New Eastern Outlook » Trofimova Olga

Islamic Banks are Increasing their Share of the EU Market

Ольга Трофимова — Thu, 06 Apr 2017 12:00:36 +0000

The abrupt growth of the Muslim population in EU countries has led to the growing amount of influence that Muslim migrant communities are now enjoying over the economic and political life of European countries. The percentage of Muslims in the population of European states is constantly growing, with this number jumping from around 4% back in 1990 up to more than 7% of the total population in 2014. According to the Pew Research Center, this ratio will exceed 8% of the EU population by 2030.

However, it won’t be an exaggeration to state that Muslims have never played the role that they are playing today in the financial sectors of the EU economy. Islamic finance practices deserves a special attention, since it’s becoming an integral part of the global financial system. This phenomenon that is based on the traditional values of Islam, appeared in the second half of the 20th century after the collapse of the colonial system. Islamic finance practices are providing a sort of an alternative to the liberal values of capitalism and the principles of socialist planning. The share of Islamic financial services still makes up about 15% of the market even in the Islamic world. And in the global volume of assets of the financial sector it amounts to mere 2%, but they’ve been gaining ground rapidly over the years.

The EU countries are only witnessing the initial stage of activization of Islamic banks and funds, which, during the global financial crisis, have maintained their stability through diversification of financial risks, while attracting new sources of investment, thus transforming themselves into a profitable market niche for the European financial institutions. By increasing the range of their financial activities in European countries, Islamic banks count both on Muslim clients and non-Muslim ones, while diversifying the investment portfolio and using new financial instruments in cooperation with those used by more traditional banks.

The first Islamic banks in Europe was established in Geneva in the late 1970’s – early 1980’s by the Saudi royal family. The Islamic Banking System International Holding first appeared on the market as a joint-stock company. Then, the Al-Baraka investment group acquired the Hargrave Securities in the UK back in 1982, making it the first EU bank to be converted into an Islamic bank due to the high demand for Islamic financial products in the country.

As of December 15, 2014, the assets of Islamic funds in Europe were distributed as follows: 22.9% in the Cayman Islands, 44.97% in the UK, 20.04% in Luxembourg, 5.55% in the British Virgin Islands, 4.92% in Ireland, 0.34% in Germany, 0, 24% – in France. The total amount of assets managed by Islamic banks in Europe at the end of 2015 amounted to some 14.4 billion dollars. However, Europe’s share in the total assets controlled by Islamic banks remains insignificant. Back in 2014 it was estimated that it only amounted to 0.5% of all assets controlled by those banks. According to the report of the Ernst & Young World Islamic Banking Competitiveness released in 2014-2015, Islamic assets on the accounts of commercial banks in international markets exceeded 778 billion dollars, and the total number of their customers reached 38 million people. Major European banks associated with Islamic finance are UBC Goup AG (Switzerland), HSBC Holding and Royal Bank of Scotland (UK), Credit Agricole and Group BNP Paribas (France), Deutsche Bank (Germany).

The first Islamic bank in the United Kingdom was opened in 2004 that was known as the Islamic Bank of Britain that was later remained in the Al Rayan Bank in 2014. In July 2015, the first German Islamic bank – the KT Bank with the authorized capital of 49.5 million dollars, owned by the Kuwait-Turkish financial institution Kuveyt Turk Beteiligungsbank (KTB), opened its doors. In France, there’s only Chaabi Banque, a subsidiary bank of the Moroccan People’s Bank that does in fact offer Islamic financial services. French financial companies are actively involved in joint ventures that use Islamic finance for projects in the Maghreb countries. According to official forecasts, France can attract 120 billion dollars of Islamic investments by 2020 for its business and financial sector. Investors from the Persian Gulf are now working to establish a Islamic bank in Luxembourg that will be known under the name of Eurisbank. It is also planned that this bank will open its branches in Paris, Brussels, Amsterdam and Frankfurt.

The total number of Islamic funds in Europe reached the total number of 186 by 2013: 87 of them being in Ireland (with the total assets of 4.8 billion dollars), 30 in the UK (1.3 billion dollars in assets), 52 in Luxembourg (800 million dollars in assets), 7 in France (147.2 million dollars in assets). However, it won’t come as a surprise that the largest center of Islamic finance in Europe is London, where there’s over 10 investment funds making deals in the real estate market along with 13 banks providing Islamic services, with 6 of them being totally Islamic.

