List of Tables
List of Figures
Glossary: Main Islamic financial terms
2 Objectives and Methodology
2.1.) Problem Identification and Explanation
2.2.) Research Questions
3 Survey of Literature
3.1.) Islamic Finance
3.2.) Detail "interest free"
3.3.) Detail "Helal"
3.4.) Internal View, Banks
3.5.) External View, Customers
3.6) Summary of Literature survey
4.2.) Detail "interest free"
4.3.) Detail "Helal"
4.4.) Internal View, Banks
4.5.) External View, Customers
4.6.) Summary of empirical part
5.2.) Detail "interest free"
5.3.) Detail "Helal"
5.4.) Internal View, Banks
5.5.) External View, Customers
6.1.) Main Objective
6.2.) Detail "interest free"
6.3.) Detail "Helal"
6.4.) Internal View, Banks
6.5.) External View, Customers
8 Appendices and Questionnaire
This work analyzes whether in recent years Islamic financial developments apply globally, for example to Germany. The author is interested in the reality of Islamic finance and its potential existence in non-Muslim environments? In much of the extant literature, studies consider a theoretical model such as: “The stability of Islamic finance”. The authors in these studies tend to focus on global Islamic banks. In the present study, the Author wants to examine the situation for a specific non- Muslim country like Germany. The second focus is to find out whether there is a relationship between the number of Muslims in Germany and the need for Islamic financial products. A detailed view of market entry and critical key indicators are analysed. The current laws and their handling by Islamic banks will additionally be examined. To complete this research, a comparison with a country with more real market experiences in the field of Islamic finance, such as Turkey, will be undertaken.
Islamic economics, Islamic finance, Islamic banking, economics, theory of finance, finance, bank stability, confidence, welfare
Cilem práce je formulace doporu čení pro posilení pozice bank orientavaných na poskytování finančnich produktů splňujících požadavky islámského práva v zemích s muslimskou menšinou. Zámĕrem autora je posoudit konkurenceschopnost a udržitelnost bank nabízejících islámské finanční produkty v zemích jako je 3ĕmecko.
Vcelé řadĕ odborných publika í bylo poukázáno na nárůst počtur bankovních subjektů orientujících se na islámské finančni produkty. Jednim z dílcích cílů je nalezení vztahu mezi nabídkou tĕchto produktů a velikosti muslimské komunity v nemuslimských zemi typu 3ĕmecka.
Práce poskytuje doporučeni pro banky uvažující o vstupu na trh produktů islámských financí v nemuslimských zemích. Práce srovnává zkušenosti nĕmeckého a tureck ého trhu.
Islámská ekonomika, islámsk finanční produkty, islámské banky, 3ĕmecko.
LIST OF TABLES
- Table 1: Banking sector structure in “Islamic” countries as of 2007,
- Table 2: measuring stability, selected conventional versus Islamic banks,
- Table 3: Summary Statistics of the Sample, 1993-2004,
- Table 4: Summary Statistics of the Sample, 1993-2004,
- Table 5: Frequently Performed Religious Acts According to Socio-Demographic Characteristics,
- Table 6: Evaluation of Religious Items (Median*),
- Table 7: Membership of Mosque Organizations,
- Table 8: Members of Selected Roof Associations and Total Membership,
- Table 9: Results IF Questionnaire , Cluster B: wishes for assets,
