Credit Crunch: A Chance to develop the Islamic Finance Market in Germany?

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Credit Crunch: A Chance to develop the Islamic Finance Market in Germany?

By Nicole Guski, Islamic Finance News (IFN) Vol. 6, Issue 10. Available at

Nearly five years have passed since the federal state of Saxony-Anhalt in Germany issued Europe’s first Islamic bond in July 2004. As a result of such issuance market players were quite enthusiastic about the potentials of Islamic finance for the German market. Although more than 3 million Muslims live in Germany and the Deutschland-AG has a good reputation in many Muslim countries the expected boom of Islamic finance seems not to have arrived in Germany. The reasons for this are manifold, but unlikely due to a lack of potential. Although the majority of Muslims living in Germany have a background of migration and as a result have tendency to a lower income by than German natives, their savings are usually higher. According to Booz & Company there is a potential of Euro 1.2 Billion per annum for Shariah-compliant finance products which would mean an annual growth of 15 – 20 % . There is definitely also a growing interest in the product as the increasing number of attendees from Germany at Islamic finance conferences shows.

Due to globalization a rising number of German banks are already involved in the Islamic finance markets outside Germany. In particular German banks such as Deutsche Bank, Commerzbank and Dresdner Bank are quite active in such markets. Deutsche Bank has been issuing sukuks in cooperation with Saudi banks since 2005. These are, however, not the only banks which are active in the field of Islamic finance. In 2005 for example, it was announced that Arcapita Bank B.S.C. mandated Bayerische Hypo- und Vereinsbank AG, Standard Bank plc and WestLB AG, London Branch to arrange a US $ 200,000,000 five multicurrency murabaha sukuk. In particular Islamic trade and export finance structures are structures which are regularly used by German banks. Similarly CCH Europe GmbH, the German subsidiary of CCH International, arranged a $ 20 million murabaha for Globexbank, Moscow in 2006.

In order to service their Muslim customers German banks often establish a Shariah-compliant window. Just recently HSH Nordbank, a German financial institution and key market player in shipping and renewable energy finance, together with Dubai’s Al Salam Investment signed an agreement with the intention of setting up a Shariah-compliant joint venture in 2009. Also in the past Islamic finance was never a one-way street. Since 2006 Islamic investors have shown an increasing interest in investment opportunities in Germany. In particular the German real estate market was a main target of such investments. Just to name a few, Abu Dhabi Investment House launched a Euro 600 million Gulf German residences fund in 2006, Arab Investment Ltd set up its German AIL Fund 1 for the purpose of making investments in German shopping centers and commercial properties in 2007 and Deutsche Bank even launched a special banking brand called Bankamiz for its Turkish costumers who represent the largest Muslim community in Germany. Still the German Islamic finance market is not yet as developed as in the UK and in all likelihood now also ranks behind the French Islamic finance market given the significant tax and regulatory changes announced by the French authorities last year. What are the obstacles which prevent the German Islamic finance market from developing faster? Why is there not a higher demand for Islamic finance products in Germany given the size of the Muslim community?

Lobby for Islamic Finance in Germany
One suspicion is that German Islamic finance products are not widely known within the Muslim community in Germany as such products are rarely advertised. According to Michael Mahlknecht even bankers are often not aware of the existence and availability of such products within their bank. Accordingly such products are not offered to their customers and there is also probably an element of reluctance on such customers to enquire about these products in light of the unjustified but nevertheless stereotypical association that is often made with persons of a Muslim background being linked to terrorists. In addition, the Muslim community in Germany is not a homogeneous group as most of them have a background of migration with family stemming from different countries. Even if they are second or third generation Muslims living in Germany their cultural differences are still quite apparent. Accordingly it is more difficult for them to create their own lobby in Germany. A good example for such difficulties is the Central Council of Muslims in Germany (Zentralrat der Muslime in Deutschland – ZMD). Although the ZMD was established in 1995 there is still an ongoing discussion amongst Muslims in Germany whether the ZMD has the authority to represent the German-Muslim community.

