ANALYSIS - Retail questioned as France pushes Islamic Finance

By Tamora Vidaillet

PARIS (Reuters) - France's quest to create a new European hub for Islamic finance could soon yield results for wholesale banking and Islamic bonds, but concerns over the image of Islam may put the brakes on retail banking.

Since launching a drive to develop Sharia-compliant financing and draw Middle Eastern capital to France around two years ago, Paris has made large strides on the legal and fiscal front, with much of the framework already set.

Expectations are growing that it might be a matter of months before a firm or local authority issues France's first sukuk bond, which pays no interest but offers returns on underlying physical assets, and licences Islamic banks.

The country's tiny Islamic finance market has so far largely involved Sharia-compliant property deals, a far cry from neighbouring Britain, which has spent the past five years positioning itself as a major Islamic banking centre.

Whether the size of the French market can really top 100 billion euros ($144 billion) in time, as suggested by two French professors in a 2008 report, is debatable.

But analysts reckon there will be a stream of Sharia-compliant property or corporate financing deals and some sukuk issues over the coming two years in a country which has over five million Muslims, Europe's largest such community.

Islamic finance is derived from the Sharia, or Islamic law, and is valued at a global $1 trillion. It avoids interest-based financing and advocates ethical principles with a fair distribution of profits and losses between venture partners.

"On the retail side, I think there is a very big question mark," said Anouar Hassoune, senior credit officer with Moody's.