Islamic bank are also issuing securities known as sukuk. In addition, there is growing interest in obtaining education in the Islamic finance. In total, there are 109 educational institutions providing education in this area, 63% of which are based in the UK.

These processes indicate that the trend towards the expansion and diversification of Islamic finance in Europe continues. Interest in Islamic financial products is growing slowly but steadily, which creates opportunities for the Western states to obtain additional investments for their projects.

Olga Trofimova, PhD in Economics, Senior Researcher of the Center for European Studies of the Institute of World Economy and International Relations of RAS, exclusively for the online magazine “New Eastern Outlook“.

Marine Le Pen and French Immigration Policy

Ольга Трофимова — Sun, 12 Mar 2017 03:59:18 +0000

Many Europeans are still coming over the shock they experienced after the victory of ” Eurosceptics” and rise of the National Front (NF). Since July 2014, the NF has been dominating with 24 mandates against 14 mandates held by the ruling party. Proclivity for nationalism and enhanced patriotic sentiment in the context of globalization, integration and national interests is demonstrated not only in France, but also in other EU member states, in particular, in Austria, Hungary, the Netherlands, Italy, Greece and Denmark and in the United Kingdom, where supporters of withdrawal from the EU are celebrating their victory. At the same time, Europeans are now giving more consideration to radical parties. This trend indicates that the concept of the “European integration” at the economic, political and institutional levels is going through a crisis.

French “Euroscepticism” is rooted in the deteriorating economic situation, low GDP growth and implications of these shortfalls. Another important factor contributing to the rise of nationalists was ineffectiveness of French immigration policy of the last 30 years, as well as the failure of the EU to formulate a uniform EU policy regulating the flow of immigrants. The 2015-2016 immigration crisis revealed that some countries had been putting their national interests before supranational.

Although France was not affected by the 2015-2016 crisis as much as other European countries (because of language barrier, high unemployment rates and complicated refugee process it ranks only sixth among EU states in terms of the preferred place for immigration), it still disrupted the balance of political power in France and deepened dissatisfaction of French citizens with the pan-European illegal immigration strategy, especially in respect of refugees from Muslim countries. France has the largest Muslim diaspora. Almost 8 million (8.3% of the total population) Muslims, about half of whom originate in the countries of the Arab Maghreb Union, which have long-standing ties with France, but are considered a source of major terrorist threat (www.ec.eu/eurostat/statistics-explained/index.php/Files:foreign-born-population-of-birth-11January2014.YB15-fr.pgn), live in France. According to the estimates, the total number of Muslim immigrants (both legal and illegal) is close to 7%-9% of the country’s total population. Some time ago, France became a desirable destination for labor migrants from the southern Europe, who managed to integrate into the French society rather painlessly. Collapse of the colonial system de facto signaled the beginning of “colonization” of France by immigrants from former French colonies. Though these people live in a secular European state, their lives are governed by the Sharia law, which creates an awkward situation.

Unlike the first wave of immigrants from the southern Europe and former colonies of France, including returnees from Algeria, the second and third generations of immigrants, who now hold French citizenship, reject European style of life amid growing youth unemployment (over 30%). Meanwhile, intensifying propaganda of Islam contributes to the rise of radicalism. The terrorist attacks committed in 2015-2016 taking lives of more than 200 people, were carried out by French citizens of Muslim origin. That provoked an amplification of anti-Muslim sentiment and an upswing in the number of incidents (attacks on mosques) and wide acceptance of the NF slogan “France for the French”.

Irresponsible immigration policy balancing between the interests of the “left” and the “right” and of traditional hospitality and hostility toward immigrants has failed to properly address this important issue. Tough statements delivered by Marine Le Pen sound like she knows what to do and appeal to certain groups of population, especially French residing in the regions with the highest percentage of Muslim immigrants (Central France, Paris, southern parts of Marseille, where the number of immigrants exceeds 25%, Lyons and other so-called “disadvantaged urban areas”). Steps taken by the right-wing and left-wing governments to control the flow of immigrants (introduction of the 180-200 thousand annual quota, tightening of the asylum process, quotas for popular jobs in some industries, issue of no more than 30 thousand temporary permits for labor immigrants, deportation of illegal immigrants, etc.) resulted in a mere 3% reduction in the number of arriving immigrants in the last five years. An 80% decrease in the amount of benefits paid to immigrants (2013) did not encourage an outflow of immigrants either. Almost 1/3 of those coming from Muslim countries prefer not to work, live on welfare, stay in France as “social tourists” putting additional strain on the already faltering French social security system.

