Islamic Finance Experience - the Development in Germany Dr. Johannes Engels London, 7 July 2011

1. Islamic Finance Experience -the Development in GermanyDr. Johannes Engels London, 7 July 2011

2. Islamic Banking in Germany • Contents: • 1. Aspects to German Banking Supervision/ Background: a Huge Market • 2. Situation of Islamic Banking in Germany/ EU Passport? • 3. Consequences to Regulatory Framework Islamic Banking | Seite 2

3. 1. BaFin – subjects of integrated financial supervision • Approx. 1,900 employees • Regulation of approx. • 2,000 credit institutions • 700 financial service institutions • 650 insurance undertakings • 25 pension funds • 85 investment companies Frankfurt Bonn Islamic Banking | Seite 3

4. 1. Banking market structure in Germany Islamic Banking | Seite 4

5. BaFin‘s structure President & Directorate Public Relation Office Internal Revision, Compliance General Administration 4 Cross Sectoral Departments • Banking Supervision Directorate • Licensing, revocation and limitations of operations of credit and financial services institutions • Solvency supervision of credit and financial services institutions • Risk management • Insurance Supervision Directorate • Licensing and revocation of insurance companies • Solvency supervision of insurance companies • Risk management • Market Supervision Directorate • Market surveillance: Insider supervision, transparency • Investor protection: Supervision of rules of conduct by investment services enterprises and investment companies • Licensing and supervision of collective investment schemes asset management Islamic Banking | Seite 5

6. General aspects to Islamic banking Islamic Banking | Seite 6

7. 1. Some aspects to banking business • - Looking to the main banking activities, there are a lot of them, which are in general also non-problematic according Sharia. • - To these belongs the deposit taking (like running accounts without interests), the depositing in general, the realization of securities orders and/ or the consulting. • - It is simply clear, that the client could not get these services cost-free. He has to pay fees, like in the rest of the business world. Islamic Banking | Seite 7

8. 1. Some aspects to banking business • It is clear, that also in the Muslim world clients want to get money from the bank, when deposited there. • - In this case, the bank gives a gratification in the meaning of a „thank you“ to the client in a regular sequence. Islamic Banking | Seite 8

9. 1. Some aspects to banking business • The vice versa thing happens, when the client needs money from the bank. The bank does not take an interest rate, but informs the client about the lot of work, to catch the wanted money first on the market. In this context the bank wants to get the money from the client (to pay the own staff for this sending-out etc.). • Besides this, the bank needs the trust from the ones, who are ready to give the money and to deposit it there. Also this important to know for a better supervisories‘ understanding. Islamic Banking | Seite 9

10. 1. Some aspects to banking business • Exists between the bank and the client a difficult business activity with the need of financing, (for example project financing), the Arabian world defines this as Mudaraba, when in harmony with Sharia. This type of credit is in a frequent use. • During the bank mobilizes the money, the client engages himself with his qualified knowledge and experience. The success (or the losses) will be divided in an agreed way, which was discussed before. • Some of this remembers to the German idea/ tradition of co-operative business Islamic Banking | Seite 10

11. 1. Some aspects to banking business • - Financing real estate is, when realized on the basis of Sharia a Murabaha, in which the bank first buys the object itself. After that, the bank sells it to the client, who pays back step by step the credited money. The sum of this money includes all the activities for the bank, which were necessary to make this thing happen. • - There is not to forget, that in several OEEC countries, there is – like in Germany - the problem of double tax-paying! Islamic Banking | Seite 11

12. 1. Some aspects to banking business • - Like in a lot of other business activities, there is easily to see, that Islamic finance is based on the philosophy of common co-operating together (servicing company/ client), which has some similar aspects to the traditional German type of co-operative business. • - The bank is entitled to make plus at the end of the day, which is not against Koran. Central aspect is the living-together under Muslims, which must be strictly honest and fair. Islamic Banking | Seite 12

13. Islamic Banking in Germany • Contents: • 1.Aspects to German Banking Supervision • 2. Running Situation in Germany/ EU Passport • 3. Consequencesto Regulatory Framework Islamic Banking | Seite 13

