Islamic Finance in Germany

By Mr. Zaid el-Mogaddedi

With a Muslim Population of more than 4.2 million, Germany’s Muslim community is by far larger than the total population of many Emirates in the Gulf region. Additionally, savings among these people are in absolute figures by far higher than in many countries in the Middle East or Northern Africa. In the West however the starting conditions for Islamic Financial Institutions have shown to be entirely different.

Among all Western countries, today the UK and the US have the most sophisticated Islamic finance infrastructure. In both countries a wide range of financial institutions are offering Shariah complaint Products. While there have been attempts to create Islamic Financial Institutions in other countries, none in fact have reached the sophistication and the volumes that can be ascertained in the US and the UK. There are many issues which have served to make the Islamic financial industry become particularly strong in the UK and in the US and less so in other countries. However, two factors stand out prominently. On the one hand an openness of governmental institutions towards Islamic finance, and on the other hand a favourable socio-economic structure of the local Muslim Diaspora.

It is the declared target of the British government to promote the industry and to position London as a central hub for Islamic finance . The intention on the one hand being to retain London’s status as a leading international financial centre, and on the other hand to prevent social and financial exclusion of people that feel uncomfortable using conventional finance due to religious reasons.

With such government backing and readiness to adapt regulations, the Islamic financial industry in the UK could prosper in a pace that has no equal in the Western world. The average UK citizen has now access to fully Islamic bank accounts, home-financing schemes, mutual funds and consumer credit finance.

The situation in other countries, e.g. Germany, looks less bright. The government in Germany has been rather reluctant to accept Muslim presence and the consequences associated with it. Also, in contrast to Muslims in the UK, Muslims in other countries have not been able to position themselves as attractive customer groups, as they usually constitute an economically rather disadvantaged part of the population.

The increasing visibility and competitiveness of the global Islamic finance industry raise the question as to whether there could be a market for Islamic Financial Products in Germany too, which is home to some 4.2 m Muslims.

With approximately 4.2 million Muslims (Assumption: 7 million will live in Germany by 2020), Islam forms the second-largest religious community in Germany. While the great majority is of Turkish descent – 2.4 million, constitutes around 75% of the German Muslim – there is also a considerable number of Muslims with other countries of origin. These comprise inter alia Bosnia-Herzegovina (167,000), Iran (116,000), Morocco (81,000), Afghanistan (72,000), Lebanon (54,000), Iraq (51,000), Pakistan (38,000), Syria (24,000) and Tunisia (24,000).

The net income of Turkish citizens is estimated to amount to Euro 10.5 – 13 billion p.a. The savings rate in the 70s and 80s was about 30 percent, and a major part of the income was transferred to and invested in Turkey. With the perspective of staying on in Germany the attitude changed and the saving rate declined. In contrast to the first generation of guest-workers, their children and grandchildren transfer less money to their ancestors’ countries.

When taking a similar age and employment structure as of Turks to raise figures proportionally, following figures result:

– The average income of Turkish households is significantly lower than that of German households (EUR 2,020 vs. EUR 2,675 in 2002).

– The Turkish households on average save EUR 359 per month (i.e. 18% of their income, as opposed to a German average of 10.6%).

– With 660,000 Turkish households, this translates into savings of EUR 2.8 bn each year.

– The age structure of the Turkish population is heavily skewed to the young (58% are younger than 35 which implies that the segment is about to grow significantly in future.

– If the saving rate of the whole Muslim community is set equal to that of the Turks the annual income of Muslims in Germany accounts to Euro 16-20 billion, the savings per year sum up to Euro 2.2 in a low – 6 billion in a high scenario, and the cumulated savings in German banks account to Euro 22-38 billion.

At present there is no fully fletched Islamic bank operating in Germany. Many banks based in Muslim countries do have branch offices in Germany, but those offices do not offer Islamic banking. They can be seen as representatives of the parent company, and they mainly concentrate on capital transfers from Germany to their home country. Thus, due to the lack of alternatives, Muslims living in Germany have to revert to residing conventional banks.

