Islamic Banking in Germany_Opportunities and Potential Aspects
Transcript of Islamic Banking in Germany_Opportunities and Potential Aspects
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 1/97
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 7567550 Worms
Matriculation no.: 666149
Winter Term 2013/2014
Worms, October 19th, 2013
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 2/97
I n The Name of Al lah,
The Most Beneficent, The Most Merciful
Dedicated to my father’s soul,
Fathy Abd-elaziz Hamed
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 3/97
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.
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 4/97
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
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 5/97
Abstract
IV | P a g e
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.
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 6/97
Table of Contents
V | P a g e
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
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 7/97
Table of Contents
VI | P a g e
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
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 8/97
Table of Contents
VII | P a g e
APPENDIX 1.2 .................................................................................................................. ix
APPENDIX 1.3 .................................................................................................................. xi
Appendix2 ............................................................................................................... xii
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 9/97
List of Figures
VIII | P a g e
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
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 10/97
List of Abbreviations
IX | P a g e
List of Abbreviations
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.
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 11/97
List of Abbreviations
X | P a g e
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.
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 12/97
Glossary
XI | P a g e
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 ofreligious law, which is the interpretation
of the Sacred Law, Shariah.
Fuqaha (sing. faqih) Muslim jurisprudents who havereligious authority.
Gharar uncertainty, speculation.
Hadîth (plural ahadith) the technical term for the source relatedto 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).
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 13/97
Glossary
XII | P a g e
Ijara contract a leasing contract.
Ijara wa iqtina a lease-purchase contract, whereby the
client has the option of purchasing theitem.
Ijma means consensus among jurists basedon the Holy Qur’an and Sunna, and oneof the four sources of law in SunniIslam.
Ijtihad means the act of independent reasoning by a qualified jurist in order to reachnew legal rules.
Islam is submission or surrender to the will ofGod.
Istisnaa a contract to manufacture.
Maysir means gambling, from a pre-Islamicgame of hazard.
Mudaraba contract is a trustee financing contract,
where one party, the financier, entrustsfunds to the other party, theentrepreneur, for undertaking anactivity.
Mufti is a jurist who is authorised to issue a fatwa or legal decision on a religiousmatter.
Murabaha is resale with a stated profit, forexample 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 agriculturalland with profit-sharing.
Musharaka contract is an equity participationcontract, whereby two or more partnerscontribute with funds to carry out aninvestment.
Qard hasan a benevolent loan (interest free).
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 14/97
Glossary
XIII | P a g e
Qiyas means analogical deduction.
Qur’an is the Holy Book, the revealed word ofGod, followed by all Muslims.
Rabb al-mal refers to the owner of capital orfinancier in a mudaraba partnershipagreement (also sahib al-mal ).
Riba is literally ‘excess’ or ‘increase’, andcovers both interest and usury.
Shariahis Islamic religious law derived fromthe Holy Qur’an and the sunna.
Sukuk Certificates of equal value representingundivided share in ownership oftangible assets of particular projects orspecific investment activity, usufructand 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 asrequired in the Holy Qur’an and is oneof Islam’s five pillars.
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 15/97
Research Overview
1 | P a g e
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 Europeancentral bank (2013, p. 19), Islamic banking has shown annual sustainable growing
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 16/97
Research Overview
2 | P a g e
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 bankingwith 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.
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 17/97
Research Overview
3 | P a g e
1.2. Purpose
The purpose of this thesis is to examine the German market and to investigatewhether 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.
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 18/97
Research Overview
4 | P a g e
Research OverviewIntroduction& Overview
IslamicModes ofFinance
CorporateGovernanceIn Islamic
Banks
IslamicBanking &
The GermanMarket
Conclusion
1.4. Thesis Structure
The disposition of the Thesis chapters is illustrated in figure1 and followed by asummary 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
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 19/97
Research Overview
5 | P a g e
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.
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 20/97
Islamic Banking : An Introduction & Overview
6 | P a g e
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 bankingsystem 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).
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 21/97
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 22/97
Islamic Banking : An Introduction & Overview
8 | P a g e
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)
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 23/97
Islamic Banking : An Introduction & Overview
9 | P a g e
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).
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 24/97
Islamic Banking : An Introduction & Overview
10 | P a g e
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 anevidence of his Prophecy. The literal meaning of the word Qur’an is ‘reading’ or
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 25/97
Islamic Banking : An Introduction & Overview
11 | P a g e
‘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
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 26/97
Islamic Banking : An Introduction & Overview
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.