- Table 10: Results IF QUESTIO AIRE, Cluster D: Interest Islamic Finance Products,
LIST OF FIGURES
- FIGURE 0: RESULTS IF QUESTIO AIRE VERSUS RATE (CO TROL-SAMPLE),
- FIGURE 1: COMPARISO OF AVERAGE Z-SCORES,
- FIGURE 2: AVERAGE BA K STOCK RETUR BY SPECIALIZATIO 1995-2009,
- FIGURE 3: UMBER OF ISLAMIC BA KS REPORTI G TO DATABASE BA KSCOPE,
- FIGURE 4: EXPA SIO OF ISLAMIC BA KI G 1995 - 2008,
- FIGURE 5: CHALLE GI G EEDS, EXTER AL VIEW,
- FIGURE 6: SAVI GS MOTIVATIO CHALLE GI G, EXTER AL VIEW,
- FIGURE 7: EXTER AL VIEW O EEDS A D ASSET-DEVELOPME TS,
- FIGURE 8: PRIVATE EEDS, SAVI GS A D CO SUMPTIO ,
- FIGURE 9: DEGREE OF RELIGIOUS BELIEF,
- FIGURE 10: MEMBERSHIP OF A MOSQUE ORGA IZATIO ,
- FIGURE 11: MAI CLUSTER EXTER AL VIEW, FI A CE PRODUCTS,
- FIGURE 12: PRIVATE EEDS, SAVI GS A D CO SUMPTIO , MODIFIED,
- FIGURE 13: RESULTS TURK ISBA K 2010 - 2011 I COME STATEME TS,
- FIGURE 14: RESULTS “I TEREST FREE BA K”,
- FIGURE 15: RESULTS HELAL, MURABAHA, I TER AL,
- FIGURE 16: RESULTS HELAL, BA KI G PRODUCTS, I TER AL,
- FIGURE 17: RESULTS I TEREST FREE, MAI PRODUCTS, I TER AL,
- FIGURE 18: RESULTS 5 TURKISH ISLAMIC BA KS,
- FIGURE 19: RESULTS 5 TURKISH CO VE TIO AL A D 5 ISLAMIC BA KS,
- FIGURE 20: RESULTS GERMA BA KS 2010 - 2005,
- FIGURE 21: RESULTS GERMA BA KS 2010 - 2005, I COME STATEME TS,
- FIGURE 22: RESULTS TURKISH BA KS 2010 - 2005,
- FIGURE 23: RESULTS TURKISH BA KS 2010 - 2005, I COME STATEME TS,
- FIGURE 24: RESULTS TURKISH ISLAMIC BA KS 2010 - 2005, I COME STATEME TS,
- FIGURE 25: RESULTS GLOBAL CO VE TIO AL A D ISLAMIC BA KS 2010 - 2006,
- FIGURE 26: RESULTS GLOBAL ISLAMIC BA KS 2010 - 2006, I COME STATEME TS,
- FIGURE 27: RESULTS IF QUESTIO AIRE, CLUSTER A PERSO AL DATA, AGE, PLACE OF BIRTH,
- FIGURE 28: RESULTS IF QUESTIO AIRE, CLUSTER A PERSO AL DATA, EDUCATIO ,
- FIGURE 29: RESULTS IF QUESTIO AIRE, CLUSTER A PERSO AL DATA, PROFESSIO ,
- FIGURE 30: RESULTS IF QUESTIO AIRE, CLUSTER D: I TEREST ISLAMIC FI A CE PRODUCTS -> “ASSETS & CREDITS,
- FIGURE 31: RESULTS IF QUESTIO AIRE, CLUSTER E: POSSIBLE ISLAMIC FI A CE PRODUCTS,
- FIGURE 32: RESULTS IF QUESTIO AIRE , CLUSTER F: ADVA TAGES & DISADVA TAGES,
- FIGURE 33: KEY ES IS-LM MODEL MODIFIED,
The most important Islamic financial terms:
Bai 'al' inah (sale and repurchase agreement)
An agreement for a purchase or sale between a lender and customer. The lender buys a product or service for the customer on a spot basis. Then the asset is sold to the customer on a deposit basis and the remaining price is paid in installments.
Bai 'bithaman ajil (deferred sale)
The sale of goods with postponement, based on agreed prices, and with a fixed profit margin.
Bai al salam
A contract in which payments are made for goods in advance. The seller undertakes to deliver the agreed specific goods to the buyer at a later time. It is necessary that the quality of the goods is fully agreed upon, so that no ambiguity can arise.
An agreement between two or more partners, each partner brings a share of funds into the cooperation. Profits are distributed according to the proportion invested among the partners. In case of loss, each partner loses capital in the same proportion.
A special kind of partnership, where one partner brings money for investing in a
commercial enterprise, which is called "Rabb-ul-mal", while the management and work is exclusively done by the other partner, called “mudarib”.
