Islamic Finance - Ways out of the financial crisis?
On 29.10.2009 a high-level conference on "Islamic Finance" took place in Frankfurt's Villa Kennedy, hosted by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). The particular focus of the conference was "Islamic Banking". Alexander v. Vietinghoff-Scheel, lawyer for KWAG - Law Firm for Economic and Capital Investment Law -, took part in the conference in order to specifically address the rights of investors.
"Islamic Finance"" (IF) is the generic term for a variety of different financial business models which are governed by the rules of the Koran and Sharia law. In addition to the prohibition of interest and the fact that no capital may be invested in the production of alcohol, pork, weapons, pornographic products and betting one of the key principles is that no return may be possible without your own risk (also for banks). It is noteworthy, therefore, that many of these financial operations have survived the financial market crisis virtually unscathed because of these principles. In many cases capital investors of these IF products have lost less capital from the financial market crisis than is the case with conventional - ie non-Islamic-compliant - financial products.Thus statistics indicate: the market for Islamic-compliant investments is growing.
Apparently Germany will now also participate in this growth market. Certainly the assertion of the President of the German Federal Financial Supervisory Authority, Jochen Sanio, can hardly be understood otherwise, "I see no reason why providers of these financial products should not get a banking license from the BaFin."
Yet in Germany there is no larger number of IF-investments besides some of the smaller funds. However, if you look at other Western European countries - particularly Britain - the IF represents a growth market there.
But which opportunities are there for Germany through the IF? Two areas are to be observed:
Part 1: Opportunities for Investors
For many of their investments capital investors could benefit from a higher security of capital investments. The financial market crisis - especially the bankruptcy of investment bank Lehman Brothers - has shown: Many financial products are pure speculation by financial institutions at the expense of investors. Because of the ban on betting and the obligation of providers of IF products not to carry out any unilateral distribution of risks at the expense of capital investors, some key risks of financial products can be eliminated:
Many Sukuks (Islamic compliant bonds) may thus provide safe investments with good returns in times of turbulent financial markets.
In many Islamic countries investors also invest in the relatively safe Takaful (a kind of co-insurance). In some Islamic countries Takaful are even preferred by the majority of non-Muslims living there because they hope to gain more security from these insurances than from traditional insurance or investment products.
Another important form of capital investment is the Murahaba (a type of debt financing) This could be particularly interesting for German house builders: Since there is a prohibition of interest in Islam, the bank buys the property (or any other desired capital item) and then sells it to the borrower in installments. Both parties therefore bear the risk of default. In Germany, however, problems are still being caused by the current tax laws, as real estate transfer tax is expected to incur twice for such a business.
Part 2: Opportunities for entrepreneurs for corporate financing
The credit crunch is on everyone's lips. Islamic Finance could be a solution to overcome this dilemma:
On the one hand capital for investment is available at many banks and investors from the Islamic world. Due to the much more defensive orientation of its investments the Middle East has been relatively unscathed by the financial crisis. For German entrepreneurs this could now be an opportunity to meet their financing needs, without risking too much:
One possibility is Mudaraba. An investor (bank) provides the capital, the other party provides the management, manpower, etc. The investor in this is a silent partner. Losses of the business are borne by the investor, but for him a share in profits is agreed upon in advance. This is a sort of mezzanine financing, which could be particularly interesting for German small and medium-sized businesses.
Another form of financing is Musharaka. Here gains and losses are shared equally between investor and capital seeker. This form of equity financing corresponds to a joint venture.
Part 3: Conclusion
Islamic finance can be interesting for German investors as well as for German entrepreneurs. "Islamic" is ultimately only the name of the products , instead they could also be called products that submit to special - here Islamic-compliant - rules. Investors and entrepreneurs could benefit from these rules because they provide an equal burden sharing with the banks and credit institutions.
The law firm KWAG has been engaged in Islamic-compliant products for some time and, due to its many years of work for investors in the wider Middle East has a good network in the Arab world. The law firm KWAG has been engaged in Islamic-compliant products for some time and, due to its many years of work for investors in the wider Middle East, provides a good network in the Arab world. For inquiries and information please contact :
Jens-Peter Gieschen, partner of the law firm, attorney and lawyer specializing in banking and capital market law