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 27/97
Islamic Banking : An Introduction & Overview
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
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 28/97
Islamic Banking : An Introduction & Overview
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, r iba
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).
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 29/97
Islamic Banking : An Introduction & Overview
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
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 30/97
Islamic Banking : An Introduction & Overview
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).
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 31/97
Islamic Modes of Finance
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), thistechnique 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.
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 32/97
Islamic Modes of Finance
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) (Usmani2002, 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 .
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 33/97
Islamic Modes of Finance
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 theownership 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)
Customer
(Mudarib)
Know-HowBusiness Activity
Outcome
Negative
Positive
e.g. 40%
from profits
e.g. 60%
from profits
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 34/97
Islamic Modes of Finance
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 assertedthat PLS contracts aim to develop and sustain the financial market, as it
CustomerIslamic Bank
Asset
20% of the payment80% of the payment
Payments to increase
ownership
Figure 5 Diminishing Musharaka Model (Own illustration)
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 35/97
Islamic Modes of Finance
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).
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 36/97
Islamic Modes of Finance
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
Payment of the purchase
price + profit margin CustomerSeller
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 37/97
Islamic Modes of Finance
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).
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 38/97
Islamic Modes of Finance
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 rawmaterial 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
Payment of the purchase
price upon delivery Delivery of the
goods on schedule
Customer
Seller Islamic Bank
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 39/97
Islamic Modes of Finance
25 | P a g e
role by entering in back-to-back i stisna’a contract, or Parallel contract. In essence,
i stisna’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
Manufacturer
Delivery of the
goods on schedule
Payment of the purchase
price upon delivery
Advanced payment of the
purchase price
Delivery of the goods on schedule
Islamic Bank
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 40/97
Islamic Modes of Finance
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
Payment of the purchase
priceLease payments
Ownership transfer under
“Ijarah Wa Iqtina”
CustomerSeller Islamic Bank
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 41/97
Islamic Modes of Finance
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, qar d 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 activitiesand 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.
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 42/97
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 43/97
Islamic Modes of Finance
29 | P a g e
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
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 44/97
Islamic Modes of Finance
30 | P a g e
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 , i jara 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
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 45/97
Islamic Modes of Finance
31 | P a g e
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
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 46/97
Islamic Modes of Finance
32 | P a g e
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
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 47/97
Islamic Modes of Finance
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 ,
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 48/97
Islamic Modes of Finance
34 | P a g e
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)
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 49/97
Islamic Modes of Finance
35 | P a g e
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)
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 50/97
Corporate Governance In Islamic Banks
36 | P a g e
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
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 51/97
Corporate Governance In Islamic Banks
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-to- day operation to insure that Shariah
principles are fully implemented.
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 52/97
Corporate Governance In Islamic Banks
38 | P a g e
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).
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 53/97
Corporate Governance In Islamic Banks
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.
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 54/97
Corporate Governance In Islamic Banks
40 | P a g e
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.
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 55/97
Corporate Governance In Islamic Banks
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.
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 56/97
Corporate Governance In Islamic Banks
42 | P a g e
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
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 57/97
Corporate Governance In Islamic Banks
43 | P a g e
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 andequity 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).
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 58/97
Islamic Banking & The German Market
44 | P a g e
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
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 59/97
Islamic Banking & The German Market
45 | P a g e
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. Infact, 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.
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 60/97
Islamic Banking & The German Market
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
1.41.2
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
1.70.1
0.34.0
Muslims According to Denomination (in percent)
Sunni
Shiite
Alevi
Ahmadi
Sufis/Mystics
Ibadis
Other
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 61/97
Islamic Banking & The German Market
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)
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 62/97
Islamic Banking & The German Market
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.
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 63/97
Islamic Banking & The German Market
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).
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 64/97
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 65/97
Islamic Banking & The German Market
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 followingShariah 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 finincialinstitutions more, that followIslamic principles, than banks andfinancial institutions, that do NOTfollow the principles.
For me, it is important that my bank in Germany adheres rulesand principles of Islam.
Attitude on banks in Germany
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 66/97
Islamic Banking & The German Market
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 followrules and principles of Sharia’a
regarding investments.
Answer Scales (1= Agree ... 6=Disagree)
Relevance of Shariah compliance and adherence of Islamic
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 67/97
Islamic Banking & The German Market
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
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 68/97
Islamic Banking & The German Market
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
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 69/97
Islamic Banking & The German Market
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.
