Islamic Finance

The Shariah-compliant mini-bond—how Italian legislation may open doors to the Islamic Economy

Photo: TURIN, ITALY, JUL 28, 2015 :Global Islamic Economy Summit 2015 Modest Fashion Roundtable. In the picture are Piero Fassino, Mayor of the city of Turin (standing), Gianmarco Montanari, Director General of the city of Turin (to Fassino's right), Alia Khan of Islamic Fashion and Design Council (to Montanari's right)
The author of this article, Alberto G. Brugnoni, is Managing Partner of Islamic finance consultancy ASSAIF. Any opinions expressed here are the author's own. 

In January 2014, recognizing that Italy’s new mini-bond legislation lent itself especially well to the letter and spirit of Islamic modes of financing, advisory firm ASSAIF teamed up with a Turin-based investment advisory firm and R&P Legal to put in place the framework for the issuance of mini-bonds that comply with Shariah requirements.

The aim of the Shariah-compliant mini-bond is twofold: to offer foreign Islamic entities a rewarding and halal-investable environment in sectors where Italy is a renowned world player and, at the same time, to help the domestic industry develop an Islamic Economy.

ASSAIF is in the process of engaging a suitable Shariah advisory firm for the Islamic mini-bond and is currently in talks with Amanie Advisors for this purpose.


The Italian productive system is the third largest in Europe and the eighth in the world. It holds sizeable shares in the world export market sectors of furniture, fashion, mechanicals, steel and metals products, rubber and plastics, pharma products, food and beverages, wood, paper and printing, chemical products, automotive, and electronic products.

As a brand, Italy scores fifth in the Country Brand Index, and ‘Made in Italy’ is the third most known brand worldwide.

Small and medium-sized enterprises (SMEs) constitute the backbone of this economy. However, although they account for 99 percent of active enterprises, 81 percent of the workforce, and 68 percent of the value added, they suffer from chronic undercapitalization and over-dependence on the banking sector.

Furthermore, they are still reeling from a decade-long credit crunch with no end in sight, and the measures introduced by Basel III will certainly push banks to focus on short-term financing instead of long-term corporate lending.


To help address this situation and diversify SMEs’ sources of funding, Italy enacted two pieces of legislation that pave the way for the process of disintermediation.

The “Decreto Sviluppo” and “Decreto Destinazione Italia,” informally known as the mini-bond legislation, eliminate the fiscal constraints that hindered the issuance of debt instruments by unlisted SMEs and remove the unequal treatment between listed and unlisted companies.

In particular, this legislation allows for the issuance of bonds that exceed the amount of capital and reserves held by the issuer, the deductibility of interests and issuance costs, and the waiving of the withholding tax for foreign investors resident in whitelisted countries.

Most notably, it allows for the issuance of bonds with a profit-sharing clause, thus linking the amount payable to the holder of the bond to the performance of the issuer.

These new rules apply to the European classification of SMEs, thus excluding micro-companies or enterprises employing less than 10 units and with a turnover or balance sheet total not exceeding 2 million euros.


A 2014 census of 1,040,443 companies with an annual turnover between 6 million and 300 million euros gives an environment of potential issuers numbering 37,466 companies, of which 17,873 are in manufacturing (4,613, investment grade; 8,403, standard grade; and 4,857, sub-standard) and 19,593 are service companies.

This investable environment excludes banks, insurance firms, public administrations, companies with partial or incomplete data, as well as unethical companies. There is a strong movement in Italy, unrelated to Shariah, for ethical investments that overlap with Islamic investments, impact investing and CSR. However, these investments are not necessarily Shariah-compliant as they can use conventional interest-based finance.


The Shariah-compliant mini-bond is a hybrid instrument: legally, it is a bond with a creditor–debtor relationship; economically, it is an equity tool with a profit sharing agreement.

As the Italian regulator requires that a percentage of the return be fixed and equal to the official Tasso Ufficiale di Riferimento (official discount rate), Shariah-compliant mini-bonds at present carry a fixed return of 0.02 percent while the balance of the return is a percentage, agreed upon by the issuer and the holders, of the economic performance.

The Shariah-compliant mini-bond is a “restricted investment,” regulated by the Italian Civil Code. The investment is legally and contractually earmarked for a specific and well-defined halal production, and the company has to use the funds received for that purpose only.

As such, it lends itself well to the launching of Shariah-compliant productions even by SMEs that do not abide by Shariah requirements. The return for the holder of the mini-bond is a percentage of the profits on this specific production only. A formal segregation of the funds received with the implementation of a separate bookkeeping ledger is not required, and thus does not impose additional administrative costs on the issuer.

Finally, usual financial covenants apply to monitor the relations between the net financial position (NFP); earnings before interest, taxes, depreciation and amortization (EBITDA); and equity.

© 2016


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Alberto G. Brugnoni, Managing Partner, ASSAIF