Can Islamic banking help boost Czech exports?

A good deal of the ongoing economic and financial turmoil on world markets has been blamed on the unscrupulous practices of the international banking and financial sector. Islamic banking, on the other hand, is seen as a fairer and more balanced alternative which has been much less affected by the crisis. Can the Czech Republic benefit from a financial system based on the Islamic law? And can Islamic banking help boost Czech exports into Muslim countries? These are some of the issues debated at an international conference on Islamic banking held in Prague.

Based on the principles of Islamic law, or shariah, Islamic banks are prohibited from charging interests, speculating as well as investing in businesses considered unethical by Islamic scholars. Instead, Islamic or participant banking offers a system of shared risks and profits, and its supports claim it is committed to promoting equity, moderation and social justice.

Islamic banking is today the fastest growing segment of the financial system, and is also considered a more honest and fairer alternative to conventional banking. Cihad Erginay is the Turkish ambassador to Prague, and head of the local group of the Organisation of Islamic Cooperation which organized the event.

“There was great interest on the subject from our Czech colleagues, Czech bankers and journalists who kept asking us about it and expressed their interest because they saw that Islamic banks were not as affected by the economic crisis that we see today. That led us to think that it could be interesting to organize such a conference. And as you can see from the participation, there is great interest in the subject.”

source : Radio Prague
Read more at :

http://www.radio.cz/en/section/marketplace/can-islamic-banking-help-boost-czech-exports

Islamic Bank of Britain host UK’s first ‘Islamic Finance Question Time’

Islamic Bank of Britain plc (IBB) held a question and answer session hosted by the Bank’s Shari’a scholars, ‘Islamic Finance Question Time’ on April 23. The aim of the event was to “demystify Islamic finance and provide an insight into how it offers a faith-based alternative to conventional finance and banking,” according IBB spokesperson.

IBB’s Sharia Supervisory Committee (SSC) consists of esteemed Shari’a scholars, Sheikh Dr Abdul Sattar Abu Ghuddah, Sheikh Nizam Muhammed Saleh Yaqoobi and Mufti Abdul Qadir Barkatulla.

Commenting on the event, Chairman of the IBB SSC, Sheikh Abu Ghuddah, said, “Islamic finance is as old as the religion of Islam itself. However, there is still a lot of misunderstanding around how it works and the need for Muslims to manage their finances in Shari’a compliant manner. The IBB SSC hopes the Islamic Finance Question Time event has shed some light on the matter and gone some way to encouraging the further take-up of Shari’a Finance amongst the Muslim community.”

Senior Manager, Sharia Compliance at IBB, Samir Alamad, who works closely with the IBB SSC on a day to day basis, also commented, “The feedback from attendees of Islamic Finance Question Time has been very positive. The public welcomed the opportunity to engage with the IBB SSC so openly. The event is the first time a UK Islamic bank has given open access to its SSC, and this reflects the open and transparent way the Bank works with its customers.”

Over 150 guests attended the event, held in central London for a debate lasting over 1.5 hours. Of the questions, the following generated a lively and informed discussion amongst the panel and their guests:

Read more at :

http://www.muslimnews.co.uk/paper/index.php?article=5838

Islamic banking could be perfect fit for Scotland – Omar Shaikh, of the IFC

YOU cannot mask what has happened to the banking industry over recent years. Alongside the near collapse of our biggest banks, there has been a disintegration of trust.

It has spurred many of us from the worlds of business, the churches and academia to explore new models of financial institution that bring together Islamic and ethical banking for a more socially-focused view of lending.

Today the Tods Murray/Islamic Finance Council UK (IFC) ethical finance forum will look at the practical challenges relating to marketing and distribution and discuss methods for measuring social returns.

Over recent weeks, these discussions have become even more pertinent against the backdrop of constitutional reform. Scotland’s monetary system is being hotly debated.

We strongly believe the shared values between Islamic finance, the churches and broader ethical banking could provide the bedrock to a more stable and prudent banking sector whatever the outcome of a referendum, and no less so were Scotland to become independent.

