Islamic banking in Germany: opportunities and potential aspects

Islamic Banking in Germany: Opportunities and

Potential Aspects

MASTER – THESIS

Adviser: Prof. Dr. Lars Jäger

Co-Adviser: Dr. Johannes Engels

Course of Studies: International Business Administration and

Foreign Trade

UNIVERSITY OF APPLIED SCIENCES WORMS

Submitted by:

Islam Hamed Gabriel-von-Seidl-Straße 75 67550 Worms [email protected]

Matriculation no.:

666149

Winter Term 2013/2014

Worms, October 19th, 2013

In The Name of Allah,

The Most Beneficent, The Most Merciful

Dedicated to my father’s soul,

Fathy Abd-elaziz Hamed

Acknowledgements

Acknowledgements

First of all, I would like to thank Almighty Allah for everything in my life,

Without his guidance I would never be able to accomplish anything in my whole

life.

I would like also to thank my mother who has supported me with her prayers, as

well as her best dedication. I cannot forget my sister and my brother who had been

always beside me.

I am further grateful to thank all my family members, as well as my friends for

their support, without you it would be very difficult to overcome all the

challenges. I cannot say thanks enough to my beloved fiance, Sarah El-sadany,

who has inspired me with her hope, love and support.

Finally, I would like to offer my gratitude to my supervisors Dr. Jäger and Dr.

Engels for their support and guidance through this thesis.

Student’s Declaration

Student’s Declaration

I hereby declare that this thesis is my own original work and that no other than the

listed references have been used as sources of information.

I further declare that no part of this thesis has been previously submitted to this or

any other institution.

Worms, October 19th

, 2013

Islam Hamed

Signature

Abstract

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Abstract

The Islamic banking sector has grown rapidly with double digit rates in the past

decades. It is further considered the fastest growing segment in the global

financial system. Hence, several countries were attracted by the business around

the globe. In particular, several western countries who started to realize the

potential of its Muslim minorities, and started to open doors for Islamic banks. In

consequence, Islamic banks started to spread in several western countries. On the

contrary, other European countries with a large group of Muslims did not launch

the business yet, such as Germany.

The purpose of this thesis is to examine the German market and to investigate

whether it is potential for Islamic banking or not. It will further highlight the main

opportunities for the future growth of the business, as well as the main challenges

facing Islamic banks in the country.

Key words: Islamic banking, Islamic finance, Islamic banks, Market potential,

German banks and regulatory framework.

Table of Contents

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Table of Contents

Acknowledgements ................................................................................................... II

Abstract ................................................................................................................... IV

List of Figures ......................................................................................................... VIII

List of Abbreviations ................................................................................................. IX

Glossary ................................................................................................................... XI

1. Research Overview ............................................................................................. 1

1.1. Introduction ........................................................................................................ 1

1.2. Purpose ............................................................................................................... 3

1.3. Research Design & Methodology ....................................................................... 3

1.4. Thesis Structure .................................................................................................. 4

2. Islamic Banking: Introduction and Overview ....................................................... 6

2.1. History & milestones .......................................................................................... 6

2.2. Evolution of Islamic banking ............................................................................... 8

2.3. Shariah & Fiqh ..................................................................................................... 9

2.3.1. The sources of Shariah .............................................................................. 10

2.4. The Prohibition of Riba ..................................................................................... 13

2.5. The Prohibition of Gharar and Maysir .............................................................. 14

2.6. Halal and Haram concept ................................................................................. 15

2.7. Zakat ................................................................................................................. 16

3. Islamic Modes of Finance .................................................................................. 17

3.1. Profit -and -Loss Sharing Instruments .............................................................. 17

3.1.1. Mudaraba ................................................................................................. 18

3.1.2. Musharaka ................................................................................................ 19

3.2. Deferred Sales Contracts .................................................................................. 21

3.2.1. Murabaha ................................................................................................. 21

3.2.2. Forward Sales: Salam and Istisna‘a ........................................................... 22

3.3. Ijarah - Leasing .................................................................................................. 25

3.4. Qard Hasan ....................................................................................................... 27

3.5. Retail Banking: Funding Accounts .................................................................... 27

3.5.1. Current Accounts ...................................................................................... 28

Table of Contents

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3.5.2. Saving & Investment Accounts ................................................................. 28

3.6. Sukuk ................................................................................................................. 29

3.6.1. Ijarah Sukuk .............................................................................................. 30

3.7. Takaful .............................................................................................................. 32

4. Corporate Governance In Islamic Banks ............................................................ 36

4.1. The Shariah Supervisory Board (SSB) ............................................................... 37

4.1.1. Functions and Responsibilities.................................................................. 37

4.1.2. The Issue of Fatwa .................................................................................... 38

4.1.3. Characteristics of The Board Members .................................................... 39

4.1.4. Shariah Supervisory Boards & Western Regulators ................................. 41

4.2. International Islamic Financial Infrastructure................................................... 42

4.2.1. AAOIFI ....................................................................................................... 42

4.2.2. IFSB ........................................................................................................... 42

4.2.3. IDB ............................................................................................................. 43

4.2.4. LMC ........................................................................................................... 43

5. Islamic Banking & the German Market .............................................................. 44

5.1. Muslims in Germany ......................................................................................... 44

5.2. Financial Behavior of the Muslim population in Germany ............................... 48

5.2.1. Current Trends .......................................................................................... 48

5.2.2. Market potential for Shariah-compliant products in Germany ................ 50

5.3. Regulatory Framework of The Financial Entities in Germany .......................... 54

5.3.1. Banking Supervision in Germany .............................................................. 54

5.3.2. Licensing of theIslamic Financial Entities in Germany .............................. 55

5.4. Feasible key players in the German market ..................................................... 59

5.4.1. Deutsche Bank AG .................................................................................... 59

5.4.2. Commerzbank ........................................................................................... 60

5.4.3. Kuveyt Türk Participation Bank ................................................................. 62

6. Conclusion ....................................................................................................... 63

6.1. Opportunities for the Islamic Banking industry in Germany ............................ 63

6.2. Challenges Facing the Islamic Banking Industry in Germany ........................... 64

References ................................................................................................................. i

APPENDIX 1 ............................................................................................................ viii

APPENDIX 1.1 ................................................................................................................ viii

Table of Contents

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APPENDIX 1.2 .................................................................................................................. ix

APPENDIX 1.3 .................................................................................................................. xi

Appendix2 ............................................................................................................... xii

List of Figures

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List of Figures

Figure 1 Thesis Structure .................................................................................................... 4

Figure 2 Trend in Global Islamic Banking Assets ................................................................ 8

Figure 3 Geographical Breakdown of Total Global Islamic Financial Assets ...................... 9

Figure 4 Mudaraba Model ................................................................................................ 19

Figure 5 Diminishing Musharaka Model ........................................................................... 20

Figure 6 Murabaha Model ................................................................................................ 22

Figure 7 Bai'salam Model.................................................................................................. 24

Figure 8 Istisna'a Model .................................................................................................... 25

Figure 9 Ijarah - Leasing Model ......................................................................................... 26

Figure 10 Sukuk issuance .................................................................................................. 30

Figure 11 Structure of a generic ijarah sukuk .................................................................. 31

Figure 12 The global gross Takaful contributions ............................................................. 33

Figure 13 Takaful Mudarbah Model ................................................................................. 35

Figure 14 Muslims According to Region of Origin ............................................................ 46

Figure 15 Muslims according to denomination ................................................................ 46

Figure 16 Age Structure of Muslims According to countries of Origin ............................. 47

Figure 17:Bank preferences for Muslims in Germany with Turkish Background ............. 50

Figure 18 Attitude on Banks in Germany……………………………………………………………………… 51

Figure 19 Relevance of Shariah Compliance and Adherence of Islamic principles .......... 52

Figure 20 Importance of Islamic Investments by Religiousness ....................................... 53

List of Abbreviations

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A

AAOIFI Accounting and Auditing Organization for Islamic

Financial Institutions.

ARCIFI Arbitration and Reconciliation Centre for Islamic

Financial Institutions.

B

BaFin Bundesanstalt für Finanzdienstleistungsaufsicht

(the Federal Financial Supervisory Authority).

BOT Build–operate–transfer.

C

CIBAFI Council for Islamic Banks and Financial Institutions

G

GCC Gulf Cooperation Council.

I

ICD Islamic Corporation for the Development of the

Private Sector.

ICIEC Islamic Corporation for the Insurance of Investment

and Export Credit.

IDB Islamic Development Bank.

IFIs Islamic financial instutions.

IFSB Islamic Financial Services Board.

IIFM International Islamic Financial Market.

IRTI Islamic Research and Training Institute.

http://en.wikipedia.org/wiki/Build%E2%80%93operate%E2%80%93transfer


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K

KFH Kuwait financial house.

KTP Kuvyet Türk participation bank.

KWG Kreditwesengesetz (the German Banking Act).

L

LIBOR London interbank offered rate.

LMC Liquidity Management Centre.

P

PBUH Peace be upon him.

PLS profit and loss-sharing.

R

ROE Return on equity

S

SDLT Stamp Duty Land Tax.

SPV special purpose vehicle.

SSB The Shariah Supervisory Board.

Glossary

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Glossary1

Allah The Arabic word for God.

Amana is trust; the contract of amana gives rise

to fiduciary relationships and duties.

Bay (bai) a comprehensive term that applies to the

sale transactions, exchange.

Bai bi-thamin ajil a deferred payment sale by installments

Bai’muajjal a deferred-payment sale.

Bai’salam a pre-paid purchase.

Fatawa (sing. fatwa) legal decisions or opinions rendered by

a qualified religious leader (mufti).

Fiqh Islamic jurisprudence, the science of

religious law, which is the interpretation

of the Sacred Law, Shariah.

Fuqaha (sing. faqih) Muslim jurisprudents who have

religious authority.

Gharar uncertainty, speculation.

Hadîth (plural ahadith) the technical term for the source related

to the Sunna; the sayings - and doings -

of the Prophet (PBUH), his traditions.

Hajj The pilgrimage to Mecca.

Halal means permitted according to the

shariah.

Haram means forbidden according to the

shariah.

1 1 The definantions are according to the glossary from Lewis & Algaoud ( 2001) and Ayub (2007).

Glossary

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Ijara contract a leasing contract.

Ijara wa iqtina a lease-purchase contract, whereby the

client has the option of purchasing the

item.

Ijma means consensus among jurists based

on the Holy Qur’an and Sunna, and one

of the four sources of law in Sunni

Islam.

Ijtihad means the act of independent reasoning

by a qualified jurist in order to reach

new legal rules.

Islam is submission or surrender to the will of

God.

Istisnaa a contract to manufacture.

Maysir means gambling, from a pre-Islamic

game of hazard.

Mudaraba contract is a trustee financing contract,

where one party, the financier, entrusts

funds to the other party, the

entrepreneur, for undertaking an

activity.

Mufti is a jurist who is authorised to issue a

fatwa or legal decision on a religious

matter.

Murabaha is resale with a stated profit, for

example the bank purchases a certain

asset and sells it to the client on the

basis of a cost plus mark-up profit

principle.

Musaqah is a contract for the lease of agricultural

land with profit-sharing.

Musharaka contract is an equity participation

contract, whereby two or more partners

contribute with funds to carry out an

investment.

Qard hasan a benevolent loan (interest free).

Glossary

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Qiyas means analogical deduction.

Qur’an is the Holy Book, the revealed word of

God, followed by all Muslims.

Rabb al-mal refers to the owner of capital or

financier in a mudaraba partnership

agreement (also sahib al-mal).

Riba is literally ‘excess’ or ‘increase’, and

covers both interest and usury.

Shariah is Islamic religious law derived from

the Holy Qur’an and the sunna.

Sukuk Certificates of equal value representing

undivided share in ownership of

tangible assets of particular projects or

specific investment activity, usufruct

and services.

Takaful refers to mutual support which is the

basis of the concept of insurance or

solidarity among Muslims.

Zakat is a religious levy or almsgiving as

required in the Holy Qur’an and is one

of Islam’s five pillars.

Research Overview

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1. Research Overview

1.1. Introduction

The negative consequences of the global financial crisis have made both investors

and experts rethink the current financial system. Speculation schemes, as well as

sub-prime loans, drove the global economy to the so called “black hole”. Several

banks have gone bankrupt and as a result, customers started to lose trust in the

current financial system, particularly, in the banking sector (Ernst & Young,

2011). Despite the fact that governments began to pursue restrictive schemes

against speculations and credit lending, the situation was beyond recovering. The

Eurozone crisis has hit the financial system again, resulting with an ongoing

financial crisis, and the reason was still the same.

On the other side, the consequences were slightly lighter across the majority of the

Muslim countries, especially the ones that are operating according to the Islamic

financial system. The Islamic-financial system which based on the elimination of

both interest rates (riba) and speculation (gharar & maysir), has been very stable

against the global financial crisis. Following the crisis, some Investors started to

search for other alternatives than conventional banks. As a result, many investors

have switched to Islamic banks, as they could structure profitable products, with a

lower risk. Furthermore, Investors started to orient their investments into ethical

products, which could be found only in Islamic banks. In 2009, The Vatican

announced officially in its newspaper, that banks should learn from the Islamic

banking procedures in order to retrieve customers’ confidence.

All the above reasons and more have elaborated to make Islamic banking and

finance a hot topic among researchers and experts. Despite the fact that the

principles of Islamic banking and finance were set in the 7th century (the

Muslims’ golden age), the phenomenon began to evolve in the past 30years. In

particular, in the 1970s , with the rise of the Islamic banks in the GCC area. The

sector started to grow rapidly with double digit rates. According to the European

central bank (2013, p. 19), Islamic banking has shown annual sustainable growing

Research Overview

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rate by 15-20percent over the past five years, the handled assets by the Islamic

banks have reached $1.3 trillion at the end of 2012.

Western banks were also attracted by this profitable business. Hence, several

banks started to launch “Islamic windows” in many Arab countries, by offering

Islamic financial products through its subsidiaries (mainly GCC region).

Moreover, some western countries started to realize the potential of its Muslim

minorities, and thus started to launch Islamic financial banks in their countries.

The United Kingdom, with a potential market of more than 2 million Muslims,

was one of the leaders in Islamic finance and banking business in Europe since

1980s. It was the first Western country to open the doors for Islamic banking

with the first established Islamic bank in 1982 (Wilson, 2007, p. 420). Currently,

the UK is the centre of Islamic finance in Europe, with $19 billion of reported

assets and various banks delivering Shariah-compliant products (UKTI, 2013).

Other European countries have also a large group of Muslims as the UK or maybe

more; however, Islamic banking did not penetrate its markets yet, such as

Germany. The success of the UK raised the question of whether Germany can be

also a potential market for Islamic financial products or not. Despite its large

Muslim population and its strong economy, no serious actions have been taken to

launch the Islamic business till now. Several Islamic banks showed a real interest

in launching a subsidiary in Germany, however, regulatory and legal issues are

still the major constraints facing the implementation of this business.

The Kuveyt Türk Participation Bank was the first bank to take a serious step in

the Islamic banking business in Germany. The new Islamic bank has opened its

first branch in Mannheim, in 2010, with a limited license issued by BaFin (the

Federal Financial Supervisory Authority). However, the bank did not obtain the

Full license yet, due to the different regulatory constraints. In this regard, many

questions have been raised, such as is Germany really a potential market for this

business? What are the opportunities & challenges? This paper will try to

investigate about these questions.

Research Overview

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1.2. Purpose

The purpose of this thesis is to examine the German market and to investigate

whether it is a potential market for Islamic banking or not. In this context, the

paper will scrutinize the financial behavior of the German Muslim population. In

addition, the anticipated key players in the domestic market will be outlined. The

dissertation will further highlight the main opportunities for the future growth of

the business, as well as the main challenges facing the business. In this regard, the

regulatory restrictions as well as the other implications facing the business will be

discussed. It is important to note that the paper will not discuss further any legal

issues.

1.3. Research Design & Methodology

The research relied mainly on two methods. First, secondary data available

through the conducted research papers as well as authorized publications and

online sources. Secondly, Interviews with the Islamic finance experts which are

located in Germany. Therefore, several experts and banks' representatives across

Germany have been contacted via email. Unfortunately, there was no answer from

almost all of them, except Dr. Johannes Engels2 from the federal financial

supervisory authority (BaFin). For these reasons, the majority of the data in this

thesis is mainly based on the working papers, market surveys and other online

researches.