When asked specifically about the view of German Muslims on Sharia-compliant investing, 23% indicated that they perceive it to be very important (10%) or rather important (13%). The importance of Sharia-compliant investment increases with the degree of religiosity.

Of those who view themselves as very religious, 55% viewed Sharia-compliant investment to be very important (29%) or rather important (26%). This figure is lower for those who view themselves as rather religious, where 26% view it to be very important (10%) or rather important (16%).

Beside the figures mentioned above the experience of so-called Islamic holdings in Germany must be taken into account when trying to give a correct answer to the question on the market potential for Islamic financial products in Germany.

Other experience with Islamic finance in Germany comprises the Commerzbank Al-Sukoor investment fund, the UBS Lux Islamic Fund and the Sukuk of the federal State of Saxony-Anhalt. The distribution of Al-Sukoor in Germany started in 2000 and was terminated in 2005. The reason for the termination was weak uptake. Analysts explain this by the fact that little to no marketing had been conducted to promote the fund and that it mainly addressed Middle Eastern investors. The UBS Lux Islamic fund received authorization for distribution in Germany in 2001 but was closed a couple of weeks ago. The Saxony-Anhalt Sukuk too was mainly intended for Middle East investors.

The Islamic holdings have their roots in Turkey, when in the early 1990s an increasing number of Muslim Turkish entrepreneurs sought means to finance their business undertakings without resorting to conventional finance. Instead, they turned to the public and issued share certificates.

These certificates made shareholders participate both in profits and losses of the respective enterprises. The denotation as Islamic holdings appeared because shares were marketed mainly by reference to the Islamic character of the companies. While in principle this sounds like a fair arrangement, in practice this was a highly opaque system which did not sufficiently account for the rights of shareholders. Potential investors were addressed in private places and in mosques, local Imams and religious associations were used to build up credibility, share certificates were exchanged for cash without government supervision, and access to books (i.e. to verify accounts) was limited.

Despite these shortcomings, the holdings have proven to be very popular within the Turkish Muslim community, both inside and outside Turkey. Turkish capital market supervisory bodies estimate that at least 78 holdings left Turkish ground to acquire capital from the Turkish Diaspora in Europe. As to Germany, the Centre for Turkish studies speaks of 52 holdings which have collected some EUR 5 bn from Turkish savers in Germany. It is estimated that between 200,000 and 300,000 Turkish savers in Germany had placed funds with these holdings (i.e. approx. EUR 20,000 per person). Unfortunately, even though some of these holdings have become very successful conglomerates (e.g. Kombassan and Yimpas), German and other European savers largely lost all their investments, partly because of deliberate fraud, and partly because of sheer mismanagement.

It is important to understand what it was that made these holdings so successful in attracting this large number of people with such significant amounts of money. This is necessary in order to be able to assess whether or not an introduction of Islamic Financial Products in Germany – if marketed appropriately – could invoke an equally enthusiastic response.

The major success factors of these holdings and the implications for the market potential for Islamic Financial Products in Germany were:

– Holdings pledged to fully abide by Islamic business ethics (including the prohibition of interest).

– Holdings promised high profit rates (between 20% and 50% annually) with very little risk.

– The agents of the holdings were Turks and Muslims made investors feel comfortable and rendered them blind to the possibility of fraud.

– Holdings promised investors to deploy the capital to finance projects that would do good (e.g. create new jobs) and clearly bring their home-country forward. Thus, there was a clear social motive involved in the decision-making process.

– Holdings used very effective distribution channels. They went to the mosques, secured the support of local Imams and members of the various Islamic associations, and launched advertisements with the (Turkish) media.

The case of the holdings not only demonstrates the financial power of the Turkish community, but also shows that uptake on Islamic Financial Products if structured and marketed correctly would be real and not theoretical.