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 70/97
Islamic Banking & The German Market
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
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 71/97
Islamic Banking & The German Market
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 aconsultant.
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.
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 72/97
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 73/97
Islamic Banking & The German Market
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 mor tgage 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
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 74/97
Islamic Banking & The German Market
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
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 75/97
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 76/97
Islamic Banking & The German Market
62 | P a g e
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 toopen 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.
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 77/97
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, asseveral industries have been designing particular services to the Turkish
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 78/97
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.
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 79/97
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
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 80/97
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.
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 81/97
References
i | P a g e
References
Abdul-Rahman, Y., 2010. The Art of Islamic Banking and Finance Tools and
Techniques for Community-Based Banking. New Jersey: John Wiley & Sons, Inc.
Akhter, W., 2010. Takaful Models and Global Practices. [Online]
Available at: http://mpra.ub.uni-muenchen.de/40010/1/MPRA_paper_40010.pdf
[Accessed 27 September 2013].
Al Baraka, 2013. About Al Baraka. [Online]
Available at: http://www.albaraka.com/default.asp?action=article&id=97
[Accessed 12 July 2013].
Algaoud, L. M. & Lewis, M. K., 2007. Islamic critique of conventional financing.
In: K. M. Hassan & M. K. Lewis, eds. Handbook of Islamic Banking.
Cheltenham: Edward Elgar Publishing Limited.
Ali, S. S., 2005. Introduction To Ijarah Sukuk: Current Structures And Future
Prospects.. [Online]
Available at: http://www.kantakji.com/fiqh/Files/Markets/m117.pdf
[Accessed 6 October 2013].
Al-Qattan, M. A. A., 2008. Shari'ah Supervisory Boards: Selection of Their
Members. [Online]
Available at: http://uaelaws.files.wordpress.com/2012/05/shariah-supervisory-
boards-selection-of-their-members-and-their-regulations.pdf
[Accessed 25 July 2013].
Ayub, M., 2007. Understanding Islamic Finance. West Sussex: John Wiley &
Sons Ltd.
BaFin, 2013. Financial Stability Act expands cooperation between BaFin and Bundesbank. [Online]
Available at:
http://www.bafin.de/SharedDocs/Veroeffentlichungen/EN/Fachartikel/2013/fa_bj
_2013_08_interview_hufeld_dombret_en.html
[Accessed 29 August 2013].
BaFin, 2013. Functions & History. [Online]
Available at:
http://www.bafin.de/EN/BaFin/FunctionsHistory/functionshistory_artikel.html
[Accessed 30 August 2013].
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 82/97
References
ii | P a g e
Belder, R. T. d. & Sapte, D. W., 2008. Shari’a Supervisory Boards and Shari’a
Compliance. In: R. Millar & H. Anwar, eds. Islamic Finance: A Guide for
International Business and Investment. London: GMB Publishing Ltd..
Butt, I., 2012. Islamic Finance Tax Considerations Around the World. [Online]
Available at: http://www.pwc.com/en_MY/my/assets/publications/islamic-
finance-tax-booklet.pdf
[Accessed 3 October 2013].
Chahboune, J. & El-Mogaddedi, Z., 2008. Kreditwesen, Islamic Bankning- das
Marktpotenzial in Deutschland. [Online]
Available at:
http://www.ifibaf.com/uploads/Artikel%20Test/Artikel%20ZfK%20082008gesich
ert.pdf
[Accessed 2 September 2013].
Commerzbank, 2012. Kuveyt Turk Bank:A USD350mn 5year sukuk issue in
Turkey attracts an international market. [Online]
Available at:
https://cbcm.commerzbank.com/en/site/credentials/casestudies/kuveytturkbank.jsp
[Accessed 8 October 2013].
Deutsche Asset & Wealth Management, 2013. Company profile. [Online]
Available at: https://www.dws.com/About-DWS/Company-Profile
[Accessed 1 September 2013].
Deutsche Bank, 2013. Deutsche Bank Middle East & North Africa, Islamic
Finance. [Online]
Available at: https://www.db.com/mena/en/content/islamic_finance.htm
[Accessed 1 September 2013].
Deutsche Bank, 2013. Facts and Figures. [Online]
Available at: https://www.deutsche-
bank.de/en/content/company/facts_and_figures.htm
[Accessed 1 September 2013].
Deutsche Islam Konferenz, 2007. Muslim life in Germany. [Online]
Available at: http://www.npdata.be/Data/Godsdienst/Duitsland/fb6-muslimisches-
leben-englisch.pdf
[Accessed 01September 2013].
