assets also for the issuance of Ijarah sukuk.

Particular attention should be given to the ELITE programme. It is managed by Italian stock exchange and is aimed at helping fast growing companies get access to the debt and equity capital markets. It includes today some 430 Italian companies with a high-growth potential, 183,00 employees and aggregate revenues of €46 billion. On the debt side the Elite Club Deal (“ECD”) – Basket Bond has been just launched. The aim of the ECD is to create a systemic platform which interlinks corporate and investors. The innovative tool is represented by an asset backed security (the “Elite Basket Bond”) collateralized by a basket of bonds issued by companies belonging to the ELITE programme. The Elite Basket Bond is structured in two phases. In Phase I each issuer issues a bond with certain predefined characteristics. In Phase II the bonds are used as collateral by a special purpose vehicle set up under Italia law on securitization. It could be explored whether a similar structure could be set-up in a Shariah compliant manner, using the Italian Islamic bonds rather than conventional bonds, to be subscribed by an SPV issuing sukuk.

On the equity side it should be possible though an appropriate screening, to identify an Islamic ElITE Basket which would include all those companies out of the ELITE programme which meets Shariah criteria, i.e. are not involved in non-Shariah compliant activities. In particular the applied screens could be, similarly to what happens for other Shariah compliant indices, business activity (therefore excluding companies engaged in alcohol, tobacco, pork-related products, entertainment – casinos, gambling and pornography – weapons and defence, conventional financial services – i.e. banking, insurance and so on – and biotechnology companies involved in human/animal genetic engineering) and financial ratio screen having regard to debt, cash and interest bearing assets, accounts receivables etc.

Once the basket has been constructed, Islamic investors could be easily target the companies which are in the basket knowing that they are fast growing and meet Shariah criteria.



This article is a synthesis of a series of articles which appeared in the publication Islamic Finance News in the months of October and December 2017 and January 2018, by the same author. Across the EUniverse thanks both Stefano Padovani and IFN.




This article is for information purposes only and is not intended as a professional opinion.
For further information, please contact Stefano Padovani.

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