We would not want to be in a similar situation to Ireland trying to bail out our banks. IMF studies have shown Islamic banks are more stable than their conventional counterparts and we need to see what we can learn from this to mitigate systemic risk.

Scotland has a tremendous heritage for ethical and prudent finance from the original mutual investment trusts to the Savings Bank movement. Indeed the Savings Bank structure inspired the first attempt at a modern Islamic bank in Egypt more than 40 years ago.

This is also a nation for innovation. In a brave, new world, the Scottish banking system has the opportunity to once again show moral leadership giving the people of Scotland a fair, socially responsible bank system that works for them and ensures Scotland can withstand any future financial crisis.

Many people are already basing their financial decisions on moral considerations, there is a growing appetite for ethical trading and there is an expanding sector of society who will choose social over purely financial returns. That is worth building on.

read more at http://www.scotsman.com/news/omar-shaikh-islamic-banking-could-be-perfect-fit-for-scotland-1-2172994/

The stranger bits of Finance Bill 2012: from cricket to Islamic finance

THE FINANCE BILL 2012 was published yesterday by Minister for Finance Michael Noonan and among the Mortgage Interest Relief measures and tax changes for businesses, the Bill also clarified the following (more unusual) elements of Irish taxation:

1. Bread

The Finance Bill 2012 clarifies the range of bread products, including bagels and blaas, which will not be liable for VAT and will instead remain designated at a zero rate of tax.

The zero-rated breads include loaves, rolls, batch bread, bagels, baps, blaas, burger buns, finger rolls, wraps, naan breads and pitta bread.

Other flour- or egg-based bakery products are subject to VAT of 13.5 per cent.

The Department of Finance said that the breads listed above are being designated zero-rated for tax in an effort to reflect the kinds of bread currently available on the market while taking into account the development of bread for health and ethnic reasons.

2. Cricket

The Finance Bill had some good news for professional cricket players: they are being added to the list of professional sportspersons entitled to tax relief on certain income.

The move also means that the cricketers will be eligible for a higher rate of relief on pension contributions.

Other sportspersons covered by this are: athletes, boxers, cyclists, golfers, motor racing drivers, footballers, rugby players, swimmers, jockeys, and tennis, squash and badminton players.

They must be resident in the state for the relevant tax assessment period to qualify and the deduction only applies to direct sports earnings (less expenses) and not for indirect income earned through promotional appearances or sponsorship.

3. Islamic Finance

The Finance Bill also includes enhancements to the tax regime for Islamic finance.

This area of finance in Ireland, which although faith-based is not limited to Muslims, was introduced in the Finance Act 2010, and refers to financial transactions which are consistent with the principles of Islamic or Sharia law.

Under Islamic finance, the payment and receipt of interest is forbidden. Speculation is also prohibited, while investment in unethical businesses, products or services is also banned. According to the Revenue Commissioners, under Islamic finance, transactions are typically backed by or based on an identifiable and tangible underlying asset.

The transactions also involve sharing risk between the investor and the investee, and products under Islamic finance operate along the same lines as conventional financial products by using familiar legal structures in an alternative way to achieve the financing objectives.

The Finance Bill published yesterday proposes technical changes to certain Islamic financial transactions in the same way as conventional financial transactions by allowing such a company to have other income in addition to income from leasing and/or income from specified financial transactions.

source : the journal.ie

Ireland may be first EU state to sell Islamic bond

By Elffie Chew

IRELAND plans to become the first European nation to sell sovereign sukuk — Islam-approved financial certificates — as its equal tax treatment for Islamic-finance products attracts investors.

The Government has agreements with more than 60 countries to avoid double taxation on Islamic transactions, Micheál Smith, the south-east Asia director of IDA Ireland, said.

Islamic finance assets around the world may rise about 16% to €1,240 billion this year, Raj Mohamad, managing director at Five Pillars, a consulting firm based in Singapore, told Bloomberg Television yesterday.

While plans to sell sukuk by Britain, France and Luxembourg have stalled, Mr Smith said Ireland will push ahead with a sale.

“Ireland will be going back to the bond market and a sukuk is an option when conditions are right. We also hope to form more working groups with Muslim countries such as Malaysia to build up a critical mass of expertise as the objective is for Dublin to become a centre of excellence for Islamic finance.”