Deutsche Islam Konferenz, 2010. What is the DIK? [Online]
Available at: http://www.deutsche-islam
konferenz.de/DIK/EN/DIK/UeberDIK/WasIstDIK/wasistdik-node.html
[Accessed 28 August 2013].
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 83/97
References
iii | P a g e
el-Mogaddedi, Z., 2007. Islamic Banking in Germany, Islamic Finance News.
[Online]
Available at: http://www.uni-marburg.de/fb01/lehrstuehle/zivilrecht/kling/islamicfinance/materialien/islamicba
nking091107.pdf
[Accessed 2 October 2013].
Engels, 2013. Germany & Islamic banking [Interview] (29 October 2013).
Engels, J., 2010. German banking supervision and its relationship to Islamic
banks. In: M. F. Khan, M. Porzio & E. Elgar, eds. Islamic Banking and Finance in
the European Union. Cheltenham: Edward Elgar Publishing Limited.
Ernst & Young, 2011. A new era of customer expectation, Global Consumer
Banking Survey. [Online]
Available at: http://emergingmarkets.ey.com/wp-
content/uploads/downloads/2012/04/Global_A-new-era-of-customer-
expectation_global-consumer-banking-survey_Mar2011.pdf
[Accessed 22 October 2013].
Ernst & Young, 2012. The World Takaful Report. [Online]
Available at:
http://www.ey.com/Publication/vwLUAssets/The_World_Takaful_Report_2012/$
FILE/Ernst%20&%20Young's%20The%20World%20Takaful%20Report%20201
2.pdf
[Accessed 15 October 2013].
Ernst & Young, 2012. World Islamic Banking Competitiveness Report 2012-2013.
[Online]Available at:
http://www.ey.com/Publication/vwLUAssets/The_World_Islamic_Banking_Com
petitiveness_Report/$FILE/World%20Islamic%20Banking%20Competitiveness%
20Report%202012-13.pdf
[Accessed 17 November 2013].
European Central Bank, 2013. Islamic Finance in Europe. [Online]
Available at: http://www.ecb.europa.eu/pub/pdf/scpops/ecbocp146.pdf[Accessed 6 October 2013].
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 84/97
References
iv | P a g e
Farhoush, A. & Schmidt, N., 2011. Islamic Finance in Germany: Trends,
opportunities, and Potential. In: Islamic Capital Markets Products and Strategies.
West Sussex: John Wiley & Sons, Ltd.
Gassner, M. S., 2004. Regulatory Framework of Germany - Opportunities for
Structuring Shari'a compliant Financial Products, s.l.: Harvard Law School.
Geyer, R., 2002. Mit Allahs Segen Entwicklung und Marktstellung islamischer
Investmentfonds. [Online]
Available at: http://www.zfwu.de/fileadmin/pdf/2_2002/Geyer.pdf
[Accessed 2 September 2013].
Global Islamic Finance magazine, 2013. Germany to welcome Islamic banking.
[Online]Available at:
http://www.globalislamicfinancemagazine.com/?com=news_list&nid=568
[Accessed 8 October 2013].
Gleisner, F., Hackethal, A. & Rauch, C., 2010. Migration and the retail banking
industry: an examination of immigrants' bank nationality choice in Germany. The
European Journal of Finance, 16, No.5 (Taylor & Francis), pp. 459-480.
Grais, W. & Pellegrini, M., 2006. Corporate Governance and Shariah
Compliance in Institutions Offering Islamic Financial Services . [Online]Available at: http://elibrary.worldbank.org/content/workingpaper/10.1596/1813-
9450-4054
[Accessed 21 July 2013].
Halim, N., 2012. Islamic FInance News Supplements. [Online]
Available at:
http://www.islamicfinancenews.com/2012_supplement/2012takaful/Takaful.pdf
[Accessed 26 September 2013].
Hansen, R., 2003. Migration to Europe since 1945: its History and its Lessons,Oxford: Blackwell Publishing Ltd.
Hayen, D. et al., 2005. Migranten und Finanzdienstleistungen, Studie im Auftrag
des Bundesministerium für Ernährung, Landwirtschaft und Verbraucherschutz
(BMELV), Hamburg: Evers & Jung GbR.
Hussain, M. M. & Pasha, A. T., 2011. Conceptual and Operational Differences
Between General Takaful and Conventional Insurance. Australian Journal of
Business and Management Research, Volume Vol.1 No.8 , pp. 23-28.