One of the key success factors for the Islamic holdings was indeed the fact that investors were addressed by fellow Muslims or Turks. The confidence that was inspired by this approach made investors feel comfortable with investing in the holdings even though they neither knew the holdings nor those who ran them; they simply trusted the selling agents. The optimal way to do it would be to mimic the case of the Islamic holdings. Muslims can best explain to Muslims why a product is Islamic and another is not. In fact, at the Islamic Bank of Britain many over the counter jobs have been given to Muslims for precisely this reason.

One of the major reasons why demand is not palpable for financial institutions could be that the Muslim community (be it individuals, religious associations or other associations) has far not actively and publicly voiced demand for Islamic Financial Products.

The sales-force itself in the financial institutions must too display a certain credibility. Ideally sales agents would be Muslims. Such was the case with the Islamic holdings, and this is the model that is currently followed by the Islamic Bank of Britain. The reason is that Muslims are more credible than non-Muslims when it comes to explaining religious matters but let us be realistic Islamic Banking is Banking so we need not only Experts in Islamic Finance but also Experts who understand the modern way of Banking.

If that is not possible, sufficient training should be given so as to avoid arousing the natural suspiciousness of Muslims towards the Islamicity of the institution or the product.

Due to their ethical character, Islamic Financial Products could also be relevant for the non-Muslim population. Like Islamic banking, ethical banking too is an emerging industry, and it is increasing in importance and popularity also in the German context but we should be aware that copy-paste is not the right strategy to expand the Islamic Finance Product range here in Europe otherwise we will end in an Islamic subprime dilemma too.

The latest announcement to establish an Islamic Bank in Switzerland put a big smile on my face. Remember the never ending story of the mega bank in the GCC to be founded a couple of years ago.

We are still waiting for this Islamic giant. The question is not only to what extend is there any demand for such a business case the main question that has to be answered seriously is will this Islamic Bank be able to offer an excellent service and real Shariah complaint products. from my experience in the German market I am absolutely sure that there will be no regulatory obstacles in this case but being able to survive in a Swiss or German shark pool with excellent back office skills and capabilities will be the biggest challenge for these GCC investors.

Inter alia a clear vision, a well trained staff, a wide range of products and explicit definitions of corporate governance guidelines are needed to succeed in a European market but what I have seen in the past based on many discussions with potential investors from the GCC showing interest in entering the German market was almost part of the big IBM-oriental-story: inschALLAH – bukrah – mallesch!

There is no doubt that the time is ripe for an Islamic Bank in the German speaking area, so may ALLAH taála help and guide our community to spread the Islamic finance wings in Europe but let us do this step as professional as possible.

Meanwhile all the best & Wasalaam


Zaid el-Mogaddedi

Founder & Managing Director

Institute for Islamic Banking and Finance (IFIBAF

The first ever Islamic Finance Country Report in Sri Lanka was launched by KPMG Ford, Rhodes

Sri Lanka’s first ever Islamic Finance Country Report in Sri Lanka was launched by KPMG Ford, Rhodes, Thornton and Co. in collaboration with the Research Intelligence Unit.

The publication titled ‘Islamic Finance Country Report – Window of opportunity in Sri Lanka’ provides insight into the demographics of the Islamic finance market and an in-depth analysis of the trends in the industry together with the future position and a series of interviews with key professionals in the field, the Research Intelligence Unit said in a statement.

Islamic Finance was first introduced to Sri Lanka as early as 1997.

However the landmark evolution was the amendment made to the Banking Act No. 30 of 1988 in the year 2005 in order to permit licensed commercial banks and licensed specialised banks to offer selected financial instruments such as Murabaha and Mushakraka.

Islamic Finance has garnered an increased interest in the last few years and has the potential to develop the capital markets of Sri Lanka and assist with the development of infrastructure along with encouraging foreign investment in Sri Lanka.