2 Dr. Johannes Engels is a Senior Advisor at The Federal Financial Supervisory Authority (BaFin)

– Germany. He has studied General Economics in Aachen and Cologne; he finished in at

University of Cologne with Doctor Degree. He has been working for the Federal Financial

Supervisory Authority for twenty two years, in the international dept. for eight years. Since

October 2012 he has been the lecturer for Corporate Governance at University of Applied Sciences

in Mainz. He has written several publications in the field of Islamic finance.

Research Overview

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Research Overview Introduction & Overview

Islamic Modes of Finance

Corporate Governance In Islamic

Banks

Islamic Banking &

The German Market

Conclusion

1.4. Thesis Structure

The disposition of the Thesis chapters is illustrated in figure1 and followed by a

summary of the chapters’ content.

This paper is divided into six chapters. This first chapter, is an introductory

chapter, which outlines the research objective as well as the methodology and the

chapters’ contents.

The second chapter gives a brief overview of the history and the evolution of the

Islamic banking, as well as the Islamic legal system (Shariah and Fiqh). In this

regard, the main principles of the Islamic finance and banking will be discussed.

The chapter is geared to provide the reader with the basic knowledge of the

Islamic finance & banking principles for a better understanding of the following

sections and chapters.

The third chapter introduces the main financial instruments offered by Islamic

banks. In this context, the structure of the several products and services will be

explained with practical examples presented graphically for understanding their

concepts better. Moreover, the chapter discusses other Islamic financial

alternatives, such as the Islamic insurance (Takaful) and Islamic bonds (sukuk).

Compliance structure and governance of Islamic banks will be discussed in

chapter four. The first section will be about the Shariah supervisory board in the

Islamic banks and its central role in assessing and monitoring the Islamic banking

business. The second section will examine the International Islamic financial

infrastructure. In this respect, the most important Islamic international

organizations will be addressed.

In order to investigate whether the German market has potential for Islamic

banking or not, this matter will be analyzed in chapter five. This chapter

Figure 1 Thesis Structure

Research Overview

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scrutinizes the Muslim populations in Germany and its financial attitudes and

behaviors. In addition, the chapter will highlight the main key players in the

domestic market. Finally, the major regulatory and taxation issues facing the

implementations of this sector will be discussed.

In the last chapter, the research conclusion will be outlined.

Islamic Banking : An Introduction & Overview

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2. Islamic Banking: Introduction and Overview

Following the birth of Islam, almost 1400 years ago, new financial principles were

introduced by prophet Mohamed (PBUH), the prophet of Islam. This was mainly

based on the prohibition of riba (usury) and the reliance on the profit-sharing

concept (Lewis & Algaoud, 2001, p. 4), which modernly known as Islamic

finance. Approximately 40 years ago, the concept was absorbed by the modern

financial institutions, as they started to design products and services in

compliance with the Islamic law (Shariah). In consequence, a new banking

system has emerged, which is known as “Islamic Banking”.

The new banking system has expanded across both the Muslim and non Muslim

countries, currently there are more than 500 IFIs (Islamic Finance Institutions)

and the number is expeditiously increasing (Etzold, 2011). In spite of this wide

expansion, Many Muslims and non Muslims nowadays have a poor understanding

of this field concepts and practices (Lewis and Algaoud 2001, p. 1).

The following chapter will outline the Islamic banking history with its major

milestones. Furthermore, it will discuss the main sources of the Islamic law

(Shariah), as well as the main principles of that business.

2.1. History & milestones

The interest-free concept, which was introduced by prophet Mohamed, in the

seventh century, has declined over the years and was decimated after the World

War I, in particular, after the collapse of the Ottoman Empire. Consequently, the

interest –based concept dominated the new economic system and spread rapidly in

the western world. As a result of the World War I, Britain and France occupied

most of the Muslims countries (Abdul-Rahman, 2010, p. 191). Accordingly, the

British established the first commercial bank in the Muslim world in 1890s, in

Egypt. The main purpose was to manage the financial transaction regarding the

Suez canal construction. Nevertheless, the existence of the latter bank had faced a

wide rejection from the Muslim scholars at that time (IRTI &IFSB, 2007).


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Between 1990-1950s, the interest-based banking system spread rapidly in the

Arab regions as well as the Indian sub-continent. Hence, Islamic economists had

to put an effort to design alternatives in the scope of Islamic Shariah. The first

practical model was introduced by Dr. Ahmed Al Naggar in Egypt in the early

1960s. The young German-educated Egyptian established a small bank in

Zefta/Mit Ghamr, in order to finance the basic needs of the poor farmers. The

bank showed a great success over the agriculture industry until it was

nationalized by president Nasser3 under the name of “Nasser Social Bank”

(Abdul-Rahman, 2010, p. 192).

Another essential milestone was the Arab-Israeli war in, 1973; it pushed

tremendously the oil prices which created the first oil crisis. Subsequently,

massive cash flows entered the gulf area introducing a new class of dollars, the

petro-dollars. As a result, King Faisal of Saudi Arabia established the Islamic

Development Bank, IDB, which aimed to develop a new vision for the Islamic

banking system. Simultaneously, The establishment of the Islamic bank in Dubai

and the Kuwait financial house (KFH). Later in Egypt, the Faisal Islamic bank

was established by the King’s Faisal son, prince Mohamed Al Faisal. The bank

has grown rapidly in Egypt with many branches serving more than 700,000

customers. In addition, Sheikh Saleh Kamel established the Egyptian Saudi

Finance Bank (Bank Al Tamweel Al Misry Al Saudi) (Abdul-Rahman, 2010, p.

193). It is one of the major Islamic banks in Egypt with 22 branches.currently the

bank’s name has changed to “alBaraka Bank Egypt” (alBaraka, 2013).

In 1980s the scheme continued to spread in many countries with the existence of

new Islamic Banks and academic institutions. Pakistan , Iran, and Sudan

announced the intention to transform their financial system to be governed by

Shariah . Additionally, the establishment of the Islamic Research and Training

Institute (IRTI) in 1981. Consequently, the IMF started to publish many research

papers on the topic, as it became a rapidly grown business. During the 1990s, the

Islamic banking business became a hot topic in the western academic world.

Moreover, commercial events on the topic took place in several countries. Most

3 President of Egypt (1956-1970), a leader of the Egyptian free officers revolution of 1952.


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importantly, the establishment of The Accounting and Auditing Organization for

Islamic Financial Institutions (AAOIFI) (IRTI &IFSB, 2007).

The duration between 2000 and 2006 witnessed the real establishment of the

Islamic financial infrastructure which is considered as the backbone of the Islamic

Financial system. Specifically, the establishment of the Islamic Financial Services

Board (IFSB), the International Islamic Financial Market (IIFM), the General

Council for Islamic Banks and Financial Institutions (CIBAFI) and the Arbitration

and Reconciliation Centre for Islamic Financial Institutions (ARCIFI) (IRTI

&IFSB, 2007).

Recently, Islamic banking business has spread rapidly through the European

countries to serve the Muslim minorities. The Islamic Bank of Britain (IBB) is

one the main players in this business in Europe. It is worth pointing out that the

first customer in the Leicester branch of IBB travelled over 100 miles to open an

account , which reflects a high degree of service transparency (Ayub, 2007, p. 16).

2.2. Evolution of Islamic banking

The Islamic banking industry has shown substantial growth in the past decade. As

part of the Islamic finance industry, Islamic banking accounted for almost 80

percent of the Islamic financial assets with $1.3 trillion assets in 2012 (figure 2),

and with 15-20 percent annual growth for the past 5 years (ECB, 2013, p. 19).

Figure 2 Trend in Global Islamic Banking Assets (ECB, 2013, p. 20)


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The industry trend is expected to continue growing with a constant rate, which

made this industry the fastest growing segment of the entire global financial

system. The industry started to compete with the conventional banking industry.

In terms of profitability, Islamic banking average ROE in 2011 was 12 percent

compared to 15percent in conventional banking (Ernst & Young 2012). The

industry is mainly focused in the GCC region (i.e. Saudi Arabia, the United Arab

Emirates, Kuwait, and Qatar) as well as in South-East Asia ( i.e. Malaysia and

Indonesia) ( figure 3) (ECB, 2013, p. 19).

Figure 3 Geographical Breakdown of Total Global Islamic Financial Assets (ECB, 2013, p. 19)

2.3. Shariah & Fiqh

In the religion of Islam, Allah (the Arabic word for God) is the creator and the

owner of everything, it is He only who has the ultimate right to establish the right

path for the mankind. Therefore, Muslims believe that following Allah’s law is

essential, as it is established and ordained only by Him and not with a human

lawmaker (Kettell, 2010, p. 84).


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In fact, the term Shariah literally means ‘the way to the source of life’ (Algaoud

& Lewis, 2007, p. 38), ‘the way to a watering place’ (Kettell, 2010, p. 84), it can

be also translated as ‘the law’ (Abdul-Rahman, 2010, p. 63).

Shariah represents a set of duties which governs the whole Muslims life

including. It regulates the relationship between man and Allah (Fiqh Ibadah)

concerning worship duties and activities (prayers, fasting, pilgrimage, etc.). On

the other hand, it regulates the relationship among people in the society (Fiqh

muamlat) (Millar, 2008, p. 5), such as manners and morals, crime and commercial

transactions. In the latter case, in business transactions, Shariah acts as a

regulator between the seller and the buyer. In this context, business transactions

can be divided into four classes: first, sales (bay), the transfer of a property’s

ownership to another entity with a beneficial value. Second, hire (ijara), the

transfer of the usufruct of certain property to another entity with a beneficial

value. Third, gift (hiba), a gratis transfer of the property. Fourth, loan (ariyah), a

gratis transfer of the usufruct (the right to use) of the property. Based on this,

almost all financial transactions fall in the context of the latter cases, for instance,

deposits, partnerships, guarantee, agency, etc. (Algaoud & Lewis, 2007, p. 38).

2.3.1. The sources of Shariah

The scope of Shariah is relatively wider than any other legislative system; it is a

unique legislative system that governs the relationship between man to Allah and

man to man. In fact, Shariah has two main sources, primary and secondary

(Kettell, 2010, p. 86). The Quran and the Sunna are the primary sources , whereas

Ijma (consensus) and Qiyas (analogy) are the secondary sources, as illustrated

below. (Visser, 2009, pp. 10-12).

2.3.1.1. The Qur’an

The Qur’an is believed to be a revelation from Allah to his last prophet

Mohammed (PBUH) by the angel Gabriel in the city of Mecca. The Qur’an is

considered to be a verbal miracle to prophet Mohammad (PBUH) and an

evidence of his Prophecy. The literal meaning of the word Qur’an is ‘reading’ or


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‘recitation’; it was revealed in the Arabic language approxmaitely1400 years ago.

In fact, the Qur’an was revealed gradually based on certain situations over a

period of time. It contains 114 Suras (chapters) and 6235 ayat (verses) differed in

length (Kettell, 2010, pp. 87-88). It confirms the sequence of both prophets and

their revelations as stated in many verses of it (Abdul-Rahman, 2010, pp. 65-66).

In fact, approximately 500 verses of the Qur’an dealt with legal injunctions, these

cover marriage, rights and obligations, divorce, loans, punishment, inheritance,

etc. Therefore, it is the first primary source of Shariah (Kettell, 2010, p. 86).

2.3.1.2. The Sunnah

Sunnah is the second primary source of Shariah. It means a path, or an example, it

refers to the way of prophet’s Mohammad life as it is practiced in the light of the

Qur’an. Sunnah represents the prophet’s life on the basis of the sayings,

comments and actions approved or done by him (Abdul-Rahman, 2010, p. 66). In

fact, the Qur’an was written and preserved in the life of the prophet Mohammad.

The Sunnah on the contrary, was recorded directly after his death by his

companions. They started to record all the prophet’s sayings ( Ahadith, the plural

of Hadith ) and doings . In addition, Sunnah is very important to understand the

context of the Qur’anic verses, whereas the verses were revealed based on a

certain situations during the life of the prophet (Kettell, 2010, pp. 89-91).

2.3.1.3. Ijma (Consensus)

Apart of the confirmed primary sources of Shariah , the Qur’an and the Sunnah,

there are two secondary sources Ijma and Qiyas. The word Ijma derived from the

Arabic verb ajma’a, which means ‘to determine and to agree upon something’.

Thus, Ijma refers to a consensus on a certain opinion of the prophet’s early

companions and the followed Muslims jurists on a various Islamic matters

(Kettell, 2010, p. 92). Actually, Ijma applies just in cases where there is no

explicit or clear solution for a certain problem from the Qur’an or the Sunnah. The

process is only done by the Muslim jurists (fuquahaa ) and not by the individuals

(Abdul-Rahman, 2010, p. 68). Indeed , Ijma can just occur after the death of the


12 | P a g e

prophet and not in his lifetime, as he was the highest authority on Shariah. The

process began when several problems arose after his death, the companions

started to consult each other until they agree on one solution, the process passed

through the following generation and so on. Hence, once Ijma is settled, it became

an authority which cannot be rejected by anyone (Kettell, 2010, p. 93).

2.3.1.4. Qiyas (analogical reasoning)

Qiyas is the second secondary source of Shariah. It means literally ‘measuring’,

and can also refer to a comparison to asses equality or similarity between two

things (Kettell, 2010, p. 94). In the Islamic context, qiyas is an analogical

approach done by Jurists on an original case in order to extract the rules from it,

and practice these rules on a new case. Usually, this new case does not have a

clear conclusion from the Qur’an or the Sunnah, and there is no Ijma on it (Abdul-

Rahman, 2010, p. 68). For instance, the use of wine is considered to be strictly

condemned according to the Qur’an, similarly, the use of any other toxicants can

fall under the same prohibition as well (Visser, 2009, p. 12).

2.3.1.5. Ijtihad

Ijtihad is considered to be an important source when developing new Shariah-

compliant products. In fact, it took over an effective role in developing the Islamic

Banking and finance industry. Ayub ( 2007, p. 489) defined Ijtihad as :

[a]n endeavor of a qualified jurist to derive or formulate a rule of law to determine the

true ruling of the divine law in a matter on which the revelation is not explicit or certain,

on the basis of Nass or evidence found in the Holy Qur’an and the Sunnah.

Indeed, there are strong debates about ijtihad, which is mostly concerned about

who can perform ijtihad, as he should be a very qualified scholar (Millar, 2008, p.

5). Ayub ( 2007, p. 441) further argues that ijtihad is the main cause for the non

standardized products across the IFIs, due to the different Shariah interpretation.


13 | P a g e

2.4. The Prohibition of Riba

The prohibition of riba (usury) is one of the main principles of the Islamic

financial system. The term riba literally means “increase” or “addition” or

“surplus”(Visser 2009, p. 31). Generally, it refers to an addition cost imposed on

the borrower at the maturity date (Kettell 2010, p. 13). The Holly Qur’an and the

Sunnah strongly condemn riba in many places (Appendix 1.1 & 1.2). In fact, Riba

was also condemned in all of the revealed religions, such as Christianity and

Judaism. With regard to riba in Islam, there are no debates among Muslims about

the prohibition of riba, as almost all Muslims regard it as a great sin (Ayub, 2007,

p. 44). However, Muslim scholars have been arguing about its frame in the

modern life and particularly in business activities.

On that basis, Muslim scholars argued that the concept of riba is wide and can

take different forms other than interest rates. In this regard, Muslim scholars have

divided riba into two categories (Kettell 2010, p.13):

1- Riba al-nasia, where an increase imposed on the loan by the case of

deferment (conventional banking interest rate).

2- Riba al-fadl, where unequal exchange takes place between two

commodities (e.g. good quality dates for less quality dates).