Ireland introduced tax legislation for products that comply with Islam’s ban on interest in 2010, Mr Smith, who is based in Singapore, said.

The Central Bank has a Shariah team overseeing its Islamic funds, which total about €390m under management.

The Irish Stock Exchange listed its first sukuk in 2005 and Ireland is a popular choice for sales because the nation offers a “relatively inexpensive” and timely listing process, he said.

The Government last sold bonds in September 2010, the year it had a deficit that was the highest as a percentage of gross domestic product in the developed world. The Department of Finance estimates the ratio dropped to 10.1% of GDP in 2011 from 31% the previous year.

CIMB Group Holdings, the world’s biggest sukuk arranger, said this week that it got approval to set up the first Shariah-compliant equity funds from Malaysia in Ireland.

Ireland’s bid to become an Islamic finance hub received a boost in October when Goldman Sachs Group got approval from the nation’s central bank to list its $2bn (€1.55bn) sukuk programme. The planned sale has attracted criticism among Islamic scholars, with some saying the proceeds may not be used according to Shariah law.

CIMB-Principal Islamic Asset Management, based in Kuala Lumpur, chose Ireland for its Islamic equity funds because there’s no double taxation and no withholding tax on interest payments, Jim McCaughan, chief executive of US-based venture partner Principal Global Investors, said on Monday.

An initial investment of $20m (€15.5m) will be put into three funds that will open for subscription next month, he said.

“We expect interest from Europe, Malaysia and more importantly the Persian Gulf and other Muslim countries,” Mr McCaughan said. “People are getting wealthier and want to diversify their funds.”

Global sales of sukuk, which pay asset returns instead of interest, total €4.7bn this year, compared with €500m in the same period in 2011, according to data compiled by Bloomberg. Offerings reached a record $36.3bn last year, surpassing the $31bn raised in 2007.

The difference between the average yield for sukuk and the London interbank offered rate, or Libor, narrowed two basis points to 299 basis points yesterday, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index.

The average yield has climbed nine basis points, or 0.09% point, this year to 4.08%.

Shariah-compliant bonds have dropped 0.1% in 2012, according to the HSBC/Nasdaq index, while debt in developing markets declined 0.2%, JPMorgan Chase & Co’s EMBI Global Composite Index shows.

The Bloomberg Malaysian Sukuk Ex-MYR Index of foreign currency Islamic debt sold by companies in Malaysia rose 0.5% this year to 104.919 yesterday. The gauge increased 5.9% in 2011.

Britain cancelled what would have been the first sukuk sale by a Western government last February, saying the debt didn’t offer value for money. Luxembourg ruled out a plan to sell Islamic bonds in 2011 because the government saw no need to raise additional funding. France has legislation in place to facilitate a sale and has yet to proceed with an issue.

Ireland has a Muslim population of 30,000, according to a Department of Finance document covering the nation’s Islamic industry issued in March 2010. Roman Catholics make up 87% of Ireland’s population.

The Islamic Cultural Centre for Ireland and the Immigrant Council of Ireland have all called for more Shariah-compliant initiatives, the report said.

“There’s been no objection to Islamic products being sold in Ireland,” said Mr Smith, who is also a director in charge of the 10-member Association of Southeast Asian Nations at the IDA.

The European debt crisis provides an opportunity for Islamic finance to grow given it is rooted in ethics and religion, according to Nik Norzrul Thani, the chairman of Malaysian law firm Zaid Ibrahim & Co.

“What Ireland is doing is a step in the right direction,” Nik Norzrul said in an interview in Kuala Lumpur.

“Ireland’s ambition to be a Shariah-compliant hub is a recognition that Islamic finance isn’t only for Muslims.”

Read more: http://www.irishexaminer.com/business/ireland-may-be-first-eu-state-to-sell-islamic-bond-180837.html#ixzz1k8GcROxQ

source : Irish Examinar

UK Experts Eye Islamic Finance Solution

A decision by the UK government to put on hold earlier plans for the first Islamic sovereign bond from a western country was criticized as a setback for the initiative that could have provided more security to a shaking economy.