14. 2. Running situation in Germany • - Meanwhile, there live more than 4 Mio. Muslims in Germany, with a rapid growing tendency. There is to confirm, that they are really needed. In this group are more than 100.000 persons, which could establish own enterprises successfully. The quote of own real estate runs to 8 %. • - This frame could make sharia-compatible products of finance in Germany very interesting. Islamic Banking | Seite 14

15. 2. Running situation in Germany • - In Germany exists a fragmented banking market (market share of the today’s four largest banks is around 25 % whereas in the UK the five largest banks comprise a market share of 70 %) leading to fierce competition; • - A very high degree of competitiveness in banking resulting in low domestic lending margins; • - A low profitability in comparison with international peers. Islamic Banking | Seite 15

16. 2. Running situation in Germany • Up to now, there were only some single contacts of interested groups addressed to BaFin and former BAKred and BAV about the question to establish banks or insurance companies working according Islamic principles in Germany. • Still now, there exists no bank or insurance company, which works according the above mentioned principles. In opposite to this, there are some large German banks and insurance companies, which offer Islamic products abroad (like in Dubai) – “Islamic windows”. Islamic Banking | Seite 16

17. 2. Running situation - Islamic Products • Issue of Islamic Products by German commercial banks • Example: Deutsche Bank AG • Establishment of the credit centre “International Loans & Agency Services”, also providing Shar’ia-compliant products mutual funds certificates

18. 2. Running situation in Germany • Probably soon, there might be the use of EU Passport in one case. A bank with its origin in U.A.E. and being established with a subsidiary (Ltd.) in London, plans to use the above mentioned passport with the target to start with a branch in Germany. • The supervisory responsibility would be still then in the United Kingdom (FSA). Islamic Banking | Seite 18

19. 2. Running situation in Germany • . In Germany there are some financial instruments in use, which are accepted according sharia. Basis of this are the German prospectous regulations. One large German bank uses since 2002 some financial instruments according sharia in Germany. Some large French banks offer in Germany certificates via the use of European Passport. Islamic Banking | Seite 19

20. 2. Running situation - Islamic Bonds • Experience with “Islamic bonds” (sukuk) in Germany • The State of Saxony-Anhalt initiated a sukuk in 2004. • Presumably the first European issuer of a sukuk • Issue through the Dutch foundation “Stichting Sachsen- Anhalt Trust” on 13 August 2004 • Lead Arranger: Citigroup Global Markets Ltd. Co-Lead Manager: Kuwait Finance House

21. 2. Running situation - Islamic Bonds • Features of Saxony-Anhalt’s first Islamic bond • Issue size: 100 million € • Maturity: 5 years • Legal status: “bearer trust certificate” / floating rate note • No interest ► but the return is bound to the 6-M EURIBOR (six-month European-interbank-offered rate), cash flow originates from rental payments for the premises leased (Ijara Head Lease Agreement) • Rating by Standard & Poor’s AA-, Fitch Ratings Ltd. AAA • The “Stichting” is sort of a trustee of State-owned real estate while the user leases the land. The State remains the legal owner of the estate while the “Stichting” can exploit it.

22. Islamic Banking in Germany • Contents: • 1. Aspects to German banking supervision • 2. Running situation in Germany • 3. Consequences to Regulatory Framework Islamic Banking | Seite 22

23. 3. Consequences • Islamic banks and insurance companies differ from conventional ones in various legal and economic respects. But despite these differences, they can be considered as regular banks/ insurance companies and should be eligible to get a license from the BaFin which shall be recognized in all other EC member states because it is in conformity with the respective co-ordination Directives of the EC. • Once this is accepted and once an application for an „Islamic“ license has been made, the European financial supervisory authorities will have to think about adoptions of their tool boxes. Credit institutions and insurance companies of a new type require innovative ideas for the design of adequate and fair regulatory instruments. Islamic Banking | Seite 23

24. 3. Consequences • There is not to forget is the aspect of the financial product‘s check. • Islamic Finance is a new field of research for German universities. • In opposite to Iran, there are other good motivating examples, like U.A.E., Oman, Malaysia, Singapore, Indonesia and Syria. Islamic Banking | Seite 24

25. Thank you for your attention! • Dr. Johannes Engels • Lurgiallee 12 • D – 60439 Frankfurt upon Main • Tel.: 0049/ 228/ 4108-1605 • johannes.engels@bafin.de Islamic Banking | Seite 25