It can be obviously concluded that the ban on riba is not limited just to money; it

is also over the exchange of goods (Visser 2009, p. 34). The conventional banking

system which is based on the credit lending falls in the first category (Riba al-

nasia). One might think that the Islamic rejection of interest neglects the time

value of money. However, the time value is widely recognized in the case of

credit sales as it is permitted in Islam. It was explicitly stated in Sura 2:275, trade

is permitted but riba is not (Visser, 2009, pp. 36-37). In other words, credit sales

and interest rates may have the same mechanism, but one is allowed, and the other

is forbidden. The reason behind the latter case, the money itself does not have

value (not a commodity) (Ayub, 2007, p. 52). Money has only one function,

which is “ medium of exchange”, unlike any commodity which has value and can

be traded. This will lead to further discussion about the reasons behind the


14 | P a g e

prohibition. The Qur’an and the Sunnah did not provide a clear justification about

its reasons. However, Muslim scholars have provided different reasons concerning

the condemnation.

The unfairness of the loan contract is one of the major reasons,where one party

(the borrower) takes over the risk of losing its money and effort in the case of

project failure. On the contrary, the other party (the creditor) will receive the

principal plus the interest at any case (Kettell 2010, p.16). Another reason, riba

increases the gap between rich and poor in the society by transferring wealth from

poor to rich people. In addition, it drives people in the society to be non

productive relying on their interest returns (Visser 2009, p. 38).

2.5. The Prohibition of Gharar and Maysir

There are other prohibitions governing the business activities side by side with

riba, such as gharar (uncertainty) and maysir (gambling) (Visser 2009, p. 45).

The latter type, maysir, is derived from the Arabic word usr (ease and

convenience), which refers to “mass wealth without effort” (Algaoud and Lewis

2007, p. 39 ). The prohibition of maysir is to be found in the Holy Quran in many

verses, for instance, ‘O you who believe! Khamr, Maysir, Ansab, and Azlam are a

filth of Shaytan’s handiwork. So avoid that in order that you may be

successful’(Holy Quran, 5:90). In this context, any form of gambling is forbidden

in Islam, as it is based on hazards and speculation. Moreover, it is against the

concept of fairness in Islamic law (Algaoud and Lewis 2007, p. 39 ). Therefore,

Islamic banks are not allowed to engage in any gambling games, lotteries,

disproportionate prizes as well as conventional insurance (Ayub, 2007, p. 76).

The other type is gharar, which literally means “risk” or “deception”( Visser

2009, p. 45). This ban implies that both commercial parties should have a fair deal

and to be aware of the real counter value of the business transaction. Professor

Mustafa Al-zarqaa defined the forbidden gharar as ‘the sale of probable items

whose existence or characteristics are not certain, the risky nature of which makes

transactions akin to gambling’ (Abl-rahman 2010, p.43).


15 | P a g e

In fact,the ban on gharar was not explicitly mentioned in the Holy Quran,

however, it is against the Quranic terms of fairness and contract information

disclosure (verses 6:159, 17:35, 83:1-6 ) (Abl-rahman 2010, p.43). The

condemnation is mainly relied on the Ahadith (the sayings - and doings - of the

Prophet) which condemn the sale of the “uncertain outcome”. For instance, ‘the

sale of the birds in the sky or the fish in the water’ and ‘ the sale of the unborn

calf in his mother’s womb’ (Visser 2009, p. 45). The latter cases dealt all with the

risk of uncertainty and/or the risk of deception. Avoiding risk in contracts is

indeed impossible, since the risk margin cannot be avoided. Therefore, Muslim

scholars separated between excessive gharar which violates the contract, and

minor gharar which cannot be avoided (El-Gamal 2006, p.58).

Professor Al-Darir identified significant reasons for a forbidden gharar (El-Gamal

2006, p.58). First, the risk of uncertainty must be extremely high, in other words,

cannot be anticipated. Second, it must affect a financial contract between two

parties (e.g. sales). Finally, if it affects the primary components of the sales

contract (e.g. the price or object of sale). In this regard, selling a pregnant cow

with a higher price is permitted, whereas selling unborn calf in his mother’s womb

is forbidden. In the latter case, a primary object of the sales contract does not exist

yet; therefor, it encounters a great risk . Typical gharar contracts examples in the

modern economy can apply for the book-out contracts. In the latter type, the

customer purchases and sells the asset without any physical ownership or

possession. This applies for commodities and stocks in foreign exchange markets,

which involves excessive speculative activities. The majority of Muslim scholars

rejected the concept of these contracts as well as the concept of unknown risk

( the case of conventional insurance) (Ayub, 2007, p. 144; Algaoud and Lewis

2007, p. 40 ).

2.6. Halal and Haram concept

As previously discussed, Shariah rules promote ethical manners, mainly in

business activities. Thus, all the financial products and investments must be in the

context of “ethical investment” (Algaoud & Lewis, 2007, p. 39). The commonly


16 | P a g e

used terms when describing the situation of transactions or activities, are halal for

permitted actions and haram for forbidden actions. Accordingly, both investors

and financial institutions are not allowed to deal or invest in any type of haram

business. For instance, ‘alcohol, tobacco, pork, pornography, gambling, illegal

drugs, and other harmful products’ (Samad, et al., 2005, p. 74). Moreover, the

main concern is to satisfy the factual needs of the Muslim society. In this regard,

Producing and marketing of the luxury goods over the essential goods and

services such as clothing, health and education is rejected from the Jurisprudence

point of view (Algaoud & Lewis, 2007, p. 39).

2.7. Zakat

According to the Islamic faith, Allah owns all wealth and property (Holy Quran,

31:26), private property is given by Allah’s trustee to people in order to achieve

integration and prosperity in the community (Abl-rahman 2010, p. 32). Justice and

equality in the society are major concerns in Islam, everyone should have equal

rights, irrespective of their positions, rich or poor (Algaoud & Lewis, 2007, p. 40).

Accordingly, Islam designed a new system called “Zakah” which allows a fair

transfer of wealth from the rich to the poor. Zakah literally means “purity”and

“cleanliness” (Visser 2009, p. 27), it is considered to be one of the five pillars of

Islam (Appendix 1.3), which guarantees a fair redistribution of wealth (Algaoud

and Lewis 2007, p. 40). It is an obligation for every adult Muslim to pay a

percentage of 2.5 per cent on any assets held for one year if it reached a specific

agreed amount of money ( nisab in the Arabic language) (Algaoud and Lewis

2007, p.40). Islamic banks are obligated as well for paying zakah in addition to

regular income taxes. In consequence, the proceeds from the bank and individuals

are to be transferred to special zakah funds established by each bank (Samad, et

al., 2005, p. 74).


17 | P a g e

3. Islamic Modes of Finance

Apparently, there is no difference in the concept of funding in both Islamic and

conventional banks, whereas, the main purpose is to generate profits. However,

Islamic financial systems are governed by Shariah rules which imposes main

restrictions on the financial products. Most significantly, the rejection of “making

money out of money” concept, as it is considered a medium of exchange, which

has no value in it (kettle 2010, p. 7). In addition, the rejection of the

predetermined “fixed return” concept (kettle 2010, p. 5).

Islamic economists have developed special financial techniques with regard to

Shariah. The techniques are divided into two main groups (kettle 2010, p. 24-25).

The first group is the“profit and loss share contracts”, where the bank invests with

another partner in a certain business and shares profit and losses (based on the

mode of finance). This type is used normally for equity finance.

The second group is the “deferred sale contracts” (also known as markup), this

technique is similar to the conventional debt-financing schemes. Whereas the

customer purchase a commodity from the bank with an agreed mark-up

percentage to be paid in periodical installments.

The following sections will briefly examine the two groups in practice with a

focus on the main Shaiah-compliant products (the most popular). It is worth

mentioning that some of the following products can be named differently in other

literature; however, there is no difference.

3.1. Profit -and -Loss Sharing Instruments

PLS instruments are simply based on equity-finance modes. In fact, they represent

the ideal forms of finance with regard to Shariah. In PLS contracts, the capital

provider and the borrower share not only profits but also losses with an exception

in some cases (Visser 2009, p. 53). The most common techniques under this

method are “Mudaraba” and “Musharaka”, as presented in the following sections.


18 | P a g e

3.1.1. Mudaraba

Mudaraba is a form of business agreement between two parties, the capital owner

and the entrepreneur. The capital owner (also called rabb al-mal ) provides the

needed capital, while the other party, the entrepreneur (mudarib) brings the

knowhow and the labor needed for the project. In fact, mudaraba is a form of

sleeping partnership, in other words, the capital provider does not have the right to

interfere in any of the management decisions. However, the financier has all the

rights to guarantee that his money is well managed and invested properly.

Islamic banks use this technique as a term of finance, where the bank acts as

“rabb al-mal” and the agent as “mudrib” (figure 4). Profits are shared based on a

pre agreed ratio, in contrast, losses are endured just by the capital provider (kettle

2010, pp. 36-37). In the latter case, the main cause is that according to Shariah

‘one cannot lose what he does not contribute’(Visser 2009, p. 54).

There are two types of mudaraba, “Al Mudarabah Al Muqayyadah” (restricted

mudarabah) and “Al Mudarabah Al Mutlaqah” (unrestricted mudaraba) (Usmani

2002, pp. 98-99). Under the restricted Mudaraba, the capital provider (rab al-mal)

has the right to choose a specific agent (mudarib) with a specific type of business.

In contrast, under the unrestricted mudaraba, the agent is free to launch any type

of business, however, there are several restrictions governing the rights of the

owner. For instance, engaging other mudarib in the business and/or mixing the

investment with others without permission from rab al-maal.


19 | P a g e

Figure 4 Mudaraba Model (iFIS, n.d.)

3.1.2. Musharaka

Musharaka is a form of financial partnership, where two parties or more agree on

launching a set of business, in order to generate profit. Unlike mudaraba, the

parties contribute either with equity or labor together, in other words, it is a

similar form of a joint venture where the parties have the same rights.

Accordingly, they share both profit sand losses based on the equity contribution

(Visser 2009, pp. 55-56).

Another type of musharaka is “Diminishing Musharaka” which was developed

recently. This mode of finance is used mainly in financing the various types of

fixed assets. Under this scheme, both financier and client are participating in the

ownership of certain asset with a predetermined equity percentage. The share of

the financier is split into a number of units, and the client will purchase unit after

unit periodically based on a former agreement. In this sequence, the share of the

financier will decrease, whereas the share of the client will increase until he

acquires all financier’s shares (became the ultimate owner of the asset) (Usmani,

2002, p. 108).

For further understanding of the mechanism, an example of diminishing

musharaka model from Ayub ( 2007, p. 341) will be explained. Under the latter

Islamic Bank

(Rab-al-mal)

Kmk;lk;

Customer

(Mudarib)

Kmk;lk;

Know-How

Kmk;lk;

Business Activity

Outcome

Negative

Positive

e.g. 40%

from profits

e.g. 60%

from profits


20 | P a g e

model, the Islamic bank will finance a house for a client; both parties agree on the

equity percentage, as 20 percent for the client and 80 percent for the bank (figure

5). The finance duration is 10 years with 7 percent as a return rate (benchmarked).

The bank will lease his share (80 percent) to the client for a return of 7 percent, in

addition, the bank’s share is divided into 120 equal units (equal to the number of

months). The client will have to pay monthly payments divided into two parts,

firstly the rental payment, secondly, an amount of one share. Under this process,

the rental payment will decrease each month as the bank’s share is decreasing. At

the end of the ten years, the financier’s shares will be fully purchased by the

client, and in consequence, the client will become the owner of the house.

Even though it seems that interest-based and PLS systems are looking alike, there

is a significant difference between their mechanisms. Under the latter system,

there is no fixed yield, or maybe there is no yield based on the profit, whereas,

under the former there is a fixed yield translated into a form of a predetermined

interest rate. Moreover, PLS systems represent a physical share of profits and

losses, which indicates a strong concern from the both sides in terms of project

profitability. In contrast, the interest-based system is just concerned about the

default of the loan, in other words, the periodical interest payment regardless of

the profit or loss of the other party. For this and other reasons, Scholars asserted

that PLS contracts aim to develop and sustain the financial market, as it

Customer

Islamic Bank

Asset

20% of the payment

80% of the payment

Payments to increase

ownership

Figure 5 Diminishing Musharaka Model (Own illustration)


21 | P a g e

encourages banks to focus more on long term projects instead of the short term

lending techniques. In addition, banks will be obliged to monitor the ongoing

projects with its clients as it became a real partnership and not equity finance.

Indeed, this will increase the overall cost; however, it will develop the

investments in the financial markets (Mirakhor & Zaidi, 2007, pp. 49-50).

3.2. Deferred Sales Contracts

The second financing technique is the “Deferred sales contracts”, this type is

accepted by the Islamic jurists and widely used by the different Islamic banks.

These contracts are based mainly on selling an object with a markup percentage

(as a compensation to the seller ), which will be paid back in the future in a form

of periodical installments. The main contracts for this type are “Murabaha”,

“Salam”, “Istisna’a” and “Ijara”( Kettell 2010, p. 24). These instruments will be

successively discussed in the following sections.

3.2.1. Murabaha

Murabaha is derived from the Arabic word ‘ribh’, meaning profit. It is a

commonly used instrument by the Islamic financial institutions. In Islamic banks,

murabaha is a trade contract between the bank and the client, where the bank

purchases a certain good from a third party and resell it to the client with a mark-

up margin. murabaha contracts are commonly used for the financing of

‘machinery, consumer durables, trade supplies and means of transport’ (Visser

2009, p.57-58). In fact, there are two types of murabaha. Under the first type, the

bank purchases the assets/goods and makes them available for sale. Similarly, the

second type, also called “ Murabaha to purchase order”, the bank purchases the

asset on behalf of the customer based on an agreed promise. The most important

concept in this formula is that the bank commits to reveal the original cost of the

purchased goods to the client. In addition, both parties must agree on the mark-up

margin (figure 6) (Kettell 2010, p. 26-27). In fact, Banks commonly use the

London interbank offered rate (LIBOR) as an indicator for the mark-up

percentage (Visser 2009, p. 57).


22 | P a g e

Figure 6 Murabaha Model (iFIS, n.d.)

In fact, It can be seen that the respective model operates similarly as the interest-

based model, however, several reasons contradict this argument. First, the mark-

up margin is for a service done by the bank (intermediary service), which stands

for a certain effort. Second, in contrast with the interest based model, the mark-up

is a pre-agreed ratio which not linked to a certain time factor. Therefore, it will not

increase if the customer fails to pay in the case of deferred payment. Finally, all

risks which might occur before the possession by the customer will be borne by

the bank, as he is the owner of the goods (Mirakhor & Zaidi, 2007, p. 52).

3.2.2. Forward Sales: Salam and Istisna‘a

According to Shariah, there are basic terms govern any sales contract and prevent

any occurrence of gharar. First, The commodity must exist at the time of the sale.

Second, the commodity must be owned by the seller at the time of the sale.

Finally, after the execution of the contract, there must be a physical transfer of the

commodity’s ownership from the seller to the buyer as well as the associated

risks. However, Some contracts do not fulfil all the latter criteria; nevertheless,

they are still accepted by the Islamic Shariah (Ayub, 2007, p. 241). The following

will discuss two examples of these contracts, which are Salam and Istisna‘a

contracts (Ayub, 2007, p. 241).

Islamic Bank

Ownership transfer to the

bank

Payment of the purchase

price

ownership transfer to the

customer


price + profit margin Customer

Kmk;lk;

Seller

Kmk;lk;


23 | P a g e

3.2.2.1. Bai’salam

Bai’salam or salam (also known as forward sale contract) is a trade contract,

whereby the seller agrees to deliver a certain commodity in the future with an

immediate payment of the buyer. As a result , both parties can benefit from this

transaction. The seller covers any liquidity shortage, whereas the buyer gets a

cheaper price of the goods, as the price is always cheaper than the market price

(Usmani, 2002, p. 126). In fact, Salam has been permitted by the holy Prophet

(PBUH) himself under certain terms to prevent any excessive gharar. The main

terms are:a specific measure and weigh; a known quality; agreed price with a

specific delivery time (Ayub, 2007, p. 242). Bai’salam can be used as a way to

finance agricultural products and fungible manufactured goods, as well as for

small traders as a form of working capital finance (Visser, 2009, p. 61). On the

contrary, salam finance is not permitted in the case of gold, silver, and currency

trading (Ayub, 2007, p. 244).

