AN OVERVIEW OF ISLAMIC FINANCE IN GERMANY
In a few days, the German Federal Financial Supervisory Authority, BaFin will send two representatives on an Islamic finance congress. Dr. Johannes Engels, senior advisor and Robert Elsen, deputy head of the section for technical co-operation, will both contribute to the World Islamic Finance Conference held this year in London, March 28/29. The conference, organised by Fleming Gulf, features such prominent figures of the Islamic finance world as Sheikh Nizam Yaquby, Sharia scholar from Bahrain who is a member of more than 80 Sharia-boards advising Islamic financial institutions and is considered to be one of the top ten leading Sharia-scholars in the world. The World Islamic Finance Conference is set up to be an opportunity to forge closer ties between the European Islamic finance industries with its partners in Islamic countries. The conference is not the first effort undertaken by the BaFin to jump start Islamic Banking in Germany.
In October 2009, BaFin, even hosted its first own conference on Islamic finance which was well received in the press. It was the first event of this sort and a major break-through in public awareness on the subject. BaFin officials, including its president Mr. Jochen Sanio, repeatedly signalled their willingness to support Islamic banking. The conference was seen as the starting point to build up a regulatory framework for Islamic banking in Germany. Mr. Sanio again stressed his willingness for cooperation in a lecture held at the Euro Finance Week in Frankfurt in November 2010.
Nevertheless, so far no Islamic bank has settled for the German market. Asked why, Juergen Dreymann another BaFin representative in June 2010 stated at a panel discussion in Frankfurt that until then the BaFin had simply not received any applications for the opening of an Islamic Bank. The authorities had not undertaken further steps to bring forward the matter due to missing demand. The Kurveyt Türk Bank, announced in the press as the first Islamic Bank to open in Germany, started only by operating a representative office which will collect the money in Germany but administrate and invest it through their home offices in Turkey. The way to a full banking licence for a Sharia-compliant institution in Germany is expected still to be long even though Mr. Dreymann’s further remarks clearly showed sound interest. The framework of the German banking regulations still either does not allow trade based Islamic transactions or does not consider them to be banking transactions at all. Besides some of the tax regulations such as VAT constitute a disadvantage for Islamic banking customers who would be charged twice.
Most of the transactions executed by an Islamic bank are trade based due to the strict prohibition of interest, called “riba”. Put in a nutshell, the Islamic bank buys designated goods for the costumer and then resells them to the costumer at a higher price. The scheme is applied in variations for nearly all traditional loan products. Other Islamic financing models set up joint ventures between the bank and the costumer, the bank providing the needed funds and the costumer the labour and knowledge. Both do not affect the German banking rules as these models are not considered banking activity. Other distinguishing features of Islamic finance are customers and bank both having to bear the risk of their investment. Should the enterprise lead to a loss both will share the resulting financial burden. In consequence, deposit guaranties and other protection schemes for customers are not accepted. Additionally, certain investments are strictly prohibited such as pork, alcohol, gambling, prostitution, music, dancing and in most cases, Israeli companies. These regulations are enforced by the obligatory Sharia-board each Islamic financial institution needs to consult. It alone decides whether an activity or a product is Sharia-compliant.
The BaFin is willing to react to claims by various Muslim institutions in Germany stating that the demand for Sharia-compliant banking is high and therefore adjustments must be undertaken to meet the demand.
An extensive study by the German Federal Office for Migration and Refugees (BAMF) found that 50 % – 70 % of the 4.3 million Muslims living in Germany call themselves religious. This correlates with the findings of another study supported by the Institution for Islamic Banking and Finance (IFIBAF) in Frankfurt, Germany, in which 72 % of the Turkish answer that they would prefer to invest their money in Sharia-compliant products. Further findings of the study show the market potential for Islamic investment products to be about €1.2bn per year with overall cumulated savings of Muslim costumers between €22bn – 38bn. Ernst & Young (E&Y), in comparison, estimates the total assets of Muslims in Germany to amount to €20bn, the Central Council of Muslims in Germany (ZMD) together with E & Y assume in their study that 30 % – 50 % of German Muslims are disposed to execute financial transactions in accordance with Islamic principles.
Albeit these findings, conventional banks targeting Muslim customers on the German market up till now engage in ethnic banking only, for example Bankamiz by Deutsche Bank. It advertises conventional products and provides Turkish language advisory services along with offerings such as free transfer payments to Turkey. In a recent article published in Financial Times Germany, which asked major banks why they react reluctantly to the impressive numbers featured in the studies, corrected the estimates for real demand to between only 3%-15% of Muslims. In that same article the studies were further alleged to be carried out on a non-representative basis and grossly overestimating the need for Islamic finance.
German institutions are not hesitating to seize business opportunities, be it conventional or Islamic. This is proven by Deutsche Bank which opened “Islamic Windows” in the GCC and in Malaysia and by Germany’s biggest insurer, Munich based Allianz, which successfully launched Allianz Sharia in Indonesia in 2006 – with a continuing annual growth. Their focus on the Islamic finance market abroad may indeed be a sign that the home market is still too small.
Gradually, though, Islamic finance does take a hold in Germany. In March 2010, Meridio, an asset management company with headquarters in Cologne, launched the first actively managed Islamic mixed fund broadly advertised in Germany. And the first Islamic bank, the Kurveyt Türk Bank is short of applying for a full banking license. Their success will be one more indicator on whether further expansion of Islamic finance will have a favourable prognosis in Germany.