Islamic finance yet to capture Germany's imagination

AsiaOne:Despite a huge potential client base, Germany has proven reluctant to adapt its legal and tax systems to attract Islamic finance, which has enjoyed stellar success in Britain.

However Islamic investment funds based abroad are beginning to make considerable inroads into the property market of Europe's biggest economy.

What sets Islamic finance apart from other banking systems is that no interest is collected on loans, as this is seen as usury - a practice banned in Islamic law - and speculation.

The risks and rewards are shared between the bank and the client and debt levels are carefully monitored.

In recent years, Islamic finance has grown exponentially in the Middle East, Southeast Asia and Britain. Global assets held by Islamic banking institutions stood at nearly 500 billion dollars in 2008, compared to 260 billion in 2004, according to management consultancy firm Booz and Company.

With some 3.5 million Muslims, mainly of Turkish origin, Germany offers enormous potential demand for banks providing retail Islamic financing, said Zaid el-Mogaddedi, president of the Institute for Islamic Banking and Finance in Frankfurt.

"But the German legal and financial system is not yet geared towards the development of Islamic finance. Politicians are very wary," El-Mogaddedi said.

For their part, German banks have been quick to offer products that conform to Islamic Sharia law. But only outside Germany.

Deutsche Bank has been issuing "Sukuks" (bonds without interest payments) in cooperation with Saudi Arabian banks since 2005.

Dresdner Kleinwort, a subsidiary of Dresdner Bank, co-organised a similar issuance of one billion dollars in Bahrain in 2007, said Simon Grieser, company lawyer at Mayer Brown in Frankfurt.

However, the collapse of Commerzbank's Al-Sukoor equity fund is a less heartening example. When it was wound up after five years, it had tapped a mere four million euros (S$7.66 million), a long way from the amount it needed to make a profit.

"Unlike in Britain, not many rich families from the Gulf have settled in Germany and the Turkish community puts its money in savings banks like everyone else," said Volker Nienhaus, president of Philipps University in Marburg and a researcher of Islamic finance.

On the other hand, Islamic investors are beginning to move into the German property market - if only tentatively.

Arab Investments, based in London, has already acquired 400 million euros' worth of commercial property in Berlin, Dresden in eastern Germany and the southwestern city of Karlsruhe.

It expects to invest a further 300 million euros in 2009, says Lars-Oliver Breuer from the real estate company Savilles in the northern port city of Hamburg.

But the presence of Islamic funds on the German real estate market, which attracts between 20 and 60 billion euros of investment per year, remains "relatively small at the moment," he added. "There are enough German investors in the market" and the strong euro - even though it has weakened significantly recently - puts off Islamic investors, Breuer noted.

German officials are wary of Islamic finance because certain funds are said to be shaky and sometimes lacking in transparency.

An internal Deutsche Bank survey in 2007 showed that "the Islamic money market is based mainly on commodity trading by brokers who are not very reliable in certain cases."

The survey also warned there concerns about a potential liquidity crisis surrounding Islamic banking.

Islamic finance gaining ground in Germany

Arab News : While the United Kingdom and London in particular may have the pole position in facilitating Islamic finance in Europe, Germany potentially could emerge as an even bigger market for Islamic finance on condition that it gets its act together in several areas especially on introducing enabling legislation and increasing government support.

At the first major Islamic finance conference held in Germany and organized by IIR Deutschland in Frankfurt last week, the message was clear that despite the lack of government involvement in the sector, the number of Islamic finance transactions is increasing especially in the real estate and capital markets sectors. "The politicians for their own reasons simply appear not to be interested in facilitating Islamic finance as in the UK," explained Dr. Simon Grieser of the law firm Mayer Brown LLP in Frankfurt.

At the same time, Dr. Grieser could not explain why the momentum created by the issuance of the first quasi-sovereign Sukuk (Islamic securities) in Europe by the German state of Saxony-Anhalt in 2006, has not been further leveraged. "I do not understand why there have not been more issuances in Germany especially by local corporates and why the market has not capitalized on the Saxony Anhalt Sukuk, which was successful and subscribed largely by European investors. It is very disappointing," he added.

It is of course possible to structure Islamic financial transactions in Germany and indeed acquire an existing bank and "convert" it into an Islamic bank, subject to the provisions of the German banking Act and approval from the German Federal Financial Supervisory Authority (BaFin) and the Deutsche Bundesbank (the central bank). But despite the fact that Germany is one of the three largest economies of the world and German trade with the GCC countries is much bigger than the UK's trade with the region, Islamic finance has not featured as strongly as it has in London's trade and investment relations with the Muslim countries.

At the same time, Germany has a Muslim population of just under 5 million, of which 3 million are Turks. This is more than double the UK's Muslim population of just over 2 million. However, according to Dr. Patrik Pohl, general manager, Bankamiz, the special banking brand aimed at Turkish clients of Deutsche Bank in Germany, it is a question of market education. Most of the Turks in Germany do not "embrace Islamic finance" nor have much idea of it entails. Bankamiz is available in 55 Deutsche bank branches in germany and the plan is to increase this to 80 by the end of 2009. Similarly the service has attracted 60,000 clients and this is projected to grow to over 100,000 by end 2009.

German banks such as Deutsche Bank, Commerzbank and Dresdner Bank are already well involved in the sector albeit in overseas markets. Deutsche Bank for instance has co-lead managed MTN issuances for the Jeddah-based Islamic Development Bank and pioneered the Islamic Equity Certificates with National Commercial Bank of Saudi Arabia ? a product which the promoters claimed was the first Islamic retail product with universal marketing application and capability.

Commerzbank on the other hand structured the Al-Sukoor European Equity Fund on behalf of Al-Tawfeek Company for Investments, part of the Jeddah-based Dallah Albaraka Group which was largely aimed at Turkish expatriates on Germany and the Benelux countries, and later marketed to Turkish retail investors in Turkey as well. But the Fund for a number of reasons closed after four years.

In 2006, Abu Dhabi Investment House launched the 600 million euro Gulf German Residences Fund, an Islamic real estate fund, which invested in a portfolio of 100 buildings located throughout Germany. In 2006 also, CCH Europe GmBH, the German subsidiary of UK trade finance group, CCH International, arranged the first Islamic trade finance facility for a Russian Bank ? a $20 million Murabaha for Globexbank of Moscow, with the funds provided by a GCC Islamic bank.

Similarly, Arab Investment Ltd launched its debut German AIL Fund 1, with an investment of 400 million euro in 2007 and which invested in a portfolio of commercial properties and shopping complexes in Berlin, Karlsruhe and Dresden. According to Lars-Oliver Breuer of Savills (Germany), the property investment adviser to the Fund, there is increasing demand from Islamic investors for selected opportunities in the larger economies in Europe such as Germany. The country, he added, has a stable investment market with much less market volatility and as such has a high investment attractiveness for overseas investors.

The German real estate market also "has an excellent price/performance ratio" underpinned by favorable rent levels and high quality of construction. Germany also has one of the best deal flows in a number of attractive locations, although these deals would be above the 100 million euro levels.

Many German bankers and market players are keen to see the German government, the Deutsche Bundesbank and BaFin to be more proactive in facilitating and promoting Islamic finance, not only as a part of a social and financial inclusion policy initiative, but also to attract more investments and facilitate greater trade and financial cooperation with Muslim countries. After all, Germany already has a more competitive market position than the UK, and yet London is way ahead in terms of being an international Islamic financial center.