In practice, the Islamic bank acts as the ultimate buyer (the financier) and the

client as the seller. In this sequence, the Islamic bank can practice salam finance

in two ways. Firstly, the banks can get a promise from a third party to purchase

the commodity with a predetermined price. In this respect, the bank pays a full

payment for the first seller, later on when the bank receives the commodity, he

will deliver it to the third party with a higher price (figure 7). Alternatively, The

bank can enter a parallel salam contract. Parallel salam is two independent

contracts which are not linked to each other, whereby, the bank acts as a buyer in

the first one and a seller in the other one. In this case, the bank delivers the

received goods from the first contract to the buyer of the second contract with a

higher price (Usmani, 2002, pp. 128-129). Indeed, guarantees are important in the

case of Salam. Therefore, the bank may ask for a specific security or mortgage

which can be delivered to the buyer in the case of default (Kettell 2010, p. 76).


24 | P a g e

Figure 7 Bai'salam Model (iFIS, n.d.)

Ayub (2007, p. 243) argues that Salam contracts are an effective way to stabilize

the price in the market as well as protecting both buyer and seller from any

speculative transaction. The argument is based on the fact that Shariah prohibits

any reselling of Salam contracts before maturity; thus, there will not be any room

for speculative actions.

3.2.2.2. Istisna’a

Istisna’a is a trade contract whereby the buyer requires the seller to manufacture a

specific item for him. In this context, both parties agree on the price and the

delivery date. In principle, the item will be manufactured from the seller’s raw

material and the payment method can be either lump amount or instalments.

Istisna’a is similar to salam contract, as the product does not exist at the time of

the contract. However, the payment can be deferred based on the contract

agreement, unlike salam (Kettell 2010, p.66). Istisna’a contracts can be used for

different modes of finance, for example, house finance, constructing buildings and

plants as well as BOT arrangements (Usmani, 2002, p. 134).

In theory, both Manufacture (seller) and the buyer can go together in a direct

istisna’a contract. However, in practice, the Islamic bank takes over the mediator

Delivery of the goods on schedule

Advanced payment of the

purchase price


price upon delivery Delivery of the

goods on schedule

Customer

Kmk;lk;

Seller

Kmk;lk;

Islamic Bank

Kmk;lk;


25 | P a g e

role by entering in back-to-back istisna’a contract, or Parallel contract. In essence,

istisna’a parallel contract does not substantially differs from the salam parallel

contract. The bank will first make an agreement with the customer where the

customer provides all the details about the desired constructed item and the

payment method, either lump or installments. Upon approval, the bank

simultaneously enters a second agreement with the supplier, or the manufacture.

The desired specification from the customer will be handed to the manufacture by

the agreed date, and the bank will pay the manufacture directly all the cost. Upon

completion of the constructed item, the bank will deliver it to the customer as

agreed, then the customer will pay the agreed price based on the agreed method

(figure 8). The bank will profit from the differences between the two contract

prices (Kettell, 2010, pp. 67-68).

Figure 8 Istisna'a Model (iFIS, n.d.)

3.3. Ijarah - Leasing

Ijarah is one the major financial schemes in the Islamic financial system. The

term is permitted by the majority of Islamic scholars as it was viewed in both the

Quran and the Sunnah. Literally, ijarah is derived from the Arabic word “al-‘Ajr”

which means compensation (Ayub, 2007, p. 279). Ijarah or leasing is a contract

Customer

Kmk;lk;

Manufacturer

Delivery of the

goods on schedule


price upon delivery

Advanced payment of the

purchase price

Delivery of the goods on schedule

Islamic Bank

Kmk;lk;


26 | P a g e

between two parties, the lessor and the lessee, where the lessor transfers the

usufruct (the right to use) of a particular asset to the lessee for an agreed

periodical rent amount (Kettell, 2010, p. 54).

The latter is the first type of ijarah, where the transaction is based just on the

transfer of the usufructs of a certain asset. This type is similar to the operating

lease in the modern finance, however, ijarah is based on shariah principles (the

prohibition of Riba and Gharar). Under this ijarah type, The bank (lessor) will

purchase the required item for the client (lessee) directly from the supplier and

lease it back to the client after adding a profit margin. All risks associated with the

ownership of the asset shall be borne by the bank during the time of the contract,.

Upon the end of the lease contract, the bank will retrieve the asset again (Kettell,

2010, p. 55; Ayub, 2007, p. 289). In order to determine the profit margin, The

Islamic bank can use LIBOR interest rate as a benchmark (Usmani, 2002, pp.

140,145).

There is another type of ijarah similar to the conventional finance lease. This type

is called “Ijarah Wa Iqtina”(leasing and promise to gift) (Usmani, 2002, p. 151).

Under this type, the agreement between the lessor and the lessee is similar to the

normal ijarah, however, the lessor is obliged to transfer the ownership of the asset

at the end of the lease period (figure 9). In practice, the bank amortizes the cost of

the asset, in addition to a profit margin over a certain period (based on an

agreement between the two parties), in a way that he receives the principle and

transfer the asset to the lessee at the end of the lease period (Ayub, 2007, pp.

289,291-292).

Figure 9 Ijarah - Leasing Model (iFIS, n.d.)

Both ijarah and Ijarah –Wa- Iqtina are widely practiced by the Islamic banks;

several assets can be leased under this mode of finance, for example, aircrafts

Ownership transfer to the

bank


price

Lease payments

Ownership transfer under

“Ijarah Wa Iqtina”

Customer

Kmk;lk;

Seller

Kmk;lk

;

Islamic Bank

Kmk;lk;


27 | P a g e

building, cars and machinery. It is worth pointing out that the first Islamic lease in

the modern history was between the AL Rajhi Banking and investment

corporation (ARBIC) and the Bubai-based Emirates Airline, where the former

leased the latter an A310-300 Airbus with an amount of $US 60 (Kettell, 2010, p.

61) .

3.4. Qard Hasan

Qard hasan is a financial instrument without any intention to generate profit, it

means literally “good loan”, and also called a zero-return instrument. Normally,

qard hasan is offered as financial assistance for solidarity intentions and social

activities. For example, poverty projects and health care projects which mostly run

through governments in the Muslim countries. In fact, qard hasan’s providers are

seeking the reward in the hereafter; therefore, there is no intention to make profit

out of their deposits. Normally, Full repayment of the loan at the face value is

guaranteed by the government (Khan, 2007, p. 294). Islamic financial institutions

can also provide qard hasan to individuals; this will be also for social activities

and training programs for students who cannot afford studying expenses. For

instance, the Islamic development bank offers several academic scholarship

programs for students; the repayment of the loan would be in easy installments

and after graduation and gainful employment (IDB, 2013).

3.5. Retail Banking: Funding Accounts

Retail banking business is one of the major funding techniques for the

conventional banks. Recently, Islamic banks adapted the phenomena to offer

Islamic retail banking products in accordance to Shairah. The following sections

will briefly explain some Islamic retail banking products such as the current,

saving and investment accounts.


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3.5.1. Current Accounts

The Islamic current accounts are way similar to the conventional accounts. The

main benefit from these accounts, is to build an effective relationship with the

customer in order to gain his trust and to profit from his/her investments in the

future. These types of accounts are held by the trustee of the bank without any

interest charges at any level. However, the Islamic bank can charge an

administration fee to cover its cost, as well as a penalty fee in case of overdraft.

Furthermore, the deposits amount support and strength the bank’s balance sheet in

order to meet the regulatory requirements (Millar, 2008, p. 32).

The Islamic current accounts are justified by the Islamic Shariah based on the

concept of al-wadiah (trust or safekeeping). Wadia can be defined as ‘setting up

an agency contract for the purpose of protecting one’s wealth’ (Lewis & Algaoud,

2001, p. 47). In other words, the bank does not have the right to invest these

accounts at any type of investment.

3.5.2. Saving & Investment Accounts

Both conventional and Islamic saving and investment accounts are equal in their

nature, but are way different in their mechanism. Under the Islamic saving

accounts, the bank guarantees a full repayment of the deposits’ nominal value

with a small return (based on the applied method ). Whereas under the investment

accounts, the full repayment of the deposits’ nominal value is not guaranteed, and

the return is higher. The return on the both former types of deposits is not fixed;

otherwise it would endure a sort of riba transaction such as in the conventional

system.

The Islamic saving accounts can operate under several methods. The first method

is according to al-wadiah principle (please refer to 3.5.1.), under this scheme the

bank invests the deposits in a Shariah complaint business with a pre-permission

from the depositors. In return, the bank guarantees a full return of the value with a

shared profit. The second method is to deal with the saving deposits as a qard


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hasan ( please refer to 3.4.) from the depositors. The third method is to deal with

the saving deposits as investment deposits, in other words, the depositors will

permit the bank to invest their deposits in an investment pool, and they will agree

to share profits and losses on the basis of mudaraba (Lewis & Algaoud, 2001, p.

47).

The Islamic Investment accounts are subjected to al mudaraba al mutlaqa

principles (please refer to 3.1.1.), as its main purpose is to earn profit. The

mechanism is similar to the third method of the saving accounts (illustrated

above), however, other requirements will apply such as higher fixed minimum

amount, longer duration of deposits and most importantly the possibility of losing

some funds in case of loss occurrence (Lewis & Algaoud, 2001, p. 47).

3.6. Sukuk

The Islamic capital market has grown expeditiously after the 1990s; it started in

the GCC region and spread across Europe and Asia. Several products have been

introduced as an alternative to the conventional financial instruments; indeed, the

new Islamic products had attracted the worldwide investors.

The most famous type of these Islamic instruments is the Islamic bonds, or sukuk.

The new sukuk market has been the fastest growing market after Islamic banking.

Sukuk refers to ‘certificates of equal value representing undivided share in

ownership of tangible assets of particular projects or specific investment activity,

usufruct and services’ (Ayub, 2007, p. 494). At the end of 2012, the value of the

outstanding global sukuk recorded $229.4 billion. The latter number has increased

due to the new issuances by $131.2 billion (figure10 a). The GCC countries, as

well as Indonesia have been the major players in the growth of the sukuk primary

market (figure10 b). In fact, it is expected that the demand for sukuk will grow by

significant numbers in the next decades (ECB, 2013, pp. 20-22).

Sukuk were developed by Shariah scholars as a substitute for the conventional

bonds. In essence, Shariah does not reject the idea of bond investment itself;

however, the rejection is related to its mechanism, as it relies mainly on interest


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rates. Equally important, the investor does not care about the company that owns

this bond, as he cares more about the profit. In consequence, the investor might

invest in a company which produces any products related to haram activities

(please refer to 2.6.).

Figure 10 Sukuk issuance (ECB, 2013, p. 21)

In contrast, the mechanism of the Islamic sukuk is based on ‘the exchange of an

approved asset (for example, the underlying assets could include buildings, hire

cars, oil and gas pipelines and other infrastructure components) for a specified

financial consideration’ (Mirakhor & Zaidi, 2007, p. 53). In this regard, Islamic

sukuk are based on the several Islamic financial contracts such as mudaraba,

murabaha, ijara, etc.. The following section will briefly explain the mechanism of

the most famous and important type of sukuk, ijara sukuk .

3.6.1. Ijarah Sukuk

This type of sukuk has gained wide acceptance in the market among both scholars

and investors. Several governments and corporate entities have used this type as a

strategy to raise funds, as well as for long-term project finance. Its mechanism is

based on the ijarah finance contract (please refer to 3.3.), in which the structure is

based on three parties (figure 11), the originator (beneficiary), the special purpose


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vehicle (SPV) with an independent legal structure, and the investors (sukuk

holders) (Ali, 2005, p. 3).

Figure 11 Structure of a generic ijarah sukuk (Ali, 2005, p. 5)

For better understanding of the mechanism, an example from Mirakhor & Zaidi (

2007, p. 54) will be illustrated. A corporation wants to raise funds with $50

million for the purchase of a piece of land. The corporation (originator) starts the

process through the SPV by issuing sukuk with small denominations (e.g. $10000

each) totalling $50 million. In this respect, the corporation transfers the ownership

of the land to the SPV, which will then securitize the asset by issuing certificates

to the investors. Consequently, the investors became the real owners of the

acquired asset. The funds generated from the sales proceeds will then be

transferred to the SPV and further to the corporation. The asset now is leased back

to the originator, in other words, the investors became the lessor, whereas the

corporation became the lessee. Afterwards, The rent proceeds from the originator

is divided between the investors through the SPV.

Apart from GCC sukuk market, sukuk had penetrated the western capital markets

as well. Germany was the first European country to introduce Ijarah sukuk to the


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Western market. Saxony-anhalt issued the first ijarah sukuk in 2004 by total

amount of €100 million. The respective sukuk were designed to target investors

from gulf area as well as from Europe. Finally, 60 percent of the issue was

acquired by investors from Bahrain and the UAE, the remaining 40 percent were

acquired by investors in France and Germany. The sukuk amount was fully

redeemed in 2009 (ECB, 2013, p. 26).

3.7. Takaful

The need for insurance coverage by individuals and institutions arose over time. It

became the only way to mitigate the several types of risks associated with their

wealth and lives. Despite the fact that, the conventional type of insurance is

rejected from the Shariah point of view, the IFIs had to find other alternatives in

order to fulfil this needy gab. The new Islamic insurance (Takaful) system has

been developed over several decades in accordance with Shariah principles.

Currently, large number of financial institutions are providing the service with

wide acceptance from customers in the Muslim communities (Ayub, 2007, p.

417).The following will briefly discuss the new scheme and its mechanism;

furthermore, it will highlight the main differences between takaful and

conventional insurance system.

Takaful industry which started in Sudan in 1979 has evolved over decades to

spread across the Arab and Muslim countries. The rapid growth and success in

the Muslim countries made it an attractive investment for the western world as

well. Several non Muslim countries started to launch takaful in their countries,

such as Germany (Hannover-Re entered both Takaful & re-Takaful insurance in

2007 & 2010 respectively), Britain (the establishment of Salam insurance in

2008) and Switzerland (Swiss-Re in 2009) (E&Y, 2012).

According to Halim (2012), The main takaful business is to be found in the GCC

region and southeast Asia. Saudi Arabia considered to be the largest takaful

market with approximately US$4.3 billion and 51.8 percent of the whole industry.

Malaysia contributes with US$1.4 billion while UAE contributes with US$818


33 | P a g e

million. In addition , Sudan is the main player in Africa with contributions of

US$363 million.

The Ernst & Young takaful report 2012 shows a relatively lower increase with 19

percent in 2011 in comparison with 2010 in the takaful business. Nevertheless, the

industry curve continues to grow with a double digit as in figure 12.

Figure 12 The global gross Takaful contributions (E&Y, 2012)

The new insurance Scheme differs substantially from the conventional insurance

in terms of concept and mechanism. Khan & Coopers (2008, p. 23) define

conventional insurance as ‘an agreement whereby an insurer undertakes (in return

for the agreed premium) to pay a policyholder a sum of money (or its equivalent)

on the occurrence of a specified event’. Even though that Islamic Shariah does not

reject the idea of risk mitigation, the rejection of the conventional insurance has

been debated between Muslim scholars for other reasons (Hussain & Pasha,

2011).

The rejection is based on the idea that conventional insurance involves all

prohibited transactions; this includes riba, maysir and gharar ( please refer 2.3. &

2.4.) (Visser, 2009, pp. 102-104). With regard to the involvement of riba, it is

directly involved as a result of any excess between the amount of paid premiums

and the sum insured, moreover, it is involved indirectly as the insurer normally

invest the money in an interest-based business. Concerning gharar and maysir,


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the uncertainty about the subject matter involves a high degree of risk, for

instance, in life insurance whereby the policyholder receives a sum of money in

case of death, this is seen by scholars as a sort of gambling as well as gharar

(Ayub, 2007, p. 419).

On the contrary, takaful system is based on the basis of Islamic principles which

promote solidarity and mutual cooperation (Ayub, 2007, p. 421). Under the

takaful system, policy holders can share both profits and losses. This idea is based

on the concept of donation rather than investments, ‘whereby policy holders

agree to pool their contributions and share the liability of each policyholder. So if

one policyholder has to be paid a claim, this is paid out of the combined pool’

(Khan & Coopers, 2008, p. 129).Thus, the new system has eliminated any sort of

gharar and/or gambling as it became risk sharing system under a voluntary

contribution (Visser, 2009, p. 105) .

Several models of takaful have evolved over time, the commonly used models by

the IFIs are : Wakalah4(practiced mainly in the Middle east), mudaraba (practiced

mainly in Asia), waqf (a kind of endowment) or wakalah with waqf (Ayub, 2007,

p. 423) .

