The Czech Republic is likely to see its first Islamic transactions soon following the introduction of trust funds as legal instruments at the start of the year.
Although the German State of Saxony issued one of the earliest international — and first ever European — sukuk in 2004, there has been little engagement with Islamic finance in central Europe since.
But following the change of law governing trust funds in January, the possibility of using both mudaraba (project enterprise) and musharaka (joint venture) Islamic finance structures has opened up in the Czech Republic.
The changes come as the country — one of the most stable and prosperous in the CEE — looks for both funding and investment diversification beyond the region.
“Local Czech asset managers are interested in Shariah compliant finance as the entire CEE market is exhausted and they are looking further afield,” said Filip Cabart, a lawyer at Schoenherr Attorneys at Law in Prague.
“But it also works the other way and anything which would encourage inflows from Shariah compliant investors is very welcome. There is huge interest from the Arab world to invest here and a first Shariah compliant transaction is not far away.”
To date the Czech Republic has seen no Islamic finance whatsoever and most of its financial dealings have been intra-European or with the UK and US. But the country has historic relationships with the Middle East and Asia, while its strong industrial base, resistance to the credit crisis, and 2% growth projections for 2014 have created investment prospects upon which most of the CEE region is ill-equipped to capitalise.
“There are opportunities for small investments of €5m-€10m in boutique real estate and manufacturing and the country has seen many restructuring projects, where investors have taken over businesses and changed management to make them more stable or profitable,” said Milos Koci, another lawyer at Schoeherr.
“The bigger opportunities of up to €100m are in commercial and office real estate, which are in prime locations and more interesting for foreign investors.”
As with much of the CEE region, however, sukuk issuance appears to be some way off. “Sukuk issuance in the Czech Republic is possible but entirely untested,” said Koci. “An international sukuk would be difficult because of EU securities legislation rather than the country’s own framework, which is extremely flexible. But if you had a small local pool of less than 100 investors and the notes were not publicly tradable then that might work.”
The trust vehicle — rarely offered by European legal systems — is similar in concept to the mudaraba and musharaka structures, in that it involves the transfer of property and the administration by a trustee or specialist in favour of a beneficiary/settlor.
Investments in trusts may be interest free, with profits and losses shared according to pre-agreed terms. Trusts, like the two Islamic contracts, can satisfy a range of uses, such as structuring projects, corporate restructuring or collective investment schemes.
So far, CEE sukuk exposure has only been limited to investors in the long-redeemed Saxony deal and those that count Turkey as part of their remit. Serbia recently mused about sovereign issuance but has not taken practical steps, while Germany-based FWU Group has issued small size insurance related sukuk through its Luxembourg subsidiary.
Turkey itself remains a vibrant prospect, despite recent political and economic turmoil. Turkiye Finans issued $500m of dollar sukuk last month, while Albaraka Turk has mandated banks and both it and the government look set to follow in September. Kuveyt Turk is set to issue before Ramadan (mid-June), according to bankers.