At present there is a State Bank and two licensed Commercial Banks that operate Islamic finance windows with many other potential players on the verge of venturing into the market.

Sri Lanka has witnessed an important milestone in that the Central Bank of Sri Lanka has permitted the operation of a fully fledged Islamic Finance Bank and recently an Islamic Fund was launched facilitating investment in listed securities and this Report will no doubt assist the entrance of new players and investors into the market both foreign and local alike.

Amana Bank Limited Chairman Osman Kassim, Chief Guest at the event, during his address, commented on the development of the Islamic Finance industry in Sri Lanka and also mentioned that the country’s strategic geographic location provides a window of opportunity for Sri Lanka to service the Islamic Finance needs in the SAARC region.

Also at the release, Chief Executive Officer of the Research Intelligence Unit Roshan Madawela, spoke on how the publication provided information on both the demand and supply side of the industry.

He went on to comment on how the methodology used provided insight into product profiles, customer profiles, market penetration levels, the labour market dynamics and growth potential of the industry.

Commenting at the event, Partner and Head of Advisory of the Firm Reyaz Mihular said, “KPMG Ford, Rhodes, Thornton and Co. has continuously endeavoured to eliminate the barriers faced by the Islamic Finance industry and this publication provides an overview of these challenges and opportunities.”

source : Lanka business today

Emirates airline eyes Islamic finance as European banks back out

Dubai’s Emirates, the rapidly expanding Gulf Arab carrier, is looking at the more resilient Islamic finance market to fund aircraft deliveries as international banks back out of plane deals because of the euro zone debt crisis.

European lenders, especially French banks, which have been major financiers for Emirates’ aircraft deals with Airbus and Boeing, have become risk-averse because of the crisis, the airline’s president Tim Clark told Reuters.

“We were kind of planning for finance from European banks…but it’s just a bit difficult now,” said Clark.

“We still have the Islamic finance market to go with and other funding options are always open for us,” he said, adding that issuing an Islamic bond or sukuk was “not out of the question”.
Clark declined to comment on specific financing deals, but said liquidity in the international loan market was lower and French banks were shying away from new deals. “This won’t change for the next six to nine months,” he said.

Societe Generale, France’s second-biggest listed bank, on Tuesday scrapped its 2011 dividend to help bolster capital as it reported a 31 percent drop in quarterly profit, hit by charges including Greek debt writedowns. Its chief executive said the bank would reduce its aerospace financing “very significantly”.

Emirates is active in corporate funding markets because of its busy schedule of plane purchases; it received 10 new aircraft this year and a further 13 are scheduled for delivery before the end of March next year. Emirates chairman Sheikh Ahmed bin Saeed al-Maktoum has said there is a good chance of the airline placing yet more orders at next week’s Dubai Airshow.

However, Clark played down that idea. “We will book if we have a requirement and get good deals. Otherwise we won’t,” he said.
The sukuk market has been relatively resilient during this year’s instability in global financial markets, which has made it more difficult for even highly rated companies around the world to issue conventional bonds.

That is partly because Islamic investors in the Gulf remain cash-rich, partly due to the limited supply of sukuk, and partly since sukuk investors tend to hold the bonds until maturity, reducing the chance of big swings in secondary market prices triggered by shorter-term speculators bailing out of positions.

Goldman Sachs registered a $2 billion Islamic bond program last month, a fresh case of a conventional borrower looking at sharia-complaint funding sources as other markets dry up.

Traditionally, Islamic finance has been more expensive than conventional money. But the gap between the two, especially in the fixed income sector, has narrowed during the global financial turmoil of the past year and may, for now, have disappeared completely.

Dubai shopping mall developer Majid Al Futtaim decided against issuing a conventional bond because of pricing concerns earlier this year. It has now mandated banks to set up a separate sukuk program.

Emirates has used sharia-compliant financing facilities before so the company is aware of how Islamic finance works, according to Qudeer Latif, head of Islamic finance at law firm Clifford Chance in Dubai.