A contract in which the seller of the goods announces a fixed fee. This fixed fee is then agreed with the buyer and becomes valid in the agreement.
The negotiation of a purchase price between two parties, without the transparent involvement of the seller’s calculation.
Everything which is "not allowed" in regards to Islam.
What Islam "allows".
An ex gratia payment of a debtor by another debtor with respect to a loan.
Leasing; generally, Ijarah concepts are selling a benefit or service for a fixed price or wage.
Quard Hassan (good credit / benevolent loan)
A loan that is extended as a gesture of goodwill and the debtor is only required to repay the borrowed amount.
Sukuk (Islamic bonds)
The Arabic name for financial certificates, which generate a development primarily through investments.
Takaful (Islamic Insurance)
Is an alternative form of cover that a Muslim can hedge against certain risks, losses or accidents. Takaful is based on the idea that what is uncertain for one person may be uncertain for a larger number of people. By combining the risk of many people, it provides each individual an advantage, which is acceptable by the law of large numbers.
Haram, automatic increase or surplus means and refers to any kind of interest.
Finance Institution, bank or trustee of a fund.
Occurs when a person appoints a representative to undertake transactions on his /or her behalf, similar to the power of attorney.
A tax that is payable by all people in Islam, whose wealth is above a certain threshold.
The author has worked since 1988 in an international business environment. Within this time, he was trained with relevant theoretical knowledge, practical experiences and was also part of many important decision making situations. The author tries in his economic conduct to be careful with the rules of Islam.
During this time, the idea was born, started by simple questions:
Are there any rules and standards of behavior for global economic decision- making processes? How much influence does religious education have on particular financial settings? Are they important targets, which have to be fulfilled?
Are there certain Islamic, Jewish, Christian Practices and Aims for Business?
And if so, what are the concrete measures and consequences for a market and its participants?
With this background, starting from the year 2000, the author observed and investigated economics sources. Here, the concrete issue of Islamic finance became more and more compelling. The development of Islamic finance in recent decades is characterized by increasing, worldwide market share. With the most recent crisis of 2008, Islamic finance strengthened its global attention. This was due to profit increases throughout the period of crisis.
Most of the scientific studies and literature have presented an extremely theoretical conception of stability. This has been due to a widely comprehensive overview of Islamic financial institutions - a global perspective.
For the author of the present study, the main approach is a detailed consideration of the practical implementation of Islamic principles as are relevant to private and business customers.
This study is addressed to the scientific community and attempts to contribute a refreshing perspective on the complex topic of Islamic finance.
2 Objectives and Methodology
My research work is motivated by clear and complementary knowledge between theoretical arguments and opinions in relation to Islamic finance.
This will be undertaken by comparison of a non-Muslim country such as Germany with a Muslim country such as Turkey.
2.1 Problem statement and explanation
There are, as in the Christian and Jewish world, many opinion leaders in the Islamic world. The publications display a consensus towards various theoretical objectives in an economic context. In most cases, however, there is little or no evidence base.
These publications display a use of old arguments, each side focused solely on the demand side or the supply side of economics.
Real challenges and developments may begin, from the author’s perspective, only by practical, bottom up, analysis. The two essential components of the market were included in this study.
As my "Hoca" (Preacher) once said in his prayer, “It is absolutely important to be honest and pure, but as Muslims we must start with ourselves!” I want to take these words and turn my focus to the world of Muslims, especially to the world of Muslims in so-called non-Muslim countries.
The problem that exists in the literature about facts and figures, for example, will be addressed through the creation of a separate factual basis.
The representative set of micro data will allow us to make a statistical interference, due to my work. This data is significant for a large number of people - for example, Muslims in Germany.
The relevant questionnaire was distributed in an electronic form, with both residential and business customers involved. This result of the demand side has been reflected in workshops with banks.
The organization of this work is as follows. Initially, we started with an overview of research objectives. The research objectives are formulated into main objectives and secondary objectives (which are derived from the main objectives).
The analytical framework of the study begins with the integration of major theories and publications in the field of Islamic finance. Islamic finance is presented against conventional (traditional) finance in terms of their differing theoretical foundations and practices.