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 85/97
References
v | P a g e
iFIS, n.d. Islamic Finance Glossary. [Online]
Available at: http://www.ifis-islamic.com/16-0-Islamic-Finance-Lexikon.html
[Accessed 12 November 2013].
Iqbal, M., 2007. International Islamic Financial Institutions. In: M. K. Hassan &
M. K. Lewis, eds. Handbook of Islamic Banking. Cheltenham: Edward Elgar
Publishing Limited.
Islamic Development Bank, 2013. About IDB. [Online]
Available at:
http://www.isdb.org/irj/portal/anonymous?NavigationTarget=navurl://24de0d5f10
da906da85e96ac356b7af0
[Accessed 13 July 2013].
Islamic Development Bank, 2013. Scholarship & Assistance. [Online]
Available at:
http://www.isdb.org/irj/portal/anonymous?NavigationTarget=navurl://ad51251e48
1c15795d5f2450c1099bfb
[Accessed 3 September 2013].
Islamic Development Bank, Institute of Islamic Research &Training, International
Financial Services Board, 2007. Islamic Financial Services Industry Development
- Ten-Year Framework and Strategies. Joint initiative, Kuala Lumpur:
International Financial Services Board.
Islamic Financial Service Board, 2009. Guiding Principles On Sharī`Ah
Governance Systems For Institutions Offering Islamic Financial Services.
[Online]
Available at: http://www.ifsb.org/standard/IFSB-
10%20Shariah%20Governance.pdf
[Accessed 1August 2013].
Islamic Financial Service Board, 2010. Objectives. [Online]
Available at: http://www.ifsb.org/objectif.php
[Accessed 14 July 2013].
Kettell, B., 2010. Islamic Finance in a Nutshell: A Guide for Non-Specialists.
West Sussex: John Wiely & Sons ltd.
Khan, M., 2007. Islamic methods for government borrowing and monetary
management. In: M. K. Hassan & M. K. Lewis, eds. Handbook of Islamic
Banking. Cheltenham: Edward Elgar Publishing Limited.
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 86/97
References
vi | P a g e
Khan, M. & Coopers, P., 2008. Takaful. In: R. Millar & H. Anwar, eds. Islamic
Finance: A Guide for International Business and Investment. London: GMB
Publishing Ltd..
Khan, M. & Coopers, P., 2008. Takaful vs. Conventional Insurance. In: R. Millar
& H. Anwar, eds. Islamic Finance: A Guide for International Business and
Investment. London: GMB Publishing Ltd..
Klein, O., 2012. Islamic Finance Tax Considerations Around the World. [Online]
Available at: http://www.pwc.com/en_MY/my/assets/publications/islamic-
finance-tax-booklet.pdf
[Accessed 3 October 2013].
Lewis, M. K. & Algaoud, L. M., 2001. Islamic Banking. Cheltenham: EdwardElgar Publishing Limited.
Millar, R., 2008. Religious Foundations of Islamic Finance. In: R. Millar & H.
Anwar, eds. Islamic Finance: A Guide for International Business and Investment.
London: GMB Publishing Ltd..
Millar, R., 2008. Retail Banking: Current and Savings Accounts and Loans. In: H.
Anwar, ed. Islamic Finance: A Guide for International Business and Investment.
London: GMB Publishing Ltd..
Mirakhor, A. & Zaidi, I., 2007. Profit-and-loss Sharing Contracts in Islamic
Finance. In: M. K. Hassan & M. K. Lewis, eds. Handbook of Islamic Banking.
Cheltenham: Edward Elgar Publishing Limited.
Nienhaus, V., 2007. Governance of Islamic Banks. In: M. K. Hassan & M. K.
Lewis, eds. Handbook of Islamic Banking. Cheltenham: Edward Elgar Publishing
Limited.
Nienhaus, V., 2012. Germany: More talks, little action. [Online]
Available at:
http://www.islamicfinancenews.com/listing_article_ID1.asp?nm_id=25617&searc
hid=23351
[Accessed 29 September 2013].
PricewaterhouseCoopers, 2008. Islamic finance – UK tax aspects an extract from
UK real estate insights - Issue 10. [Online]
Available at: http://www.pwc.com/gx/en/asset-
management/assets/pdf/rei10_11.pdf [Accessed 03 October 2013].
Rammal, H. G., 2006. The Importance of Shari’Ah Supervision in Islamic
Financial Institutions. Corporate Ownership and Control, 3 (3), pp. 204-208.