For further understanding of the mechanism, an example of mudaraba model

from Akhter (2010, pp. 3-4) will be explained. The takaful mudaraba model is

based on the principles of mudaraba contract (please refer to 3.1.1.), where

participants act as rab-almal who provides capital and the takaful operator acts as

mudarib who provides expertise and know-how.

The takaful fund under this model is divided into two accounts (figure13), the first

account called “Participants Account” (PA) where the majority of the participants’

contributions is deposited. The second account called “Participants Special

Account” (PSA) where small portion is deposited and used to pay claims and

underwriting costs (risk management account). The contributions from the

participants are divided between the two accounts with a higher percentage to PA

4 Wakala: the term means agency and refers to the absolute power of attorney where a

representative is appointed to undertake trasactions on another person’s behalf (Kettell, 2010, p. 232)


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over PSA (as in figure13, 80 percent and 20 percent respectively). Both accounts

are invested in Shariah based instrument(s), in case of surplus after deducting any

claims, both of the participants and operator share the profit based on a pre-agreed

percentage. On the other hand, in case of loss which exceed the amount in the

PSA, the loss is borne just by the participants and not by the operator. In this

context, shareholders can provide a form of qard hasan (please refer to section

3.4.), in order to compensate the loss.

In fact, several scholars have criticized the mechanism of the several takaful

models. For instance, In the case of mudaraba model, neither the participant’s nor

the operator has the right to profit from a donated contributions, as it is a form of

tabaruu ( voluntary donations). While according to Shariah, the nature of tabaruu

is not complying with profit purposes (Akhter, 2010, p. 15). However, the

different issues from some scholars do not affect the business, as it is approved

from the wide variety of scholars from the different fiqh schools. In addition, the

business of each takaful organization is monitored by an independent SSB.

Figure 13 Takaful Mudarbah Model (Akhter, 2010, p. 4)

Corporate Governance In Islamic Banks

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4. Corporate Governance In Islamic Banks

The need for governance arose over time as a result of the separation between

management and ownership. Nienhaus (2007, p.128 ) stated that ‘[t]he core issue

of governance of a corporation is how to ensure that managers will use a

company’s resources in the interest of the shareholders’. In the banking sector,

governance differs than other sectors. The root cause is that information

asymmetries between insiders and outsiders are relatively hard due to the nature

of the business (risky business).

In conventional banks, depositors (financiers) share part of the risk with

shareholders, especially in the case of insolvency, which can be hedged by typical

insurance schemes (Nienhaus, 2007, p. 128). On the contrary, in Islamic banks,

depositors bear higher risks comparing to conventional banks. The reason is in the

mechanism of the Islamic deposits, which differ substantially from conventional

deposits. According to Islamic banking principles, deposits (saving and

investment accounts) are subjected to mudaraba rules (please refer to 3.5.), in

other words, the principal amount is not guaranteed for full repayment . Therefore,

depositors and shareholder are likely to share an equal risk (Nienhaus, 2007, p.

129).

For these reasons, the corporate governance in Islamic system is different from the

conventional system. In Islamic Banks, Stakeholders’ confidence is a major aspect

for the success of the business; thus, the bank must gain trust of its stakeholders

and customers. In particular, they must be assured that all products are compliant

to Shariah rulings (Grais & Pellegrini, 2006). Hence, IFIs tend to pursue an

independent ‘legitimate control body’ in order to supervise the business from a

religious point of view, which is known as the Shariah Supervisory Board (SSB)

(Rammal, 2006).

The following sections will discuss the governance and the compliance structure

of the Islamic banks. The first section will discuss the SSB and its main duties,

moreover, it will highlight the main constraints facing the SSBs in the western


37 | P a g e

world. The second section will highlight the main Islamic international

organization, additionally; it will discuss its major role in setting standards and

regulations for the IFIs.

4.1. The Shariah Supervisory Board (SSB)

The Shariah Supervisory Board (SSB) (also known as Shariah Committee) is a

form of religious supervision in the IFIs. The SSB members are a group of

authentic Islamic Scholars who are highly credible in the society. The board

undertakes an important role in the process of examining the financial products in

order to certify that the issued products are conducted according to shariah

principles (Kettell, 2010, p. 102). Almost all the Islamic financial institutions have

or deal with a Shariah committee, moreover, the admission of some international

Islamic organizations strictly requires an active SSB (Rammal, 2006).

Rammal (2006) pointed out in his research regarding the different SSBs that

some institutions neither have a Shariah adviser nor a full board. However, they

rely on fatwas (religious opinions) issued by the leading Islamic organizations like

“Al Azhar” university in Egypt. On the other hand, other institutions (e.g. Meezan

Bank in Pakistan) rely on other type of SSB whose members are located in

different boards around the world.

4.1.1. Functions and Responsibilities

The SSB has several responsibilities regarding monitoring and assessing the

business in the light of Shariah. According to Abdul-Rahman (2010, pp. 77-78),

the main functions and responsibilities of an active SSB are:

Study and analyze the previous fatawa concerning the current business

transactions, in addition, issuing new fatawa based on banking and

financial questions.

Supervision of the banking day-today operation to insure that Shariah

principles are fully implemented.


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Assist in the product manufacturing process in accordance with developing

new products with the banking professionals to increase its

competitiveness.

Assist in designing the product manuals which contain detailed procedures

for the operation process.

Review and monitor any agreements or contracts related to any conducted

business inside or outside the bank to guarantee that they are complying

with Shariah.

Participate in the bank’s training programs. In this context, employees

learn the main aspects of the Islamic finance principles and the Islamic

ethics of business transactions (Fiqh Muamlat).

In principle, if the SSB has any doubt regarding a specific product or

transaction(s), which might not be fully bound by Shariah, the board will try to

find other alternative in order to execute the transaction; otherwise it will not

processed.

In case of any deception from the financial institution, the board will take a

serious action towards the underlying transaction. In this regard, any profit

generated from the underlying transaction will be transferred to the charity

account, in addition, financial penalty will take place for non-compliance as well

as adverse publicity (Rammal, 2006).

Equally important, at he end of the financial year, the SSB submits an annual

report to the bank’s directors. The report should summarize the board’s opinion

over the bank’s business transactions as well as the financial products (Abdul-

Rahman, 2010, p. 78).

4.1.2. The Issue of Fatwa

A fatwa (the plural is “fatawa”) is an Islamic religious opinion, which has to be

issued by a recognized religious authority, or alternatively by a Muslim scholar

whose knowledge is based on wisdom and honesty (Kettell, 2010, p. 205).


39 | P a g e

Issuing fatawa is one of the primary roles of the SSB, once a fatwa is issued; it is

considered binding and became an authentic guarantee for a Shariah compliant

service. However, the process of issuing any fatwa is a bit complicated which

endures significant challenges. The reason is that a fatwa is a juristic opinion

based on a particular Shariah school, and due to the existence of different Shariah

schools , some conflicts might take place.

As a result, different debates and disagreements sometimes takes place when

developing Shariah compliant products due to the different views in each Shariah

school .This lead in some cases to Inconsistency of fatawa (Belder & Sapte,

2008, pp. 186-187). Nevertheless, the CIBAFI (General Council for Islamic

Banks & Financial Institutions) sampled about 6000 SSB’s fatawa across different

banks, and found that 90% of them were consistent (Grais & Pellegrini, 2006).

4.1.3. Characteristics of The Board Members

As one of the main components of the Islams banking structure, SSB members

are chosen based on specific criteria. The AAOIF’s Governance standard No. (1)

pointed out that the board must contain at least three members, and should have a

high expertise members in economics, and/or law, and/or accounting, etc.. Most

importantly, the board must not include any influential person from the institution

administration or the shareholders (Al-Qattan, 2008).

The IFSB (2009, p. 5) has issued guidelines to strengthen the governance structure

of the Islamic financial institutions. In particular, it includes a specific criteria

concerning the selection of the SSB members in order to ensure a high level of

expertise. The main criteria are summarized in the qualification (competence) and

independence of the board members.


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4.1.3.1. Qualification

Any SSB member who is responsible for issuing a fatwa is considered to be a

mufti5. According to Al-Qattan (2008), such an important role as mutfi requires a

high level of qualification on both educational and expertise levels. In particular,

he must be a Muslim, adult, pious and knowledgeable person with high capability

of Ijtihad (please refer to 2.3.1.5.). In addition, he must be an intelligent character,

who can interact with different people and deal with cases of cheating and

deceiving. Furthermore, he must be cooperative as he should consult with the

other members . Equally important, he must be aware of the societal conditions in

general and the country condition in particular, for a better understanding of the

several fatwa conditions.

The IFSB (2009, p. 13) pointed out that the Islamic financial institutions must

provide the SSB members with special training programs mainly in the business

and financial transactions. In consequence, the member will be aware of any case

from the technical aspect as well as the religious aspect. These factors will

contribute to a continuous professional development of the board members (Al-

Qattan, 2008).

4.1.3.2. Independence

According to the AAOIF’s Governance Standard No. 1, ‘Sharia’a Supervisory

Board is an independent body of special jurists in fiqh almua’malat,and can issue

fatwas and rulings which shall be binding on the Islamic financial institution’

(Nienhaus, 2007, p. 136).

However, the board independence can be affected by its dual rule, as it acts as an

auditor and an employee at the same time. In other words, the dual relationship

might lead to a possible conflict of interest. The conflict can be represented in a

way that the board will not take any strict opinion against a profitable transaction

5 A mufti is one who reports the rule of Allah on His behalf, or he is the one who is capable of

knowing the Sharia’a rulings for events with their evidence and who has memorized most fiqh issues.


41 | P a g e

(haram transaction ) in order to maintain the profitability curve of the financial

institution .

Nevertheless, such a risk in practice can be mitigated by the ethical standards of

the SBB members. In fact, the SBB members are mostly scholars with high

reputation, therefore, such any conflict action would inflict the scholar’s

reputation as well as the financial institution.

Equivalently, any management intervention in the SSB’s compliance work will

negatively affect the stakeholders’ confidence. For these reasons, the dual relation

of the SSB is likely not to affect the board’s independence as well as the quality of

the competence job (Grais & Pellegrini, 2006).

4.1.4. Shariah Supervisory Boards & Western Regulators

There are serious challenges facing the implementation of the SSBs across the

western region. Abdul-Rahman (2010, pp. 117-118) stated three main issues

facing the implementation of the SSBs in the western countries.

1- In the majority of the western countries, there is a strong separation

between church and state across the different sectors. Hence, it is quite

sensitive to implement any religious laws at any financial institution, as it

might lead to religious discrimination for customers from other religions.

2- The fact that there will be two supervisory boards, where one can be

superior over the other, may lead to ultimate conflict. In consequence, it

will negatively impact the bank’s safety and performance.

3- The majority of the scholars do not have professional expertise in the

banking operation, however, Islamic banks can offer an intensive training

for this issue (please refer to 4.1.3.1.). Other issues, that some scholars are

located in different countries, which is nearly difficult to meet the local

challenges.


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4.2. International Islamic Financial Infrastructure

Generally, International Financial infrastructure is essential for an effective legal

and regulatory framework. Hence, it was mandatory for Islamic banks to have a

set of supporting institutions in order to facilitate monetary and financial policy-

making at a national level. Furthermore, to coordinate and develop a set of

guidelines and best practices to achieve the financial integration. In the following

section, the main Islamic international organisations will be successively

discussed.

4.2.1. AAOIFI

The Accounting and Auditing Organization for Islamic Financial Institutions

(AAOIFI) is an Islamic-nonprofit organization that aims to develop standards in

accounting, auditing, governance, ethics and Shariah for the IFIs. AAOFI plays a

major role in enhancing the industry’s human resource by providing professional

qualification programs. The organization was founded in 1990 and was officially

registered in 1991 in the state of Bahrain. The present membership is 200

members from 45 countries including different participants from the Islamic

finance industry regionally and worldwide (AAOIFI, 2010).

4.2.2. IFSB

The Islamic Financial Service Board (IFSB) is an international Islamic

organization started its operations in 2003, and based in Kuala Lumpur, Malaysia.

The main objective is to promote the Islamic financial system stability through

issuing guiding standards to the different sectors of the financial system including

banking, capital markets and insurance sectors. The process is mainly conducted

through researches in addition to organizing seminars and conferences with the

main market players. Moreover, IFSB participates in developing instruments for

efficient operational and risk management. IFSB’s members are gradually


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increasing; the present membership is 187 members including supervisory

authorities, inter-governmental organizations and market players (IFSB, 2010).

4.2.3. IDB

The Islamic Development Bank (IDB) is an international financial institution and

part of the IDB group, it was founded in 1973 and started officially in 1975. The

bank plays an important role in the economical and social development of its

member countries and the Muslim communities, according to Shariah principles.

In this regard, the bank provides financial assistance in the form of loans and

equity capital participation for the productive projects in the repective countries.

The present membership is 56 countries, the Bank’s head office is in Jeddah in the

Kingdom of Saudi Arabia, furthermore, the bank has four regional offices (IDB,

2013). IDB group involves 4 main organizations: The Islamic Development Bank

IDB, the Islamic Corporation for the Insurance of Investment and Export Credit

(ICIEC), the Islamic Corporation for the Development of the Private Sector (ICD)

and the Islamic Research and Training Institute (IRTI) (Iqbal, 2007, p. 361).

4.2.4. LMC

The Liquidity Management Center B.S.C was established in the Kingdom of

Bahrain in 2002 (Kettell, 2010, p. 181). The main purpose is to provide liquidity

assistance to the Islamic financial institutions. In other words, LMC plays an

effective key role in the interbank market by facilitating the surplus funds of the

Islamic financial institutions into short and medium term financial instruments.

Furthermore, it provides Islamic advisory services as well as sourcing assets from

both private and public sectors and transform them to innovative investment

instruments (LMC, 2009).

Islamic Banking & The German Market

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5. Islamic Banking & The German Market

With approximately 38 million Muslim citizens across Europe (Including Russia

& Ex. Soviet Union), Muslims constitute the largest minority in Europe. In fact,

the European Muslims Origins go back to several centuries, as they used to live

in the Baltic and Balkan countries, as well as Cyprus and Sicily. In Germany, the

Muslim population trend increased between the 1960s and 1990s as a result of the

foreigner workers' immigration (Farhoush & Schmidt, 2011, p. 236). Currently,

Germany contains the largest Muslim population in Europe (approximately 4

million), Moreover, it is the fifth largest economy in the world. For these reasons,

Germany seems to be a very potential market for Islamic banking and finance.

This chapter will examine the potential aspects of the Islamic banking in Germany

as well as the major obstacles facing the business. In this regard, the Muslim

population in Germany will be scrutinized as well as its financial behaviour and

demands. It will further highlight the main key players in the domestic market.

5.1. Muslims in Germany

As Christianity (mainly Protestant and Roman catholic confessions) is the major

religion in Germany, Islam represents the second major religion, and the largest

minority in the country. In fact, the first Muslims incomers were in the 18th

century as a result of military and economic agreement between Germany and the

Ottoman empire (Yorulmaz, n.d.). Two centuries after, particularly from 1960s-

1990s, immigrant waves of “guest workers” started to enter Germany from several

Muslim countries. The immigrants from Turkey, Morocco, Tunisia and

Yugoslavia, were expected to stay for a limited time, but they could settle down

their conditions to stay in Germany and not to go back to their countries.

In fact, there was and still a lack of research concerning the Muslim population in

Germany. After 11 September 2001, the German government started to take

critical steps in order to analyse the structure of its Muslim population. The


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creation of the DIK (Deutsche Islam konferenz), the German conference of Islam,

in September 2001, was one of the positive results (Farhoush & Schmidt, 2011, p.

242). The DIK was established in order to create a dialogue between the state and

the Muslim citizens, moreover, to eliminate any conflicts and to promote the

common ideas and thoughts (DIK, 2010).

The first accurate representative study over the Muslims in Germany was

conducted on behalf of the DIK and presented to the Federal office for migration

and refugees (DIK, 2007). In the context of the latter study, approximately 6000

persons were interviewed from 49 Islamic countries. Indeed, the research was not

limited to find the accurate Muslim population number in Germany, the scope was

larger to discover education, behaviours and social integration of the Muslim

citizens.