However, funding planes on order using sukuk could be tricky because Islamic finance, in addition to forbidding payment of interest, prohibits pure monetary speculation and requires deals to involve concrete assets. It would be harder to win a seal of approval from Islamic finance scholars for a sukuk that was based on assets which the airline did not yet own.

“It’s much easier to use existing planes to issue a corporate sukuk,” Latif said.

“For new aircraft, it’s not impossible but it’s much more complicated as the cash would have to go from investors through a special purpose vehicle to the manufacturer, and then a lease- back arrangement put in place with Emirates.”

Currently, two aircraft-based sukuks have been issued globally, and they were backed by existing aircraft: a $500 million issue from GE Capital in November 2009, and a $100 million deal for Nomura in July 2010.

Clark acknowledged that his airline, whose conventional $1 billion bond issue in June was more than five times oversubscribed, would be in new territory with a sukuk.

“This will be a new territory for Islamic finance. They (Islamic banks) are a bit hesitant, but they definitely have the capacity,” he said.
Emirates has continued to grow exponentially despite Dubai’s debt crisis two years ago, which hit several other government-related entities and forced the restructuring of billions of dollars in debt.

The Gulf carrier has over 190 aircraft worth more than $66 billion to be delivered over the next few years, including 73 Airbus A380 superjumbos and 41 Boeing 777-300 aircraft.

Emirates already operates in 67 countries and has 114 destinations; it has launched five new destinations this year.

The expansion of the carrier, as well as the growth of Etihad of Abu Dhabi and Qatar Airways, have alarmed older European airlines and fuelled mutual accusations of protectionism. Clark last year heaped further pressure on the European carriers by voicing plans to expand his fleet to include 120 Airbus A380s.

Source : al arabiya english


MANAMA: The World Islamic Banking Competitiveness Report 2011/12, developed in collaboration with Ernst & Young, will be officially launched on November 22 at a top Islamic banking forum in Bahrain.

The 18th annual World Islamic Banking Conference (WIBC 2011) will be held from November 21 to 23 at the Gulf Convention Centre.

The World Islamic Banking Competitiveness Report, a ground-breaking initiative designed to not only identify but also raise the bar of competitive excellence, strategic leadership and performance improvement in the global Islamic finance industry, will analyse key strategies that leading Islamic financial institutions must deploy in order to ensure continued growth in a challenging economic environment.

“The global Islamic finance industry has undergone major transformations in the last few years in its quest to boost international competitiveness and to build a sustainably profitable business model,” World Islamic Banking Conference managing director David McLean said.

“There has been a focus on product innovation efforts that aim to provide a more comprehensive array of Sharia-based products for the industry.

“The global Islamic finance industry has also seen significant developments in regulatory frameworks and Sharia standardisation making global connectivity that much more achievable,” he said.

“However, both the challenge and the opportunity currently facing leading industry players is how will Islamic banks succeed in making this growth trend sustainable and profitable,” he added.

“Islamic banking has been continuously gaining market share across key Middle East and North Africa (Mena) markets, but the question remains on how sustainable this growth is, especially in view of ongoing prolonged pressure on profitability,” Ernst & Young’s Islamic Finance Services Mena head Ashar Nazim said.

“As the leading industry players compete to stay ahead, many are looking into transforming and improving their operational performance.

“Investment in operating model redesign, customer analytics, capital management and regulatory compliance appear to be essential features of the chief executive officers’ agenda in 2012,” he added.

The report, which has over the past eight years evolved into an indispensable reference resource for the key decision-makers in the global Islamic banking and finance industry, will be exclusively launched at a special plenary session of WIBC 2011.

Titled ‘A Brave New World of Sustainable Growth’, it will be presented by Ernst & Young senior director assurance Imtiaz Ibrahim and executive manager Abid Shakeel.

More than 1,200 industry leaders from over 50 countries are expected to attend WIBC 2011.

source : gulf daily news