The program drafted by NF outlines rather tough measures of immigration control, including ban on family reunification; abolition of the law allowing to grant French citizenship after marriage; reduction of flow of legal immigrants down to 10 thousand per year; scaling down of the number of work visas and denial of naturalization for labor migrants; restricted access to free education and free medical care services; simplification of the process of deportation for illegal immigrants; non-acceptance of refugees; deportation of immigrants convicted of crimes or administrative violations. The issue concerning the control of terrorist threat occupies a special place in the NF program. For example, NF thinks that the Ministry of Interior Affairs should be given the right to shut down mosques engaged in the propaganda of Islam, especially those sponsored by international organizations, create a list of foreign organizations involved in aggressive actions against France and freely extradite foreigners linked to radical Islamic groups from the National Security Threat List.

According to the estimates quoted by Marine Le Pen, if France tightens its immigration policy, the country could save 41 billion Euros within five years. Deportation of illegal migrants and abolition of social benefits would save it another 2.5 and 18 billion Euros respectively in the same period. The idea that an increased influx of Muslim immigrants to France and intensification of Islamization of ethnic French (some 50 thousand French have already converted to Islam) pose a major threat to the very foundation of the French lifestyle lies at the heart of NF’s immigration policy, which undoubtedly will appeal not only to the supporters of NF but also to many other groups of French population. Such restrictive measures might hurt immigrant families and could provoke anti-social behavior. While these measures are designed to encourage Muslim immigrants to look for jobs more proactively and enroll in training programs more eagerly, in the context of economic stagnation and high unemployment rates they might drive further marginalization and radicalization of the younger generation of immigrants, thus increasing the threat of terrorism. Besides, as long as the situation in North Africa and the Middle East remains destabilized, the flow of refugees and illegal immigrants (including ISIS militants) will continue posing a major threat to Europe’s security and unity.

Assessing the Situation in Yemen

Ольга Трофимова — Wed, 19 Jun 2013 21:48:37 +0000

It is extremely difficult to predict how the situation is going to evolve in Yemen, which is caught in a systemic crisis. Only one thing can be said with confidence — the country is beginning a long period of political transformation like what took place in Egypt, Tunisia and Libya. However, the presence of a powerful tribal factor, serious economic problems and persistent interference from outside may, if not reversed, significantly slow the process.

Like other Arab Spring countries, the key factor in Yemen’s political transformation has been the struggle for power and influence in the military. By a miracle, the country has managed to avoid a civil war, thanks to the signing of intra-Yemeni agreements on November 23, 2011 in Riyadh. Under those arrangements, Abd Rabbuh Mansur al-Hadi, who served as vice president in the Saleh government, ran unopposed and was elected transitional president on February 21, 2012. He announced that the chief objective of his two-year term in office is to prepare for the lawful election of a new head of state, which should take place in February 2014. The new president has also been attempting to solve the country’s virtually unsolvable socioeconomic problems and has been engaged in getting his predecessor’s close relatives and associates out of the military.

Hadi lacks real support from the military, the tribes and the political circles in Yemen. The coalition government of national consensus formed to govern the country during the two-year transition period is functioning in a very inefficient and unprofessional manner. Its only support comes from the group of 10 state sponsors, which include both permanent members of the UN Security Council and countries belonging to the Gulf Cooperation Council and the European Union.

Yemen currently is involved a standoff between the Hashid tribal federation, which is led by the al-Ahmar clan, and close associates of former President Ali Abdullah Saleh. The power of the tribal leaders is concentrated in the northern part of the country, which has little in the way of natural resources. This asymmetry in the balance of power, with the bulk of natural wealth concentrated in southern Yemen and most of the power in the north, boosts the separatist mood of the people living in the south. That makes it highly likely that Southern Yemen will demand to regain its independence.

This already difficult situation is exacerbated by the country’s deteriorating economic condition, particularly rising unemployment, poverty, reduced oil revenues, food problems and depletion of water resources. Therefore, the worsening economic situation will probably be accompanied by an increased separatist mood in the country.