The estimated numbers of the Muslim population before the study was ranged

from 3.1 to 3.4 million citizens, whereas the study finding puts the number

between 3.8 and 4.3 in a country with 82 Million citizens. The percentage of

Muslims in Germany is between 4.6 and 5.2 percent of the total population. In

fact, people of Turkish origin constitute approximately 63 percent of the total

Muslim population in Germany (figure 14). The second largest group is people

from Southeast Europe by approximately 14 percent, followed by Muslims from

South Asia, North Africa and the middle east, which account for 5-8 percent of

the Muslim population. People of Iranian origin and other parts of Africa account

only for approximately 2 percent, and the minority are Muslims from central

Asia/CIS with less than 1 percent. In this context, it is worth mentioning that there

are approximately 1.7 to 2.0 million German Muslims.


46 | P a g e

Figure 14 Muslims According to Region of Origin (DIK, 2007)

With regard to the religious affiliation (figure 15), the majority of Muslims from

all origins tend to follow the Sunni faith with approximately 74 percent from all

origins, except Iranians who are from the Shiite faith. In addition, there are nearly

13 percent following the Alevi faith and 7 per cent following the Shiite faith. The

minority of the Muslims group in Germany are following other faiths like

Ahmadi, Sulfis/Mystics, Ibadis and other Muslim faiths.

Figure 15 Muslims According to Denomination (DIK, 2007)

63.2

13.6

1.4 1.2

4.6 1.7

1.5

0.4

Muslim Population in Germany (in percent)

Turkey

Southeast Europe

Middle East

North Africa

South/Southeast Asia

Iran

Other Parts of Africa

Central Asia/CIS

74.1

7.1

12.7

1.7 0.1

0.3 4.0

Muslims According to Denomination (in percent)

Sunni

Shiite

Alevi

Ahmadi

Sufis/Mystics

Ibadis

Other


47 | P a g e

The study further examined the Muslims age structure according to the country of

origin, which can provide a clear vision of the different target groups when

adopting any Islamic financial products in the future. Figure16 shows a quite large

number of children and young adults across the different country of origins. In

addition, a relatively high percentage of the group between 25 to 64 years old who

are still in the working age. On the contrary, people who are 65 years old and

older account for a small percentage ranges between 2 to 4 per cent.

Figure 16 Age Structure of Muslims According to Countries of Origin (DIK, 2007)

Indeed, it is essential to analyze the different group religiousness. Based on the

study, it can be concluded that religion takes over an important role in the life of

the Muslim in Germany. However, it cannot apply equally across the respective

groups, for instance, a substantial percentage from origins like Iran and central

Asia/CIS identify themselves as not particularly devoted or not devoted at all to

religion. Nevertheless, the percentage of people who are devoted to religion is

relatively high, 36 percent regard themselves as “very strongly religious”, whereas

50 percent are “quite religious”. With reference to the religious activities, one

third of the Muslims tend to pray, almost 50% are observing fasting rules and 70

percent are celebrating religious festivals and holidays.

24.8

28.8

26.1

31.7

28.0

18.9

6.4

23.0

31.0

16.9

10.6

16.6

17.1

19.5

14.7

23.4

17.5

13.4

54.8

58.7

55.4

48.0

49.9

63.2

70.2

55.3

55.0

3.5

1.8

1.7

3.2

2.6

3.2

0.0

4.2

0.6

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Total

Other parts of Africa

North Africa

Middle East

South/Southeast Asia

Iran

Central Asia/CIS

Turkey

Southeast Europe

0 to 15 years old 16 to 24 years old 25 to 64 years old 65 years old and older

Age Structure of Muslims According to Countries of Origin (In percent)


48 | P a g e

5.2. Financial Behavior of the Muslim population in

Germany

Muslims in Germany as the largest Muslim population in Europe has attracted

many researchers to analyze their financial attitudes and behaviour. However, the

majority of the researchers had just focused on Muslims of Turkish origin, as they

stand for the largest group of the Muslim community (please refer to section 5.1.).

Nevertheless, the rest groups which stands for approximately 37 percent of the

Muslim population will be neglected. The following section will analyse the

financial behaviour of the Muslim population in Germany who are mainly from

Turkish origins.

5.2.1. Current Trends

Figures and numbers about Muslims with Turkish background indicate a potential

target group. According to Chahboune & el-Mogaddedi (2008), Muslims of

Turkish origin in Germany accounts for 720,000 households with an average of

3,8 persons. Whereas, the average in the German households is 1.8 persons. In

this context, the Turkish average net household income is estimated by €1917,

while the average for the German household net income is €2596. Furthermore,

Turks tend to save as double as Germans with 18 percent saving rate in

comparison with 10 percent for Germans. The saving capacity of the Turks

accounts for €2.2 billion with €25 billion as an estimated total Muslim wealth

(Nienhaus, 2012).

Evers & Jung (Hayen, et al., 2005) conducted a study over the Turkish community

in Germany, in order to investigate their financial behaviours and demands. In this

regard, the research classified the Turkish community into 4 main generations and

highlighted the preference of each generation. The first generation who came to

Germany between 1960-1973 as “guest workers”, the rest generations are their

children and grandchildren. In fact, the first two generations are likely to preserve

their culture and traditional mentality, on the contrary, the third and the fourth

absorbed more the German culture equal to their own culture or maybe more.


49 | P a g e

Representatives from each generation were interviewed in the course of the

respective research, in order to understand their investment preferences. The

results indicated that one of the main reasons for saving and investing, is for

mutual and solidarity issues (mainly for the first generation). The study further

showed that the majority Turks are risk-averse, who prefer to invest in secure

investments. This reflected on their investment preferences, which were mainly

directed to real estate investments in Germany and Turkey, as well as investments

in gold and jewellery. Moreover, a deep interest in long term fixed rate

investments. On the other hand, unwillingness for mutual funds and securities

investments. In essence, several researches supported the previous analysis, as real

estate investment trends recorded an increase from 1.8 percent in 1980 to 7.6

percent in 2001 (Gassner, 2004). Furthermore, Turks deposits in the German

banks are between EUR15 and 25 billion (Farhoush & Schmidt, 2011, p. 239).

Hayen, et al.( 2005) finding further showed a poor knowledge regarding the

various financial products. In fact, language barriers can be the main cause for this

problem, as approximately 43 percent of the study sample stated that they would

prefer to be consulted in their language. Similarly, Gleisner, et al. (2010) advised

in their study over 1000 immigrants in Germany with a Turkish background, that

banking products and services should be offered in the immigrants’ native

language.

Gleisner, et al. (2010) further studied the immigrants’ bank of choice, as a result,

host nation's banks (the German banks) tend to be the first choice for the Turkish

immigrants over home nation's banks (Turkish banks operate in Germany) and

third nation's banks (international banks operate in Germany e.g. Citibank) . The

results showed that approximately 76 percent of the respondents had at least one

account in a German bank, whereas 20 percent deals with a subsidiary of a

Turkish Bank. The last group who deals with a third nation's bank account for

almost 4 percent (figure 17).


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Figure 17:Bank preferences for Muslims in Germany with Turkish Background (according to Gleisner, et al., 2010)

5.2.2. Market potential for Shariah-compliant products in

Germany

Despite the fact that, there is neither a full operated Islamic bank in Germany nor

typical Islamic retail banking products or services, the different sectors across

Germany have designed special products to attract the country Muslim

community (mainly Turks). Different stages have been taken; different marketing

campaigns took place across Germany held by Turkish representatives offering

materials in the Turkish language. With regard to the telecommunication industry,

one of the big companies, E Plus has launched a special mobile service between

Turkey and Germany. In the financial service industry, Deutsche bank has offered

special branches called “Bankamiz”. The main purpose is to consult Turkish

customers in their language as well as offering free money transfer service to

Turkey. Other banks such as HypoVereinsbank (HVB) has served customers in

Turkey with the cooperation of the YapiKredi bank. Furthermore, Allianz and

20%

76%

4%

Turkish immigrants' Bank preferences

Home nation bank Host nation bank

Third nation bank

45%

19%

10%

9%

8% 1%

0%

1%

0%

7%

Home Nation Bank

(German Banks)

Spakasse/Volksbank Deutsche Bank

Dresdner Bank Commerzbank

Postbank Comdirect Bank

BMW Bank Hypovereinsbank

DAB Bank Other Banks

Bank Preferences for Muslims in Germany

with Turkish Background


51 | P a g e

Helvetia have been offering services in the Turkish languages (Farhoush &

Schmidt, 2011, p. 240).

Based on the above information, as well as the presented trends and figures in

section 5.2.1. & 5.2.2, it can be assumed that the German Market appears to be

potential for Shariah-compliant products. However, a relatively low number of

researchers did not support this assumption. The following will highlight the

several researchers' findings regarding the potentiality of the German market with

respect to the Islamic banking business.

The survey results from Farhoush & Schmidt (2011) has supported the

assumption. The study was conducted among 373 Muslim participants from

Germany, Turkey, Morocco, and Iran. With regard to the religiousness, the results

showed that approximately 70 percent of the participants regarded themselves as

“religious practising Muslims”. In consequence, when asking about the banking

attitudes (whether following Islamic Shariah or not), more than 50 percent have a

deep trust in banks which tend to follow Shariah principles (figure 18).

Furthermore, more than 70 percent of the participants confirmed that following

Shariah rules (regarding the prohibition of riba and gharar ) is very important. In

this respect, It is worth mentioning, that the respective participants are willing to

receive lower returns on their investments, in order to be compliant with Shariah

(figure 19).

`

Figure 18 Attitude on banks in Germany (according to Farhoush & Schmidt 2011 (p. 251))

44.2%

30.8%

17.2%

23.6%

13.0%

20.0%

7.6%

7.6%

5.4%

5.9%

12.6%

12.1%

0% 20% 40% 60% 80% 100% 1 2 3 4 5 6

Answer Scales (1= Agree … 6=Disagree)

I trust in banks and finincial

institutions more, that follow

Islamic principles, than banks and

financial institutions, that do NOT

follow the principles.

For me, it is important that my

bank in Germany adheres rules

and principles of Islam.

Attitude on banks in Germany


52 | P a g e

Figure 19 Relevance of Shariah Compliance and Adherence of Islamic principles (according to Farhoush & Schmidt 2011 (p. 255))

The study further investigated the anticipated demand, in case of a future

existence of Shariah-compliant products in Germany. The analysis showed a

potential demand for the several types of investments. For instance, demand for

saving accounts will increase from 46 percent to 75 percent, in case of following

Shariah principles. Strong effect will hit the Stock investments from 25 percent to

50 percent. Likewise, investments in mutual funds will increase from 25 percent

to 52 percent, as well as for other investments. In short, the finding of this study

suggests that there is a potential demand for Shariah-compliant products in

Germany and that the Muslim community is an attractive target group.

On the contrary, The conducted survey results by Evers & Jung (Hayen, et al.,

2005) rejected the above assumption. Despite the fact that approximately two-

thirds of the participants defined themselves as “very religious” or “quite

religious”, the majority of them saw that it is not important to hold Islamic

investments (figure 20). In addition, less than 1 percent of the participants

reported that they currently hold an Islamic investment. Similarly, less than 1

percent plan to invest in such a service in the future. In fact, the negative

experience of the so-called “ Islamic holdings” in the 1990s, can be the cause of

the previous result. These holdings (e.g kombassan and Yimpas) attracted a quite

big number of the Turkish community in Germany estimated between 200,000 to

53.6%

54.4%

56.8%

17.2%

17.4%

15.8%

9.8%

11.5%

8.3%

2.5%

3.0%

3.0%

3.2%

4.0%

3.8%

13.7%

9.7%

12.3%

0% 20% 40% 60% 80% 100%

1 2 3 4 5 6

It is very important to me, to obey

prohibition of interest.

It is very important to me, to obey

prohibition of speculation.

It is very important to me, to follow

rules and principles of Sharia’a

regarding investments.

Answer Scales (1= Agree ... 6=Disagree)

Relevance of Shariah compliance and adherence of Islamic


53 | P a g e

300,000 with investments exceeded €5 billion. At the beginning , the business was

quite successful, but it last with a huge loss for both of German and Turkish

investors.

Figure 20 Importance of Islamic Investments by Religiousness (according to Hayen, et al., 2005)

On the other hand, Experts such as Zaid el-Mogaddedi (2007) stated that ‘the

experience of so-called Islamic holding 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’. Mr. el-mogaddedi further argues that this

experience has demonstrated the financial power of the Turkish community in

Germany. Furthermore, it has indicated a strong willingness to invest in such an

Islamic products, if structured and marketed correctly. Mr. Nienhaus (2012) also

reported that all numbers and figures about Muslims in Germany indicates a

potential market for Islamic Banking; however, the unsolved problems of legal,

regulatory, taxation and accounting issues are the main problem (please refer to

section 5.3.2 ).

To sum up, all figures and numbers about the Muslim population in Germany as

well as their financial attitudes and demands indicates a potential market for

Islamic banking. There might be a doubt from some researches about the expected

demand; however, the issue cannot be determined before structuring the right

products which can be marketed efficiently.

10.2%

1.0%

5.4%

9.6%

29.1%

12.5%

1.0%

1.6%

16.2%

25.5%

14.4%

1.9%

18.4%

16.3%

12.7%

56.7%

91.3%

64.9%

53.1%

27.3%

6.2%

4.8%

9.7%

4.8%

5.4%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Total

Not religious

Rather not religious

Rather religious

Highly religious

Very important Rather important Rather not important Not important No comment

Importance of Islamic Investments by Religiousness


54 | P a g e

5.3. Regulatory Framework of The Financial Entities in

Germany

5.3.1. Banking Supervision in Germany

The strong integration of the financial markets with the gradual evolution of the

financial products across the different sectors in Germany has eliminated the

typical variances between banking, financial services and insurance business. For

instance, insurance companies started to offer banking products; likewise,

financial institutions started to develop new products in accordance with insurance

companies. Equally important, the electronic business evaluation made the client

cares more about the product regardless of its source, whether a bank or insurance

company (Engels, 2010, p. 175). For these reasons, creating a single regulator

that supervises the different financial businesses including banking, financial

service institutions and insurance companies, was a mandatory action.

The new entity, the Federal Financial Supervisory Authority (Bundesanstalt für

Finanzdienstleistungsaufsicht – BaFin) was established in 2002, in order to take

over the roles of the three former supervisory agencies, the Federal Banking

Supervisory Office (Bundesaufsichtsamt für das Kreditwesen – BAKred), the

Federal Securities Supervisory Office (Bundesaufsichtsamt für den

Wertpapierhandel – BAWe) and the Federal Insurance Supervisory Office

(Bundesaufsichtsamt für das Versicherungswesen – BAV).

BaFin aims to ensure market stability and to increase both investors and

consumers trust in the financial system. Currently, 1.854 banks, 681 financial

services institutions, 592 insurance companies, 30 pensions funds, 6069 domestic

investment funds and nearly 78 asset management companies fall under the

supervision of BaFin (BaFin, 2013).

With regard to the banking supervision, both BaFin and the Bundesbank are

collaborating together under the financial stability Act (Finanzstabilitätsgesetz –

FinStabG). Since January2013, the Bundesbank has taken over the role of


55 | P a g e

“macroprudential supervision” in order to identify the dangerous issues and to

maintain financial stability. On the other hand, BaFin took over the role of

“microprudential supervision”.

According to the Banking Act (Kreditwesengesetz – KWG), section 7 (1), The

Bundesbank assesses and analyses the financial documentation (annual reports&

financial statements) submitted by the financial institutions, in order to evaluate

the capital adequacy and risk management procedures. Based on the Bundes

Bank evaluation, BaFin decides whether the financial institution took over the

appropriate risk measures, and if its risks are covered with sufficient liquidity and

capital resources.Finally, the final assessment on all supervisory measures shall

rest with BaFin (BaFin, 2013).

5.3.2. Licensing of theIslamic Financial Entities in Germany

As previously discussed, Germany with its largest Muslim population as well as

its strong economy, assumed to be an attractive market for Islamic Banking

business. According to Engels (2010, p. 174), During the past15 years, some

parties had opened preliminary talks with the BAKred/BaFin in order to set up an

Islamic bank in Germany. The respective parties were both residence Muslim

groups and Islamic financial institutions operating in the Muslim countries, who

intend to open a subsidiary in Germany.