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 87/97
References
vii | P a g e
Samad, A., Gardner, N. D. & Cook, B. J., 2005. Islamic Banking and Finance in
Theory and Practice: The Experience of Malaysia and Bahrain. The American
Journal of Islamic Social Sciences, Volume 22:2, pp. 71-86.
Sezer, S. & Tuncay, E., 2012. Reuters, Kuveyt Turk aims to be Germany's first
Islamic bank. [Online]
Available at: http://www.reuters.com/article/2012/11/28/kuveytturk-germany-
idUSL5E8MS8Q920121128
[Accessed 15 November 2013].
The Accounting and Auditing Organization for Islamic Financial Institutions,
2010. About AAOIFI. [Online]
Available at:
http://www.aaoifi.com/aaoifi/TheOrganization/Overview/tabid/62/language/en-
US/Default.aspx
[Accessed 13 July 2013].
The Liquidity Management Center, 2009. Vision & Role. [Online]
Available at: http://www.lmcbahrain.com/role.asp
[Accessed 15 July 2013].
UK Trade & Investment, 2013. UK Excellence in Islamic Finance.
Available at:
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/248
791/UK_Excellence_in_Islamic_Finance_2013.pdf
[Accessed 19 October 2013].
Usmani, M., 2002. Meezan Bank’s Guide to Islamic Banking.Karachi: Darul-
Ishaat Urdu Bazar.
Visser, H., 2009. Islamic Finance Principles and Practice. Cheltenham: Edward
ELgar.
Wilson, R., 2007. Islamic banking in the West. In: M. K. Hassan & M. K. Lewis,eds. Handbook of Islamic Banking. Cheltenham: Edward Elgar Publishing
Limited, pp. 419-432.
Yorulmaz, N., n.d. Ottoman Empire and Germany (1871-1908) Military-
economic relationship Trade Activities of German Armaments Industry In the
Ottoman Market, Berlin: s.n.
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 88/97
Appendices
viii | P a g e
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, multipliesmanifold.” (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 R iba 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.
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 89/97
Appendices
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).
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 90/97
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.”
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 91/97
Appendices
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)
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 92/97
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 benefitfrom 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 thatGermany 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 thinkthat, in the short run, it will be possible that an Islamic bank will offer a trading
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 93/97
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
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 94/97
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, Iam 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 bankingbusiness 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”.
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 95/97
Page 1 / 3 - Curriculum vitae ofIslam Hamed
For more information on Europass go to http://europass.cedefop.europa.eu© European Union, 2002-2010 24082010
EuropassCurriculum 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 - 12/02/2013Occupation 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 SKFSchweinfurt (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 andpractices concerning underwriting, applications, and granting or extending / enhancing loans.
• Analyze customer’s financial history to grant loans in accordance with risk management in thedifferent 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 MisrCairo (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
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 96/97
Page 2 / 3 - Curriculum vitae ofIslam Hamed
For more information on Europass go to http://europass.cedefop.europa.eu© European Union, 2002-2010 24082010
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 skillscovered
• Advanced Corporate Finance and Value Investing.• International Project Management.• Strategies of Internationalisation.• International Logistics & Transportation Management.
Name and type of organisationproviding education and training
University of Applied Sciences WormsWorms (Germany)
Dates 01/10/2007 - 20/08/2009
Title of qualification awarded
Grade
MBA (Financial Management)
Excellent
Principal subjects / occupational skillscovered
• International Finance.• Advanced Financial Management.• Investment Management.
Name and type of organisationproviding education and training
Arab Academy for Banking & Financial SciencesCairo (Egypt)
Dates 15/09/2002 - 30/05/2006
Title of qualification awarded Bachelor of Arts (Accounting)
Principal subjects / occupational skillscovered
• Accounting.• Economics.• Financial management.
Name and type of organisationproviding education and training
Ain Shams universityCairo (Egypt)
Dates 15/09/1999 - 20/06/2002Title of qualification awarded Secondary school
Name and type of organisationproviding education and training
Shobra ElthanawyaCairo (Egypt)
Personal skills andcompetences
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.
8/12/2019 Islamic Banking in Germany_Opportunities and Potential Aspects
http://slidepdf.com/reader/full/islamic-banking-in-germanyopportunities-and-potential-aspects 97/97
Social skills and competences • Strong sense of creativity.
• Critical thinking.
• Goal-oriented.
Computer skills and competences • MS Office.
• Mind Manager.
• Project Link. • Lotus Notes.