External factors — whether US actions against al-Qaeda or Saudi Arabia’s traditional interest in Yemen — also have a significant impact on the country’s domestic politics.

Russia’s reduced influence in Yemen is especially evident here; relations with Russia have traditionally been important to Sanaa. That is reflected in the sharp decrease in military sales and the lower numbers of physicians and other medical personnel working under public and private contracts who are now being replaced by immigrants from the CIS Central Asian Republics. There are about 50,000 graduates of Soviet and Russian universities in Yemen; they held important government posts during Saleh’s reign and still do. Empty niches in the system of foreign economic and foreign policy cooperation are being actively filled by the United States, which is unceasing in its attempts to temporarily deploy military personnel, particularly in areas important to its interests where Islamist forces have intensified their efforts.

It is virtually impossible to predict with any degree of accuracy how the situation in Yemen, which is caught in a systemic crisis, will develop over the next 2-3 years. It is unlikely that the southerners will abandon their demands to regain independence for Southern Yemen.

Should the worst case scenario comes to pass, i.e., Yemen collapses or is partitioned — which would be bad for all parties concerned — Northern Yemen would be economically unviable. Virtually all of the country’s natural resources are located in Southern Yemen, making a new civil war highly likely if that scenario emerges, and that would lead to the secession of the already de facto independent northwestern Shiite province of Sa’dah and the eastern province of Hadramaut, which is gravitating to Saudi Arabia. It is difficult to predict what Saleh, who was president for 33 years, would do in that situation. He still has a great deal of influence with the army and the other security agencies.

Thus, Yemen’s political situation will depend primarily on the interests of the Yemenis themselves, who favor a national dialogue and compromise among the political forces. At the same time, we can hardly ignore external factors and their influence on the transformations taking place in the country or the effects of the increased activities by Islamist forces in several provinces. Russia favors a dialogue between the current government and opposition forces in order to preserve the country’s integrity and stability and to implement socioeconomic and political reforms.

Olga Yefimovna Trofimova, Candidate of Economic Sciences, is a Senior Fellow at the Center for European Studies of the Russian Foreign Ministry’s Institute of the World Economy and International Relations. Exclusively for New Eastern Outlook.

The Economic Challenges of the Arab Spring

Ольга Трофимова — Wed, 03 Apr 2013 18:59:37 +0000

The political situation in North Africa was characterized by a lack of prospects before the “Arab revolutions” broke out, and corrupt authoritarian regimes held all the power. The ruling elite justified the absence of political and economic reforms and the strengthening of security forces as necessary to maintain stability and fight terrorism and radical Islamist movements, i.e., the security of the state was equated to the security of the ruling class.

Western analysts and experts usually considered the political implications and strategic significance of the Arab Spring but not its economic causes and effects.

Before the financial crisis of 2008-2009, high rates of economic growth (from 4% to 5% per year) were typical for the countries of the Middle East and North Africa; in 2010, they dropped to 2.5-3%. Tunisia’s GDP grew 5% from 2001 to 2010, and it was expected to be about 5.4% in 2011. According to some experts, that figure reflected the growth in the incomes of only part of the middle class and did not reflect increases in social tensions and regional differences. A respectable segment of the population benefited from the activities of the Ben Ali regime because almost 2/3 of the population belongs to the middle class. In return, the political elite had its support. Experts estimate Tunisia’s revolution cost approximately 5% of GDP, yet economic growth in that relatively prosperous country amounted to less than 1% in 2011.

Egypt’s macroeconomic indicators prior to the Arab Spring were positive. Its GDP in the second half of 2010 rose by 5.8% in comparison with the same period in 2009 mainly due to construction, tourism and the service sector associated with it. Egypt’s economy is dependent on food prices, and higher food prices were the original cause of the riots in Egypt and Tunisia. Food subsidies accounted for approximately 25% of all government spending in Egypt. They were designed to protect the 40% of the country’s populace that lives below the poverty line. In reality, however, that is an inefficient way of achieving social balance. According to some data, the bulk of that spending went to the more affluent groups (20% of the population) that had ties to the regime.

Youth unemployment was a catalyst of the Arab Spring because that region has one of the lowest levels of employment in the world (under 50% of the working-age population, whereas the employment level in Asia is 70%). It was 23% across the region as a whole, 25% in Egypt, and 30% in Tunisia. In addition, the banking sector in most Arab countries invested primarily in companies linked to the political regimes and limited access to capital by small and medium-sized businesses, thereby restraining the development of private enterprise and economic growth overall. In other words, it hindered rather than promoted economic growth and private sector development.