Currently, there is no Islamic bank that operates in Germany, with an exception to

the Kuveyt Türk bank, which currently operating with a limited license (still

waiting for the full license) ( please refer to 5.4.3 ). In fact, major obstacles are

facing the implementation of the business till now; most of the concerns are legal

and regulatory issues. The following will highlight the main regulatory concerns

regarding the implementation of the Islamic banking business in Germany.


56 | P a g e

5.3.2.1. Regulatory Concerns

According to the German Banking Act (Kreditwesengesetz – KWG), in particular

section 39, the use of the term ‘Bank’ is just for a credit institution holding a

license in conformity with section 32. Section 1 further defines the main

transactions which shall be conducted by the credit institution, nine types of

banking transactions were listed as follows:

1- Deposit business,

2- Lending business,

3- Discount business,

4- Principal broking services,

5- Safe custody business,

6- Guarantee business,

7- Giro business,

8- Underwriting business,

9- E-money business.

Based on the latter criteria, some had argued that the Islamic banking business is

not engaged in all of the above transactions. However, such an argument is

relatively weak, as the law did not explicitly states whether the bank must fulfil all

the above transaction, or must not perform any other type of transactions.

Moreover, from commentaries and legal practices, performing at least one or

some of the above transactions is enough for qualifying the entity as a bank

(Engels, 2010, p. 181).

The second major concern relies on the concept of “ investor protection”. In fact,

no legal definition was given to the term ‘deposits’, deposits were explained by

the Banking Act section1 as the receipt of funds from others regardless of the

actual repayment of interest. In this respect, the current accounts in the Islamic

banks conform to this definition. However, the investment accounts which are


57 | P a g e

subjected to the profit and loss concept can be different, especially in cases of

loss. As a result, the principle amount will not be fully repaid, and thus, an

essential deposit’s feature will be missing.

Dr. Engels, who was interviewed in the course of this research (Appendix 2), has

stated that the latter issue of deposits is the main constrain from the regulatory

point of view. The reason is that according to the EU regulation, each deposit up

to 100,000 euros must be fully protected; otherwise it will be hard to be accepted

by the German regulators. However, Islamic banks can still perform deposits

business, as not all of its deposits are subjected to mudaraba principles (not

guaranteed for full repayment) (please refer to 3.5.1. & 3.5.2.) (Engels, 2010, p.

182).

Dr. Engels further argues that the role of the SSB is very important for Islamic

banks. However, in some Islamic banks, the SSB can be also included with the

board directors of the bank, and it can intervene in the banks’ decisions. The

latter concept is rejected in Europe as well as in Germany, as only CEOs are

responsible for heading the bank, and any supervisory board can only act as a

consultant.

Another issue stands against the Islamic business in Germany, is the German

respective European accounting, reporting, auditing and monitoring techniques.

As the matter of fact that the particular techniques were designed for the

conventional financial institutions such as the conventional banks, which cannot

be applied to the Islamic Banks. Therefore, there should be a serious amendments

in the whole accounting and reporting system, which indeed, hard step to be

taken by the European authorities (Engels, 2010, pp. 180-181).

When asking Dr. Engels about the solution of these problems, he mentioned that

these challenges can be overcome in the future, but it needs time and efforts. Dr.

Engels further mentioned that Islamic banks must offer some compromises in

order to ease the process as in the case of the SSB.


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5.3.2.2. Taxation Issues

The German tax regulation is also a major challenge facing the Islamic banking

business in Germany. In fact, Based on the current taxation system, any Shariah -

compliant product will be exposed to different types of taxes. In addition, the

possibility for any cost efficiencies will be very hard in comparison with

conventional banks (Klein, 2012). The following will focus on one of the main

taxation problems, “the double taxation treatment”.

The double taxation problem is mainly facing Islamic banks across the western

countries, particularly, in mortgage finance under murabaha mode of finance.

Taking the example of mortgage finance, in the conventional banking system, the

bank takes over the role of “external creditor”, where the bank does not acquire

the underlying asset at any stage until the final delivery to the customer. In

consequence, the underlying process will be taxed just one time (stamp duty tax).

On the contrary, Under murabaha finance, in the Islamic banking system, the

bank takes over the role of the intermediary between the buyer and the seller. In

this respect, two steps will take place. Firstly, the acquisition of the underlying

asset from the seller by the bank, Secondly, reselling the asset to the customer (the

buyer) with a profit mark-up. In consequence, the latter transaction will be taxed

twice (stamp duty tax) at the two steps, which will impose higher costs on Islamic

banks (Klein, 2012).

Several western countries have tried to solve this problem, in order to attract

Islamic banks. One concrete example is the United Kingdom. The UK has taken

major steps in terms of tax regulations, in order to ensure that Islamic finance

investors have similar tax treatment as conventional investors. For instance, in the

case of double taxation issue under the murabaha finance, the legislator

considered the latter finance scheme as “alternative finance arrangement”. In this

regard, the bank will be subjected to the stamp duty land tax (SDLT) only once at

the acquisition step, whereas, in the second step the mark-up will be regarded as

deemed interest (Butt, 2012; PWC 2008).


59 | P a g e

On the contrary, in the case of Germany, tax regulation is more complicated and

would be very hard to accept any changes or amendments. Dr. Engels in the

course of this research clarified the latter statement, as the taxation treatment

(mortgage tax) is changing from one state to another (e.g. 2.5% in Hessen region,

whereas, 5% in Rheinland pfalz region). Hence, this difference can impose higher

cost when acquiring expensive assets in different regions. Nevertheless, Ernst &

Young has proposed such an intelligent idea which can solve the double taxation

issue. Ernst & Young advised that Islamic banks should take over the role of

“silent partnership” in mortgage finance. In this respect, the client will be

registered in the first stage as the owner, whereas the bank is documented in the

next chapter as a silent partner (has all rights to use the underlying asset).

Afterwards, at the repayment of the debt, the bank can transfer the juridical title to

the client. Under this method, the Islamic bank can offer halal mortgage based on

murabaha finance.

5.4. Feasible key players in the German market

The Islamic banking business has attracted many German banks over the past

decade. Several German banks started to launch the so called “ Islamic window”

across the Muslims countries (mainly GCC region). In fact, they have been very

active and successful in this type of business. Thus, In case of Islamic banking

implementation, these banks can be major players in the market.

The following will highlight the main German banks which operate with an

Islamic window across the Muslims countries.

5.4.1. Deutsche Bank AG

Deutsche Bank AG is one of the leading banks in Germany and Europe, the bank

was founded in 1870 with its headquarter now in Frankfurt. According to the

Bank’s figures in 2012, the bank has achieved a net profit of approximately 291

million euros wit A+ rating by Fitch and Standard & Poor’s ( Deusche bank,

2013). Over a decade, the bank has been a major player in the Islamic finance


60 | P a g e

industry, with sources in different countries mainly in the middle east region as

well as in London and Kula Lumpur . In fact, the bank was active in developing

innovative Islamic financial products across the different asset classes, liabilities

and derivatives. Therefore, it was honoured many times for its outstanding

performance with several rewards. For instance, “Best Islamic Trustee/Custodian

2011,2012”, “IPO Deal of the year 2012” as well as “Best Fund Administrator -

Mutual Funds” and “Best Fund Administrator – Shariah Compliant Funds” in

2013 (Deutsche Bank, 2013).

Deutsche Bank owns the DWS, the largest mutual fund in Germany, which ranked

among the top 10 in the world. The DWS company with €283 bn assets,

considered to be the arm of the Deutsche bank in terms of asset management

(Deutsche Asset & Wealth Management 2013). Since 2007, DWS investments

have expanded its business in Dubai and Bahrain, to offer a special fund range in

compliance with Shariah. The special fund was named as “DWS Noor Islamic

Funds” and had various investments in China, Japan and Asia Pacific’s emerging

economies. (Deutsche Bank 2006).

In short, Deutsche bank has been a major player in Islamic finance in the GCC

area, as well as in other regions. The bank expertise in Islamic finance will

elaborate to make him a strong player in the German market in case of the

business existence in the future.

5.4.2. Commerzbank

Commerzbank is one of the leading banks in Germany with approximately 1200

branches across the country. The bank has started to establish a regional footprint

in the Islamic finance business since more than one decade. In 1999, Commerz

international capital management (CICM), the owned subsidiary by the

Commerzbank has launched a new equity fund under the rules of Shariah.

“AlSukoor European Equity Fund” was launched with 100 percent focus on the

European equities, in order to attract investors from the middle east. In fact, it was

only for institutional investors from the middle east area, however, since 2000 it

became accessed by private clients in Germany. Commerezbank searched a


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partner for a better sales record,and due to the strong presence in the middle east,

the bank had already many contacts with several banks. Finally, the Al - Tawfeek

group was selected , a subsidiary of the “Dalla Albraka group”. Indeed, it was a

perfect choice as an AL-Tawfeek group managed nine funds from this type before

(Geyer, 2002, p. 263).

Alsukoor equity fund was monitored by SSB consists of five scholars. The board

was strict and working according to Shariah rules without any exceptions. Several

incidents occurred where the board refused to invest in some types of business, for

instance; the board rejected an approval by the fund manager to invest in

Lufthansa airlines as their business is engaged with serving alcoholic drinks

(Geyer, 2002, p. 264). Unfortunately, in 2005, the fund had to be closed with just

4 million Euro assets. In fact, the failure of the fund was due to several reasons.

Firstly, the fund was targeted to GCC region where real estate investment was the

most attracting type and not equity investments. Secondly, it was not well targeted

to the German investors. Finally, the negative consequences on the stock markets

after the September 11th attacks, was a strong hit to the fund (Chahboune & El-

Mogaddedi, 2008).

Commerzbank continued in the Islamic finance business across the GCC region.

Indeed, the bank has been concerned about the sukuk markets, in 2011

Commerzbankbank undertook the role of the joint lead manager for the Kuveyt

Türk Bank’s sukuk issuance. The $350 million 5year ijarah sukuk were issued to

attract investors across the Middle East, Asia and Europe. Commerzbank

presented the issue through its international network , Indeed, the issue was quite

successful and was rated at “BBB” by Fitch rating (Commerzbank, 2012).

Commerzbank can be also a critical player in this business in the future, especially

in the sukuk sector. In case of launching Islamic banking in Germany, The bank

experience in Islamic finance will be a major asset for him in the market.


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5.4.3. Kuveyt Türk Participation Bank

The Kuvyet Türk participation bank, a Turkish-Kuwaiti bank, has taken critical

steps in order to establish the first Islamic bank in Germany. The proactive bank

applied for a full banking licence to establish an Islamic bank in Germany.

However, The German banking regulator, the Federal Financial Services

Authority (BaFin), has just issued a limited banking licence to the respective

bank. In consequence, the bank opened its first branch in Mannheim in 2010

(Farhoush & Schmidt, 2011). The limited licence allowed the bank to collect

deposits from investors in Germany to be transferred to a PLS accounts in Turkey

(GIF magazine, 2013).

The bank has been active across the sukuk markets, the first sukuk issuance was

in 2010, KTB has issued a US$100 million three-year sukuk wakalah. The second

big issuance was in 2011 as mentioned above, The US$350 five-year sukuk Ijarah

were managed by different banks and corporations.

According to Mr. Uyan, the chief executive of the bank, the bank is planning to

open several branches in Germany, in case of full license issuance. Mr Uyan

further stated “We plan to open branches in Germany, and if this model becomes

successful, we could consider going to other European countries”. Furthermore,

the bank is planning to invest an initial capital of 45 million. The bank is also

planning to target the small-medium size enterprises (Sezer & Tuncay, 2012).

The bank’s full license application is still under review with BaFin, however, no

decision has been taken till now. Dr. Engels stated that the regulatory concerns

regarding the deposit taking as well as the role of SSB are the major causes.

However, it will be solved in the long run.

http://www.reuters.com/places/germany

Conclusion

63 | P a g e

6. Conclusion

There is no doubt that Islamic banking is a fast growing industry in the world. The

overview presented in chapter 2 reflects a stable growth for the future of this

business. This is supported by its new approach in doing the banking business,

therefore, it has attracted both Muslim and non Muslim investors. The cause is

that investors can earn high profits with lower risks, in comparison with

conventional banking. Moreover, consumers now are tending to invest more in

ethical products, which could be found in the Islamic banking principles as

discussed in chapter 2 and 3.

With regard to the German market, the Muslim population in Germany is the

largest in Europe, and the second largest minority in the country. The different

industries across the country have been trying to target the Muslim population, as

they believe that it is a potential group. As discussed in chapter 5, religion takes

over an important role in the life of the Muslims in Germany. Nearly two –thirds

of the Muslims have identified themselves as devoted to religion. As a result, this

will be a positive trend for accepting Shariah-compliant products in the future.

Below are the main opportunities as well as the main challenges for the Islamic

banking business in Germany.

6.1. Opportunities for the Islamic Banking industry in

Germany

The country has the Largest Muslim population in Europe, with a quite

large population between 25-64, who are still in the working age .

Muslims with Turkish background account for almost 63 percent of the

Muslim population, and represent 720,000 households, with €1917 as the

average net salary for the household. In addition, they have high savings

in comparison with the Germans, with a capacity of €2.2 billion.

The market is already ready to offer special products to Muslims, as

several industries have been designing particular services to the Turkish

Conclusion

64 | P a g e

Muslims. With regard to the Financial industry, Deutsche bank as well as

other banks has already offered private services to the Turkish Muslims

(please refer to 5.2.2.).

Results and finding from the conducted researches have shown a keen

desire to follow Shariah rules from a higher percentage of the Muslim

population.

Several German banks have been running Islamic windows in the GCC

region; hence, they had gained wide expertise in the Islamic finance and

banking industry.

Indeed, any Islamic bank who will be able to structure the right products

for the market, will definitely acquire an appropriate market share (around

5%), away of the competitors.

Launching the business will further tie the trade business between

Germany and Turkey as well as the other Muslim countries, Moreover, it

will provide funding alternatives for the investors.

6.2. Challenges Facing the Islamic Banking Industry in

Germany

The negative experience of the so-called “ Islamic holdings” in the 1990s

has negatively affected the customer trust in the Islamic product

investments. As a result, Turks in Germany lost their trust in this type of

investments, this can be reflected in their trust in the German banks, over

home national banks (76 percent have at least one bank account in the

German banks, for only 20 percent in the national banks).

The German regulations reject the concept of Islamic deposits (in

particular saving deposits), as it does not guarantee full repayment of the

deposits’ principle. Therefore, it is against the Investor protection in the

EU as well as German regulation.

The role of the Shariah Supervisory board is not compatible with the

regulation, as the board might intervene in the banks’ decisions. Equally

important is the strong separation between religion and business across

the western countries.

Conclusion

65 | P a g e

Islamic banks will have a significant problem with the German respective

European accounting, reporting, auditing and monitoring techniques. In

fact, amending or changing the respective system will be very hard.

The double taxation treatment for mortgage finance has been one of the

main challenges, however, the excellent idea of the “silent partnership”

by Ernst & Young , has solved this issue.

To sum up, the paper has highlighted the main opportunities as well as the main

challenges for this industry in Germany. It can be concluded that there is a huge

potential for the business in the country, as illustrated in 5.1 & 5.2. The majority

of Muslims are keen to invest in Shariah-compliant products. However, the

negative impact of the Islamic-holding still an obstacle. Therefore, any Islamic

bank must take necessary steps before launching any Shariah-compliant products.

Firstly, the bank must change the negative idea about Islamic banking to attract

more customers (Muslims and non Muslims). This can be done through

implementing different campaigns and conferences across the country, in order to

illustrate the mechanism of this new phenomena and the mechanism of the

different modes of finance. Equally important, the majority of the latter campaigns

should be offered in the customers' native language. Secondly, any bank must

understand first the needs of the customers, in order to structure the right products

for them. In this regard, the bank must take effective marketing strategies as well

as extensive analysis work. Finally, Islamic banks must try to find solutions to

settle down all the regulatory issues with the country regulators, in order to start

launching the business as soon as possible.