“It would certainly help the UK market if the government decided to go ahead with a benchmark sukuk,” Farmida Bi, partner at Norton Rose, the law firm, told the Financial Times.

“It could galvanize the market and would lead to more interest in Islamic finance in London and [continental] Europe.”

Affected by a financial crisis, the UK put the plans to issue the Islamic instrument on hold which would have been the first Islamic bond to be issued by a western government.

The government cited fears that a new instrument might struggle to attract demand in difficult market conditions that have been made worse by the troubles in the eurozone.

Yet, London still remains the main arena outside the Muslim world for Islamic finance.

In 2006, Britain’s fifth-biggest bank, Lloyds TSB, began to roll-out its Islamic financial services across the country.

The UK is the only country in the European Union to have Islamic banks. It is also developing its takaful market for Islamic insurance.

The UK also has a strong foothold in developing products such as commodity murabaha – Islam’s version of interbank short-term lending and syndicated loans.

Moreover, London has established the first secondary market in sukuk outside the Islamic world to help Islamic investors who seek to buy property and assets in the UK in a way that fits in with their religion, which bans earning interest, speculating or risk-taking.

London is also advanced in Islamic retail services, with institutions offering a range of Islamic banking products, such as mortgages and car loans.

The Islamic Bank of Britain, granted a license in August 2004, became the first Islamic bank in the UK and has continued to attract customers for mortgages.

Enhance Market

Admitting that the government made huge efforts to facilitate Islamic finance in the UK, there is a feeling among many bankers that the government must launch a sovereign sukuk to help the market move to the next stage.

“I think it has been a mistake by this government not to revive the idea of an Islamic government bond,” a banker at a big City institution told Financial Times.

“They worry about price and demand, but the UK gilts market is a haven.

“We are confident there would be strong demand for this product, as it is Islamic and would be denominated in sterling, which is what investors want, as there are so many problems in the eurozone.”

Despite the recent decision to hold the new instrument, the Islamic finance was gaining popularity in UK better than other European countries.

For example, though France has around 7 million Muslims, compared with UK 2 million Muslims, progress in Islamic finance in France was stalled due to problems over banning the face veil and burka in public places which put off investors.

Starting almost three decades ago, the Islamic banking industry has made substantial growth and attracted the attention of investors and bankers across the world.

A long list of international institutions, including Citigroup, HSBC and Deutsche Bank, are going into the Islamic banking business.

Currently, there are nearly 300 Islamic banks and financial institutions worldwide whose assets are predicted to grow to $1 trillion by 2013.

Islam forbids Muslims from usury, receiving or paying interest on loans.

Islamic banks and finance institutions cannot receive or provide funds for anything involving alcohol, gambling, pornography, tobacco, weapons or pork.

Shari`ah-compliant financing deals resemble lease-to-own arrangements, layaway plans, joint purchase and sale agreements, or partnerships.

Investors have a right to know how their funds are being used, and the sector is overseen by dedicated supervisory boards as well as the usual national regulatory authorities.

The Shari`ah-compliant system is now being practiced in 50 countries worldwide, making it one of the fastest growing sectors in the global financial industry.

source : onislam net

Business schools turn to Islamic finance

As unemployment levels remain high in the West, finance students are being encouraged to gain expertise in Islamic banking so that they will be able to work in the Gulf states and in the wider Islamic world.

Universities are also exposing students to other non-conventional and ethical finance models that include eco-finance and micro-finance.

While universities in the United Kingdom and France have offered Islamic finance programmes for some years because of their large Muslim populations, Spain is also increasingly looking into these programmes.

The Instituto de Empressa (IE) business school in Madrid has been offering Islamic finance programmes for five years and partnered with Saudi Arabia’s King Abdul Aziz University (KAU) to launch the Saudi-Spanish Center for Islamic Economics and Finance (SCIEF) earlier this month.

Speaking at the event, Dr Ahmad Mohamed Ali Al Madani, head of the Islamic Development Bank, said the financial crisis had raised people’s concerns beyond profit margins into where their money is invested. Al Madani was acting rector of KAU from 1967 to 1972 and was Saudi Arabia’s deputy minister of education in the 1970s.