Unfortunately, it is difficult to fully assess the economic consequences of the Arab Spring because data on some countries is lacking. According to some estimates, including one by Hamdi Al Tabaa, president of the Arab Business Federation, the Arab countries that experienced unrest and regime change lost almost $100 billion. That is the General Arab Insurance Federation’s estimate for losses by countries like Egypt, Tunisia, Libya and Yemen between December 17, 2010 and October 2012. According to other estimates, the protests in North African countries cost them 2% of GDP. The ANIMA Investment Network calculates that total losses by South Mediterranean countries due to falling revenues from foreign trade and European investments, and decreased income from tourism and money transfers by migrant workers, amounted to nearly $100 billion in 2009.

There are many factors that could expand the economic potential of the Arab countries and help them overcome their economic problems. But three stand out. The first is reform of the labor market and that education system. The second is the promotion of private business and implementation of management reforms to improve the transparency of private companies. The third is access to funding, which should stimulate the private sector and increase private investment. In addition, social and economic reforms should be aimed primarily at improving the quality of life and achieving stable and sustainable growth.

The education system in Arab countries with overblown bureaucracies was primarily designed to train civil servants, not personnel for the private sector. According to IMF estimates, public-sector salaries in those countries comprised 9.8% of GDP, whereas the level across the globe is 5.4%. However, the public sector is no longer the chief employer in those countries, and the demand for new personnel is very limited. That means that 39% of the companies in North Africa and the Middle East lack adequately trained employees. More than half of private companies encounter extortion by corrupt government agencies in obtaining licenses and authorization to operate. Only 10% of firms use local banks for their funding, and 36% have problems obtaining loans.

International organizations and a number of countries have offered financial assistance to resolve economic problems. Egypt was to receive 450 million euros from the EU between 2011 and 2013 under EuroMed. The European Union and the European Investment Bank also plan to allocate 1 billion euros to stabilize the situation and implement reforms in the countries of North Africa. According to European Council President Herman Van Rompuy, EU countries in 2013 should assist Egypt with 5 billion euros in the form of special loans and grants to support democratic processes and stabilize the economy. The EIB has developed a plan for North Africa that includes the use of a new public-private partnership model for future development in those countries. The International Monetary Fund, which had previously promised Egypt $3.2 billion, has increased that sum to $4.8 billion. The World Bank plans to allocate $1 billion, and Qatar $2 billion. In 2011, the Group of Eight proposed allocating 20 billion euros for the region to strengthen governments and stimulate business.

Despite some progress in developing relations with Russia in the 2000s, the Arab countries are not its top priority as a partner. Their share of Russia’s foreign trade is 2-3%. Whereas Russian-Arab trade grew by 38% in 2011, the rate of growth declined somewhat in 2012. Except for those countries experiencing civil war and political instability, Arab Spring has not radically changed Russia’s relations with them. However, Russia’s losses from unmet contracts in Libya alone, with which it concluded a package of agreements in 2010, amounted to more than $4 billion (about $2 billion for deliveries as part of military-technical cooperation, and more than $2 billion on a 2008 contract with Russian Railways). Trade and economic cooperation with Syria (which some reports say brought Russia’s economy about $20 billion) is being obstructed by the conflict between the government and the opposition. The political and economic crisis in Yemen has stalled implementation of major contracts. Russia is still developing a strategic partnership in the oil and gas sector and on military-technical cooperation with Algeria. Russia led the United States and several European countries in total foreign direct investments in Egypt ($1.6 billion). So long as the situation in Arab countries remains unstable, however, it will be difficult to fully restore the level of Russia’s economic cooperation and its position in a number of countries because most contracts were concluded with the previous regimes.

The economic consequences of the Arab Spring remain difficult to evaluate in their entirety. Despite the volume of foreign aid, progress in the Arab world will primarily depend on political stability and the formation of adequate and effective governments, socioeconomic reforms as an important guarantor of a state’s governability, solution of unemployment problems and expansion of the private sector.

Olga Yefimovna Trofimova, Cand. Sc. (Economics), is a senior fellow at the Center for European Studies of the Russian Foreign Ministry’s Institute of the World Economy and International Relations. This article was written expressly for New Eastern Outlook.