Germany as a country still needs to take further steps towards the Islamic banking

business, as it will be beneficial for the economy, especially after the European

financial crisis. Starting that business in the country will attract more investors

who are keen to follow Shariah. Furthermore, it will be the first step to launch

other profitable Islamic financial products, such as sukuk, which can further

strength the capital market. In fact, German regulators should try to come to a

common point with Islamic banks to ease this process. Indeed, The current

challenges can be easily solved if the country decided to give this business a

Conclusion

66 | P a g e

chance. However, Experts are sure that the business will start in the near future

and will be indeed positive for investors as well as for the country.

References

i | P a g e

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APPENDIX 1

APPENDIX 1.1

The prohibition of Riba in the Quran6

• Surah al-Rum, verse 39

“That which you give as Riba to increase the people’s wealth increases not with

God; but that which you give in charity, seeking the goodwill of God, multiplies

manifold.” (30: 39)

• Surah al-Nisa’, verse 161

“And for their taking Riba although it was forbidden for them, and their wrongful

appropriation of other people’s property. We have prepared for those among them

who reject faith a grievous punishment.” (4: 161)

• Surah Al-e-Imran, verse 130

“O believers, take not doubled and redoubled Riba, and fear Allah so that you

may prosper. Fear the fire which has been prepared for those who reject faith, and

obey Allah and the Prophet so that you may get mercy.” (3: 130)

• Surah al-Baqarah, verses 275–281

— “Those who take Riba shall be raised like those who have been driven to

madness by the touch of the Devil; this is because they say: ‘Trade is just like

interest’ while God has permitted trade and forbidden interest. Hence those who

have received the admonition from their Lord and desist, may keep their previous

gains, their case being entrusted to God; but those who revert, shall be the

inhabitants of the fire and abide therein forever.” (275)

— “Allah deprives Riba of all blessing but blesses charity; He loves not the

ungrateful sinner.” (276)

6 These are not the only the versus dealing with Riba in the Quran, Riba was mentenioed

explicitly in other versus as well.

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ix | P a g e

— “O, believers, fear Allah, and give up what is still due to you from Riba if you

are true believers.” (278)

— “If you do not do so, then take notice of war from Allah and His Messenger.

But, if you repent, you can have your principal. Neither should you commit

injustice nor should you be subjected to it.” (279)

— “And if the debtor is in misery, let him have respite until it is easier, but if you

forego it as charity, it is better for you if you realize.” (280)

— “And be fearful of the Day when you shall be returned to the Allah, then

everybody shall be paid in full what he has earned and they shall not be wronged.”

(281)

APPENDIX 1.2

The prohibition of Riba in the Sunnah (Ahadith)7

1. From Jabir (Gbpwh): “The Prophet (pbuh) cursed the receiver and the payer of

interest, the one who records it and the witnesses to the transaction and said:

‘They are all alike [in guilt]’.”

2. From Anas ibn Malik (Gbpwh): “The Prophet said: ‘When one of you grants a

loan and the borrower offers him a dish, he should not accept it; and if the

borrower offers a ride on an animal, he should not ride, unless the two of them

have been previously accustomed to exchanging such favours mutually’.

3. Zaid B. Aslam reported that interest in pagan times was of this nature: “When a

person owed money to another man for a certain period and the period expired,

the creditor would ask: ‘you pay me the amount or pay the extra’. If he paid the

amount, it was well and good, otherwise the creditor increased the loan amount

and extended the period for payment again.”

7 The Ahadith are according to Ayub (2007, pp. 46-47).

Appendices

x | P a g e

4. The holy Prophet (Pbuh) announced the prohibition of Riba in express terms at

the occasion of his last Hajj, which was the most attended gathering of his

Companions.

The Prophet said: “Every form of Riba is cancelled; capital indeed is yours which

you shall have; wrong not and you shall not be wronged. Allah has given His

Commandment totally prohibiting Riba. I start with the amount of Riba which

people owe to my uncle Abbas and declare it all cancelled”. He then, on behalf of

his uncle, cancelled the total amount of Riba due on his loan capital from his

debtors.

5. The holy Prophet (Pbuh) said, “Gold for gold, silver for silver, wheat for wheat,

barley for barley, dates for dates and salt for salt – like for like, equal for equal,

and hand to hand; if the commodities differ, then you may sell as you wish,

provided that the exchange is hand to hand.”

6. Bilal (Gbpwh) once visited the Messenger of Allah (pbuh) with some high

quality dates, the Prophet (pbuh) inquired about their source. Bilal explained that

he traded two volumes of lower quality dates for one volume of that of the higher

quality. The Prophet (pbuh) said: “This is precisely the forbidden Riba! Do not do

this. Instead, sell the first type of dates, and use the proceeds to buy the others.”

7. A man deputed by the holy Prophet (pbuh) for the collection of Zakat/Ushr

from Khyber brought for him dates of very fine quality. Upon the Prophet’s

asking him whether all the dates of Khyber were such, the man replied that this

was not the case and added that he exchanged a Sa‘a (a measure) of this kind for

two or three (of the other kind). The holy Prophet replied: “Do not do so. Sell (the

lower quality dates) for dirhams and then use the dirhams to buy better quality

dates. (When dates are exchanged against dates) they should be equal in weight.”

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xi | P a g e

APPENDIX 1.3

The Five Pillars of Islam8

1. Acceptance of the shahada or witness of faith which consists of reciting the

sentence ‘la ilaha illa llah, Muhammadu rasulu llah’ (in its alternative translation,

‘There is no God but the God and Muhammad is his Prophet’). Anyone who utters

the shahada in full faith must be regarded as a Muslim.

2. Prayer, or salat, is prescribed to be performed five times per day (at dawn,

around midday, in the afternoon, at sunset, and at night before going to bed),

preceded by self-purification through ritual washing, performed facing in the

direction of the Holy Mosque in Mecca, demonstrating ‘submission to God’s will’

by word of mouth and physical gesture.

3. Alms, or zakat (a term derived from the Arabic zaka, meaning ‘pure’). The

Holy Qur’an stresses that the giving of alms is one of the chief virtues of the true

believer, the generally accepted amount being onefortieth of a Muslim’s

accumulated personal or business wealth. Because all such revenue benefits the

poor and pays for certain activities within a 19 Islamic banking community, the

very act of giving shows the believer’s sense of social responsibility, thus leaving

acquired wealth free of disrepute.

4. Fasting or sawm. All believers are required to observe the ninth lunar month of

the Muslim year, Ramadan, as a period of fasting in which they abstain from

eating, drinking, smoking and sexual relations from sunrise to sunset (Holy

Qur’an 2:185-6). The purpose is to subjugate the body to the spirit and to fortify

the will through mental discipline, thus helping the believer to come nearer to

God.

5. Pilgrimage. The hajj, or pilgrimage to Mecca must be performed at least once

in the life of every Muslim, health and means permitting (Holy Qur’an 3.97).

8 According to (Lewis & Algaoud, 2001, pp. 19-20)

Appendices

xii | P a g e

Appendix2

In the course of this research, several experts in the field of Islamic finance as

well as banks’ representatives were contacted via email, in order to perform an

interview about the respective topic. However, there was no answer from all of

them except Dr. Johannes Engels.

Dr. Johannes Engels is a Senior Advisor at The Federal Financial Supervisory

Authority (BaFin) – Germany. Dr. Engels has studied General Economics in

Aachen and Cologne; he finished in at University of Cologne with Doctor Degree.

He has been working for the Federal Financial Supervisory Authority for twenty

two years, in the international dept. for eight years. Since October 2012 he has

been the lecturer for Corporate Governance at University of Applied Sciences in

Mainz. He has written several publications in the field of Islamic finance.

The below interview took place on October 29th, 2013 at Dr. Engels’ office.

1- As the matter of fact that Islamic banking became a hot topic in

Germany for the past years, do you think that Germany will benefit

from this business?

I can really imagine it, we have several million Muslim citizens in Germany , and

that is indeed reflected a great market. There are important Shariah principles

which must be followed in Islamic banking (riba, maysir, gharar). Indeed, if we

have operated financially according to these principles, we would never

experience the different financial crisis.

2- Facts and figures about the Muslim population in Germany have

reflected a potential group for Islamic banking, Do you think that

Germany can be really a potential market for Islamic banking?

Indeed, from the quantity, there is a potential for this business. However, when I

look to one bad experience which occurred in the 1990s, where bad Turkish

Muslims cheated other Muslims after Friday prayers, in the so-called Islamic

holding. As a result, these Muslims had lost their money, and consequently, this

bad experience still constitutes a problem . On the other hand, the majority of

Muslims in Germany is from Turkey, and from this point, it is still today, not

religiously based country. Therefore, Turkish Muslims feel home in our regional

banks which are highly preferred more than their home banks. Therefore, I think

that, in the short run, it will be possible that an Islamic bank will offer a trading

Appendices

xiii | P a g e

business (e.g. import and export business). Indeed, there will an economic niche.

Later on, it might a room for retail banking business; however, it should be taken

step by step.

3- Several German Banks have launched the so-called “Islamic

Windows” in the GCC region, Do you think that these banks can be

key players in this business, In case of further implementation?

I think in the long run, if the business shows a successful trend in the market; the

German banks will try to play such a similar role. However, I think it will not be

in the retail business, except for important clients, where they deal with them in

Kuala Lumpur or Dubai.

4- With regard to the regulatory issues, what are the major challenges

facing the business implementation? And how can Germany overcome

it?

We have no general line, when we look at the German banking act (KWG), there

is no explicit forbiddance for Islamic banking. In my opinion, the thing is

possible when it is not strictly forbidden. I think it is only a different type of

calculation in Islamic banking, for instance, deposits and lending mechanism. It

is another way to do this business and not forbidden in the KWG. My opinion, it

will be possible. There is no general line till now, still there is no final decision

about it. I think it will be a soon a final decision , as there is already a full licence

application from the Kuveyt Türk bank, which located in Mannheim.

There are indeed other concerns which related to the Islamic deposits. According

to the EU regulation, each deposit up to 100,000 euros must be fully protected,

and this type of deposit insurance system is against Shariah rules. Any Islamic

bank must follow these rules, otherwise it will be hard to obtain a banking license.

Another issue is the role of the Shariah board (SSB), it is absolutely a need to

have a qualified Shariah board. As a supervisor, I highly welcome it when there is

a qualified Shariah board. However, I know that in several countries, the SSB is

as well included in heading the bank , and it can intervene in the banks’ decisions.

In the European Union as well as in Germany, Only CEOs are responsible for

heading the business, and SSB can take over the role of a Consultant.

5- The Kuveyt Türk bank has entered the market as an Islamic bank,

however, it has obtained only a limited license, What are the main

reasons for this? And can the bank get a full banking license in the

future?

The Kuveyt Türk bank is a well known bank in Turkey and operates through

highly qualified managers. However, the main issues previously discussed

Appendices

xiv | P a g e

(deposits issue & SSB role) are the main reason for not getting a full license till

now. Indeed, I hope that it will be successful in the future, in my opinion; it is

just a new business in the country, which might face some resistance. However, I

am sure that they will get a full license in the future, but it will take some time.

Indeed, there should be some compromises from the Islamic banks' side to

overcome these issues. For instance, the SSB can be equal to the role of the

supervisory boards in the conventional banks, but not more.

6- Tax conditions in Germany also impose some restrictions to Islamic

banks? Are there any current solutions for this issue?

Under the current taxation system, Islamic banks will be exposed to double

taxation treatment in the case of Islamic mortgage finance. In addition, Germany

has a different level of taxes according to each region (e.g. 2.5% in Hessen region,

whereas 5% in the Rheinland Pfalz region). In fact, it will very difficult to change

the taxation system, such as in the UK (one time treatment) and France (double

taxation but with a lower level of taxes). However, Ernst & Young has proposed

an excellent idea, “the silent partnership”. In consequence, the bank will only be

registered only one time in this process as he acts as a sleep partner. This is

simply the solution for the double taxation problem, without changing anything

the taxation regulation.

7- Finally, what do you think about the future of the Islamic banking

business in Germany?

I think in the long run; it will be very successful, as we will have another

generation than the one who experienced the Islamic holding in the 1990s.On the

other hand, the success of Islamic finance in London (new sukuk issuance ) as

well as in Luxemburg, will positively affect the European market. Hence, in the

near future, first with a trading business (Import and export), then step by step it

will further develop to offer Islamic products and services. I think also that we

will see an Islamic index in the stock market in the future. It is not impossible;

there are several companies which don’t engage with haram business (gambling,

pork, weapons, etc.).

P.S. “The above mentioned interview reflects only the private opinion of Dr.

Johannes Engels and does not automatically display the position of German

Federal Financial Supervisory Authority”.

/ 3 - Curriculum vitae of Islam Hamed

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Europass Curriculum Vitae

Personal information

Surname(s) / First name(s) Islam Hamed

Address Gabriel-von-Seidl-Straße 75, 67550 Worms (Germany)

Mobile 004917671298135

E-mail(s) [email protected]

Nationality Egyptian

Gender Male

Work experience

Dates 17/09/2012 - 12/02/2013

Occupation or position held Lean Coordinator-Intern (Product Development Department)

Main activities and responsibilities • Implement lean tools in the PD department (e.g. Lean meetings, visual boards, 5S and VSM). • Monitor PDP/APQP running projects. • Support top management in presentations preparation and workshops organization. • Coordinate RFQ value stream mapping/analysis project. • Development of standards in Project Management.

Name and address of employer SKF Schweinfurt (Germany)

Type of business or sector Engineering

Dates 03/03/2008 - 31/05/2010

Occupation or position held Credit Analyst (Credit Department, retail Banking & SMEs)

Main activities and responsibilities • Manage, direct, and coordinate all activities to implement bank policies, procedures and practices concerning underwriting, applications, and granting or extending / enhancing loans. • Analyze customer’s financial history to grant loans in accordance with risk management in the different products. • Assist and support the lending staff with matters of credit policy, guidelines and procedures. • Monitor the quality of the loan portfolio. • Assist top management in preparing manuals for new credit products. • Prepare internal and external reports. • Answer branches inquires and dealing with complex issues.

Name and address of employer Banque Misr Cairo (Egypt)

Type of business or sector

Dates

Occupation or position held

Main activities and responsibilities

Name and address of employer

Type of business or sector

Financial and insurance activities

08/07/2007 - 01/03/2008

Accountant (Engineering Department)

• Prepare journal entries.

• Complete general ledger operations.

• Prepare monthly financial reports.

Banque Misr

Cairo (Egypt)

Financial and insurance activities



Education and training

Dates 14/03/2011 – 14/02/2014

Title of qualification awarded

Grade

Master of Arts (International Business Administration and Foreign Trade)

1.7 (scale: 1 – 5, with 1 being the highest)

Principal subjects / occupational skills covered

• Advanced Corporate Finance and Value Investing. • International Project Management. • Strategies of Internationalisation. • International Logistics & Transportation Management.

Name and type of organisation providing education and training

University of Applied Sciences Worms Worms (Germany)

Dates 01/10/2007 - 20/08/2009

Title of qualification awarded

Grade

MBA (Financial Management)

Excellent


• International Finance. • Advanced Financial Management. • Investment Management.


Arab Academy for Banking & Financial Sciences Cairo (Egypt)

Dates 15/09/2002 - 30/05/2006

Title of qualification awarded Bachelor of Arts (Accounting)


• Accounting. • Economics. • Financial management.


Ain Shams university Cairo (Egypt)

Dates 15/09/1999 - 20/06/2002

Title of qualification awarded Secondary school


Shobra Elthanawya Cairo (Egypt)

Personal skills and competences

Mother tongue(s) Arabic

Other language(s)

Self-assessment Understanding Speaking W r i t i n g

European level (*) Listening Reading Spoken interaction Spoken production

English C2 Proficient user C2 Proficient user C2 Proficient user C2 Proficient user C1 Proficient user

German C1 Proficient user B2 Independent user C1 Proficient user B2 Independent user B1 Independent user

(*) Common European Framework of Reference (CEF) level

Social Engagement

Volunteer at Misr El Kheir foundation.

http://europass.cedefop.europa.eu/LanguageSelfAssessmentGrid/en



Social skills and competences • Strong sense of creativity.

• Critical thinking.

• Goal-oriented.

Computer skills and competences • MS Office.

• Mind Manager.

• Project Link.

• Lotus Notes.

Islamic banking in Germany: opportunities and potential aspects

Economy & Finance

Transcript of Islamic banking in Germany: opportunities and potential aspects