The basics of Islamic finance are presented, along with sources, and will assist comprehension of the concepts for non-Muslim readers.
This step will be added to with a detailed description of Islamic financial instruments and institutions, in comparison with the conventional instruments and banks. This analysis is based on the German market, with comparison made to the Turkish market.
Building on historic and recent elaborations, the key indicators of Islamic finance are analyzed. These indicators are further investigated by including the Muslim population as an external view and the internal view of banks as a whole in Germany and Turkey.
The empirical validation of these findings and their theories begins with the presentation of the research methodology. The corresponding assertion is reflected in the course with the results and analysis. The results of the empirical testing are related with the corresponding relevant hypotheses. Finally, limitations of this research are discussed and suggestions for future research projects are mentioned.
2.2. Research Questions
After first examining the various sources, we felt the need for a clear description of the main advantages of Islamic finance for Muslims in Germany. Are there differences for Muslim customers in their choice of financial products?
If we look at the supply side, or as we call it, the internal view of banks, we find several arguments providing an impression of stable Islamic finance as an alternative to conventional banks.
Are these findings relevant to the specific markets of Germany and Turkey?
Furthermore, there is not at a present a voice in the Muslim world defining the results of communication, and the advantages and disadvantages of Islamic finance, particularly in regards to Germany or in Turkey.
If we proceed to look at the internal view of a bank, which makes the provision of financial services within a market, we must also examine the external view of demand from the perspective of potential customers in Germany and Turkey.
The question of decision-relevant indicators, which characterize the financial behavior of Muslims in non-Muslim countries, such as Germany, and are one of the important pillars of this research.
In line with this background, the "demand" and "supply" side are represented in Germany, for analyzing the differences and factors influencing the choice of Islamic financial products or conventional products.
We are trying to get an idea of the demand for Islamic products looking to get market shares, even if the data is not readily available? (Visser, 2009)
2.2.1. Questions and objectives
If there is a demand for Islamic financial products, what are the indicators of choice? Are there Islamic financial products that only Muslims choose? What are the indicators of the distinction between Islamic and conventional banks?
In line with this background, I define the main objective of this thesis:
Is there a relationship between the number of Muslims in Germany and successful Islamic financial placement?
Derived Partial objectives
To achieve meaningful and differentiated models and measurable responses, we derive from the above target the following detailed issue positions. This method allows the author to achieve a quantitative and qualitative result range.
2.2.2) Islamic finance institution, detail "interest-free"
Is a financial system without an "interest rate" practicable in a non-Muslim country?
A detailed review of internal procedures for an Islamic financial institution compared to a conventional bank will give us information on this.
2.2.3) Islamic finance institution, detail "Helal"
Can a "Helal" profit and loss participation system in a non-Muslim country be profitable and sustainable?
In an interview the relevant and important cornerstones are illuminated by "insiders".
2.2.4) internal view of banks
Is the difference between Islamic finance and conventional finance mainly found in improved product portfolios for customers?
The measurement of stability takes place through the integration and inclusion of z-option functions and analysis of income statement indicators.
2.2.5) external view of customers
Is the market success of Islamic finance dependent on the relative proportion of Muslims in non-Muslim countries such as Germany?
The corresponding analysis will be prepared and made from similar studies in the OECD, IMF, World Bank, ECB, and other statistical institutions. Here, a synthesis of results from a representative ethnic group in Germany and from the relevant comparison group of Turkey, will take place.
The leading objective of this research is to identify key market factors within the German market and, if necessary, by comparative with the Turkish market, in order to determine the relevance of Islamic finance. For this project, earlier empirical research results such as the IMF working paper from 2008 and empirical analysis from Islamic Banks regarding their financial stability are included.
This study examines the factors of supply and demand in order to identify possible details that display performance differences between Islamic and conventional finance. This study is structured towards finding a synthesis between theoretical real market aspects of finance.