Business schools needed to respond accordingly and Spain was in a good position to do this considering the country’s Arabic heritage, he said.

“You look around and find that Islamic institutions are in the hundreds. Amounts of the assets are in the billions. The system proved that it can support economic systems and respond to big demand from people in different parts of the world.”

full story :

source : university world news

Business students turn to Islamic finance

It is no secret that conventional financial systems are not working and the sector is looking for alternative and responsible ways of doing business.
Islamic finance poses an ethical and non-conventional model and is currently the only area with strong growth, said Professor Ignacio dela Torre, Academic Director of the Master in Finance Programmes at Spain’s Instituto de Empressa (IE) Business School last week.
Dela Torre was speaking at the relaunch of the Saudi-Spanish Centre for Islamic Economics and Finance, a partnership between IE Business School and Saudi Arabia’s King Abdul Aziz University.
The relaunch coincided with a conference on “Islamic Finance in the 21st century”. He said when employment levels are high in the West, it makes sense for finance students to familiarise themselves with alternative finance models that also include eco-finance and micro-finance.
“From a macroeconomic point of view it makes sense that European governments and financial markets set up Islamic windows so excess liquidity can be channelled through some European financing markets with these structures.”
Expertise needed
“There is already $1 trillion (Dh3.67 trillion) of Islamic money and it is growing at 20 per cent with $200 million of additional Islamic money coming in every year,” said Dela Torre.
Students are showing interest in this area of finance and universities in the United Kingdom and France have responded to the demand early on. Over the past five years, IE has been offering Islamic finance programmes.
“When you travel to the Gulf, where 50 per cent of banking is Islamised, there are not enough people with skills and understanding of Islamic finance,” he said.
He added that from a career perspective it is wise to have knowledge of this area because those who work in conventional finance will sooner or later be faced with Islamic finance.
Dela Torre says the field is not difficult to understand once the basics are covered in the curriculum illustrated by the fact most expatriate professionals in the GCC’s Islamic banking sector are Americans and Indians.
Dr Ahmad Mohammad Ali Al Madani, Head of Islamic Development Bank, said since the financial crisis, people have become more concerned with where their money ends up once invested and not just profit margins.
Celia de Anca, professor of Islamic Finance at IE Business School, added that students are increasingly interested in financial sustainability and ethics.

source : gulfnews

Deutsche Bank predicts Islamic finance boom

Analysts at Deutsche Bank, led by Ryan Ayache, have predicted in a report that global Islamic banking assets could reach $1.8 trillion by the end of 2016 – up 90% on the $939bn of assets in 2010.

The analysts argued that Islamic banks would benefit from the regulatory burden on banks in developed markets, such as Europe and the US, which will curtail bank lending. They also argued that there is growing awareness and acceptance of Islamic finance and sharia-compliant products.

Sharia-compliant bonds – known as sukuk – currently make up about 1% of global debt issuance, according to Dubai-based Ryan Ayache, who was the lead author on the Deutsche Bank report.

There has been an uptick in sharia-compliant bond issuance this year, according to Dealogic. The total value of Islamic debt issued globally in 2011 is close to breaking a post-2007 financial crisis high, with $17.3bn via 73 transactions having been priced for the year to November 14.

In 2009, just over $18bn worth of Islamic bonds were issued globally through 72 deals, while deals worth a total of $27.2bn via 100 transactions were priced in 2007.

There has been scepticism to sukuks in the past, as they are a new asset class, but the report argued that international standards, supervision and accounting methods are being brought to Islamic banks – meaning the level of harmonisation between Islamic and conventional banking regulation is eroding barriers to entry and enabling more participants into the field.

The report said: “The awareness and availability of Islamic banking is greater today than ever before.”

It added: “Companies such as GE have already tested the Sukuk market , and the existing ownership of global blue chips by certain sovereign wealth funds may create a viable pipeline for future issuances in the short and near term.”

source : efinancial news

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

Zaid el-Mogaddedi

Founder & Managing Director

Institute for Islamic Banking and Finance (IFIBAF