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Islamic Finance in France:

New Developments

Philippe Henry, Head of Corporate & Institutional Banking HSBC France,

Chairman Paris EUROPLACE’s Islamic Finance Commission

July 7th 2010

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French Initiatives: Purpose and ObjectivesFrench Initiatives: Purpose and Objectives

2007: the increasing oil-price has pushed the French government to consider Islamicfinance. The Minister of Economy, Christine LAGARDE, asked Paris EUROPLACEand the Treasury to assess and develop France’s potential to attract Islamic finance.

The main purpose is to attract a pool of liquidities from foreign Islamic investorsthrough wholesale banking and capital market instruments and to allow localauthorities and corporates to benefit from new sources of funding.

A 2008 independent report sponsored by Paris EUROPLACE assessed Frenchpotential of attraction at 10% of the $1,000m in Islamic finance.

2010 main objectives:

1. Issue a sukuk in Paris under French law;

2. Obtain the first license for an Islamic financial institution;

3. Translate the AAOIFI Shariah standards.

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French Initiatives: MethodologyFrench Initiatives: Methodology

In 2007, Paris EUROPLACE has launched the Islamic finance committee to makepropositions regarding the legal, fiscal and regulatory hindrances to Islamic finance.

In June 2009, a sukuk working group has been created with lawyers, tax specialists,Shariah advisors and Calyon to develop a sukuk structure under French law.

In 2009 Q3, Christine LAGARDE has appointed Thierry DISSAUX at the Treasury tocoordinate the French initiative in Islamic finance.

A “tax committee” has been put in place together with Paris EUROPLACE to developa range of tax bills to create a level playing field for Islamic finance.

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Source: HSBC, Delogic, 9 June 2010

Source: HSBC, Dealogic, 9 June 2010

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Work in Progress in FranceWork in Progress in France –– SukukSukuk

Achievements:

French Market Authority accepts sukuk listing (July 2008) – Prospectuscontent depends on the sukuk nature: Asset-backed or asset-based;

Tax treatment (Feb. 2009) similar to conventional bonds if remuneration iscaped to a market rate (no VAT, no taxation at source for non-residents,deductibility for the issuer);

NYSE Euronext has issued a memo on the sukuk segment (July 2009 –see next slides).

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Impediments:

No trust structure is possible under French law. Therefore, French assets cannotbe used in a listed sukuk using a trust;

The Fonds Commun de Titrisation (Securitization SPV) can only hold receivables;

The fiducie, French vehicle close to a trust, does not provide beneficial ownershipto the beneficiary – failure to pass a law (Sept. 2009) to amend the fiducie;

The current tax bill is unsatisfactory as it displays a structure using fiducie in a waythat has been judged non Shariah compliant.

Work in progress:

Dedicated working group at Paris EUROPLACE to design a new structure. Twopossibilities are under review (meetings with AAOIFI board members):

1. A “tracking” convertible bond;

2. A structure combining a fiducie-sûreté with a Fonds Commun de Titrisation.

The Tax committee is on the verge of finalizing a new tax bill for sukuk.

Potential issuers:

Municipalities (Grand Paris project, railway financing needs), local governments(Regions have autonomous budgets);

French state or public entity with AAA rating;

Corporates (noticeably those with activities in the GCC: Total, GDF Suez, etc.).

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Work in Progress in FranceWork in Progress in France –– SukukSukuk

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Thank you for your kind attention