The French authorities were faced with the task of incorporating Islamic finance into the legal system, but at the same time not violating their religious principles defined by Sharia. They coped with this task perfectly. Today, the French legal system contains the concept of freedom of contract, which already takes into account the basic principles of Islamic finance. Therefore, for Islamic transactions, there are no special amendments to the French legislation. Moreover, the Tax Directives adopted in France provided Islamic institutions wishing to start a business in France a guarantee that they would enjoy the same treatment as the French financial institutions.
In this article, we will consider the basic principles of the legislative regulation of Islamic finance in France.
Non-Discrimination is the Key
If you intend to start a business with Islamic finance in the EU, please note that the main principle of the French legal system is non-discrimination. Here, European rules apply to banking, capital markets, and the insurance industry. However, Islamic financing in France can be well realized through international agreements which can refer to any law, even non-state law, including Sharia.
The Prudential Supervision Authority (Autorité de contrôle prudentiel et de résolution - ACPR) controls insurance companies and banking institutions in France.
To start banking in France, Islamic financial institutions, exactly like any other financial institution in this jurisdiction, must obtain a banking license in France from the ACPR and fully comply with the Monetary and Financial Code rules.
Islamic Banking Peculiarities
In Islamic finance, it is strictly forbidden to receive and pay interest for the use of money or for the fulfillment of a trade agreement. Any unjustified capital gains on a loan or in the implementation of a trade agreement are treated as a rib. Thus banned any accrual and payment of money at an interest rate that does not depend on investment efficiency, and determined only by the timing and size of the loan.
One of the distinguishing features of how the Islamic banks operate, is the distribution of risk between banks and their customers. By investing in Islamic banks, clients become investors, and through the bank, their funds are directed to certain investment projects. Depending on the result of the implemented investment projects, the bank, in the proportions specified by the agreements, makes a profit and transfers part of it to the investors. If the projects end at a loss, both the bank and its depositors suffer financial losses, and the bank's depositors may not only not receive income on the deposit, but also partially or completely lose the deposit. Thus, both the bank and its clients become investors, taking on part of the project’s risk, and their income is directly dependent on the project’s result.
Islamic Finance Contracting
An agreement with Islamic financing in France can be concluded in accordance with Islamic principles of financing and take various forms. For example:
- Mudaraba is a partnership that shares responsibility for investment and management, where the investor brings equity financing and the other side brings expertise. This agreement is concluded necessarily in writing.
- Murabaha is an agreement on costs plus profit. A prerequisite: the Murabaha manager must first obtain a license to conduct credit operations in France.
- Musharaca is a partnership agreement between a joint venture for the distribution of profit, implemented in the form of a joint venture agreement in France, which meets the principles of profit and loss sharing and equal treatment.
- Ijara is a rental of your own accord, within the framework of which you can conclude a leasing transaction in France. The financier must be licensed to operate as a registered credit company in France.
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