To alleviate such concerns it would assist if, similar to the UK or France, the German government acknowledges Islamic finance as part of standard business by implementing the appropriate legal framework. A platform for which might be that the Federal Financial Supervisory authority (BaFin) in Germany has signed Memoranda of Understanding (MOU) with various regulatory authorities in the Middle East. Pursuant the MOUs BaFin agreed to co-operate with such authorities which includes establishing training programs to increase a better mutual understanding. Although such a co-operation will not immediately change the legal framework for Islamic finance in Germany a better mutual understanding will increase the awareness of Islamic finance products in Germany and may build a greater confidence in the product which may ultimately lead to a stronger lobby for such product.

Certification of Islamic finance products
In addition to the lack of a unified lobby, not every product which is called an Islamic finance product might be recognized as such by every Muslim living in Germany. To overcome such obstacle and to support the German financial institutions to increase the reliability on the Shariah-compliance of their products, ZMD commenced an initiative for establishing a program to certify the Shariah compliance of a product. Although such a program is undoubtedly appropriate to improve the reliability of Islamic finance products it is unlikely that such a program can allay all doubts surrounding the Shariah-compliance of the product. As stated above ZMD is not recognized by all Muslims in Germany as their authorized representative.

A similar issue exists in most Muslim countries where the compliance of a product with the Shariah is supervised by a competent Shariah Board of the relevant financial institution. Although the Shariah Board is independent from the financial institution and not bound by any instruction from it, experience shows that the degree of supervision often depends on the individual members on such board, i.e. a product approved by a fatwa of one Shariah Board as being Shariah-compliant might be criticized by the members of another Shariah Board. It is therefore regularly discussed at conferences and in meetings whether a central Shariah Board should be established to avoid any discrepancies. Apart from Malaysia, the concept of a central Shariah Board is however not accepted in Muslim countries since Islam does not recognise the concept of a centralized representative, as opposed to for example the Catholic Church.

Highly engineered products
Furthermore, it has to be acknowledged that Islamic finance products compete with conventional banking products. The German Muslim community is not prepared to accept Islamic finance products which do not provide them with a similar return as conventional products. Although for example a number of Shariah-compliant structures have been developed to address issues such as double real estate transfer tax, it is desirable that the legal framework in Germany is adjusted to reflect the particularities of Shariah-compliant products to allow a simplification of the relevant structures. This would support a broader use and acceptance of such structures in Germany.

Credit Crunch as a chance for Islamic finance?
Due to globalization the Islamic finance markets have also not been immune to the financial crisis, but as a result of Islamic principles, the Islamic banks are not as highly leveraged as conventional banks and tended to stay away from the main triggers of the financial crisis such as risky derivative products . Due to the global financial crisis the financial sector faces an unprecedented situation which requires a new way of thinking to overcome the difficulties brought by the crisis. Therefore the market is probably more prepared to look at the financial sector from a different angle and in particular be open for a more ethical approach. Accordingly there is good chance that the principles of a Shariah-compliant financing like the ban on uncertainty (gharar), the promotion of risk and profit sharing as well as the promotion of asset-backed transactions may become of a greater interest also to non-Muslims. On the other hand Shariah-compliant products have other inherent risks which have to be taken into account. For example they have usually a greater liquidity risk due a greater mismatch in maturity.

The German market still holds some interesting potentials for Islamic finance products. Regardless of the fact that it is already possible to use Islamic finance products in Germany, it is desirable to increase their awareness and lobby for Islamic finance in Germany by a clear statement from the German government in the form of establishing a legal framework as done in the UK and France and thereby recognizing the particularities of Islamic finance products. A certification of the Shariah-compliance of a product is likely to support the development of the German Islamic finance market even if such certification is not recognized by all Muslims living in Germany. Despite of the fact that the Islamic finance market is not large enough to solve the credit crisis on its own, it can add an interesting dimension to a solution even for the non-Muslim community, but without forgetting to mitigate the risks which are inherent in Islamic finance structures.

Best Regards

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