Islamic Finance in the Netherlands

Guest Author: Rachida Talal-Azimi

Recently, UK prime minister David Cameron announced government plans to be the first outside the Muslim world to issue a bond that observes the principles of Islamic jurisprudence. He made the announcement at the “Islamic Davos”, or the World Islamic Economic Forum (29-31 October). Although London is the main hub for the Islamic finance industry in Europe, in the Netherlands it grows as well.

Economic crisis

Despite the worldwide crisis, the Islamic financial market is rising very fast and is currently one of the fastest-growing segments in the financial sector. The sector appears to be less affected by the crisis than the rest of the financial market (Standard & Poor’s 2010, Alasrag 2010). Although the market accounts for only around 1% of total global assets and remains tiny compared to conventional finance, it has grown at an annual rate of 15% to 30% since 2000 (UKIFS 2012, Rung et al. 2011, el Qorchi 2005). Islamic financial products have to be structured according Islamic rules. This means, among other things, that an Islamic financial institution may not offer interest and gambling (e.g. speculation) products or invest in the pork, alcohol or weapon industries. Islamic financial institutions enable their clients to save or take loans through other constructions. Due to, among other factors, the presence of a sizeable Muslim population and the concomitant demand for Islamic financial products, Islamic finance has grown in both Muslim countries and Western countries, such as the United Kingdom and the United States. The French government is currently considering whether (and, if applicable, what) legislative changes should be implemented in order to facilitate Islamic finance in France. Various other European countries, including Malta, Germany and Italy, have shown an interest in this market as well (Standard & Poor’s 2010).

The Dutch market

The Netherlands, with a Muslim population of approximately one million, had also shown interest in this market, especially during the years before the financial crisis. Islamic finance and mainly Islamic mortgages had been the topic of discussion within the Dutch government, on conferences and also of research from 2004 to 2008. Different financial institutions were interested in the development of these kind of mortgages, such as the Rabobank and ABN AMRO. After a few years of investigation the financial institutions have ended these studies for different reasons, such as institutional obstacles.

Bilaa-Riba, established in 2006 as the first Islamic financial institution in the Netherlands, had the aim to introduce an Islamic mortgage, but terminated her activities in 2008. Until now, there is no real Islamic financial industry in the Netherlands, but there have been some developments in the last years. In 2007, ABN AMRO launched an Islamic structured investment product, the LLB Top 20 Middle East Total Return Index Certificate. In that same year, the minister of Finance, Wouter Bos, proclaimed that the country would review its role in the Islamic finance industry and that the government will look into ways to attract Islamic finance to the Netherlands. A year later, Barclays launched three Amsterdam-listed Islamic investment product, trackers that follow the movements on Islamic indices. On May 22, 2008, the Dutch Central Bank (DNB) and the Netherlands Authority for the Financial Markets (AFM) published a study on the potential regulatory issues that would have to be addressed when introducing Islamic finance in the Netherlands. During that time the Holland Financial Centre started a working group to promote Islamic finance in the Netherlands and to attract investors within the global Islamic financial sector to the Dutch market. This initiative came to an end after a few years.

Ethical and sustainable finance

During the beginning of the crisis, Islamic finance was not an important topic of discussion anymore in the Netherlands. Nevertheless, currently we see that the interest in Islamic finance in the Netherlands is growing again. The subject cropped up in the public debate, but also in the business domain again. The expectation is that the potential demand for Islamic finance in the Netherlands will rise in the coming years as a result of a growth in population, the educational and income level of Dutch Muslims, but also because there are non-Muslims who believe that Islamic financial products would be a better and in some way a more sustainable alternative for the conventional financial products that have been failed in their eyes. Furthermore, several conferences have been organized the last two years where the topic have been discussed, such as OIKOS (February 9, 2012 – “Islamic Development Finance”) and De Buren (October 9, 2012 – “It’s the Economy, Stupid #5: over Gharar, Riba and Murabaha”). A potential end to the mortgage interest deduction, which is an important Dutch political issue at this moment, will make it much easier to introduce Islamic mortgages in the Netherlands. The prospect is that it is just a matter of time when Islamic finance will also be available in the Netherlands.

Rachida Talal-Azimi has worked as a researcher for the Economic Research Department of Rabobank, first for the Financial Sector Research team and from January 2013 for the International Macro Economic Research team. She is involved in various subjects relating to the financial sector. She is currently obtaining a Ph.D. in Islamic Finance at Radboud University Nijmegen. Rachida studied Arabic and Middle-Eastern Studies, and previously worked at the Netherlands Authority for the Financial Markets. She also completed an internship at the Immovable Property Knowledge Group at the Dutch Tax & Customs Administration.

Literature

Alasrag, H. (2010) “Global Financial crisis and Islamic finance”, MPRA Paper 22167. Munich: University Library of Munich.

Qorchi, M. el “Islamic finance gears up.” Finance and Development – A quarterly magazine of the IMF, december 2005, vol. 42, nr. 4

Rung, G. etc. (2011) Islamic Finance: Building 150 financial institutions by 2020, Oliver Wyman.

Standard & Poor’s, Islamic Finance outlook 2010.

UKIFS (a part of TheCityUK), “Islamic finance”, Financial markets series, March 2012