A questionnaire distributed to private and business people has reached approximately 1,000 recipients in Germany. The responses include 73 from private individuals. The author has created a fact database with the feedback data from the electronic questionnaire. The first electronic distribution of the questionnaire did not receive satisfying return rates. In light of this, the interview form was chosen. This interview approach provided a substantially better answering rate and therefore a possible insight into the understanding of the external view has become possible. The demand indicators became available and their relevance to the definition of our problem has become clear. Our participants are engaged Muslims and mainly members in the Turkish, Islamic Organization DITIB.
In order to verify these outcomes, the author has provided the standard approach used in other areas. The choice of this approach was done openly, so that a legitimate statement to a gigantic number of people was possible. It was given in a political area, specifically one relation to classical elections. Accordingly, an analogy has been chosen by "infratest Dimap", and we have found that the usual development of an "opinion picture" is usually done by a choice of 1,000 people as a controlling test for the German population of approximately 82 million human. If we now take our achieved comparative rate, this result gives us the impression that we can proceed to work with these results as usable.
illustration not visible in this excerpt
The structure of the questionnaire is divided into personal information, the interest in "everyday use", and the demand for banking products. In the last part, experiences and suggestions are requested in the context of Islamic finance.
The above mentioned feedback was obtained during interviews with banks in Germany, with an "IS-Bank" in Frankfurt and the "Kuveyt Turk" in Mannheim, representing conventional banks, as well as the first Islamic bank in Germany. This mixture leads to a constructive point of view of Islamic finance.
The Islamic financial data are empirically tested in a survey. The necessary data generation was achieved using a standardized questionnaire. Results of the questionnaire are provided in section four; the questionnaire itself is attached in Appendix, Part 8.
For the supply side, banks were analyzed in detail for both the German and Turkish market. Thirdly, we will analyze the global level of conventional banks and Islamic financial institutions through comparison to each other, using the database “BankScope”.
The empirical data analysis follows a two-step approach; first, the reliability and validity of the data is tested using a comparison with other similar approaches, such as the model for national elections.
Second, the relevant hypotheses are analyzed for their relations issues. The influence of various factors on the different hypotheses is accomplished using correlation analysis.
The electronic questionnaires were used so that respondents had a convenient way to answer. We first tested the questionnaire sample. Additionally, we included rewards to increase motivation. Ultimately, the decision was made to obtain data through the form of an interview.
Before the final version of the questionnaire was distributed to potential participants, we played through the phone interview in advance in order to test the review, the adequacy and clarity of questions. These interviews lasted on average between 15 minutes and 20 minutes. As a result, small improvements were made to the questionnaire again. All the data generation phase was conducted between February 2012 and December 2012.
This research process for the synthesis of information is often subject to interpretive use of data, which can contain respective tasks.
In light of this, as well as the definition of the selected theoretical findings, a determination of our subject’s subjective perceptions was made. In this project, we have the advantage of screening and selecting the appropriate Islamic literature by relevant legal enforcement quickly. Armed with this information and the relevant problems, we attempt to synthesize knowledge in order to gain new insights into our concrete research task.
Again, the integration and the approaches of former studies in this research field are helpful and function to help check our position target.
Starting with the findings from the questionnaires and the interviews, we were able to illuminate the most important cornerstone of Islamic finance.
In conjunction with the information from “BankScope” the market-oriented view of Islamic finance was clearly shown on the national and international level.
We finally mirrored our findings with the results of our survey for Muslims in Germany and our view of the Islamic financial records.
3. Literature Overview
In this chapter, we will analyze the latest elaborations based on our questions in Chapter 2. We are starting with historical insights, and moving forward to the latest analyzes and publications.
Starting with the dissemination of the Kuran by an order from ALLAH to our Prophet Muhammad (s.a.v.), a well-known illiterate wholesaler, he was brought into knowledge of the other two main religions, Christianity and Judaism. This was necessary in order to fulfill the foundation of Islam as a whole. This inspiration has taken place around the existing knowledge; the main sources come from regional, cultural and human behavior at the time.
Looking at the economic dictates of the Kuran, we always find two essential conditions in several verses:
b) "Helal" (bypassing of "Haram")
Now, about 14 centuries later, we find that in many central banks such as the U.S. and Japan, the interest rate is at zero or only slightly above.
On July, 30th.2010, the three-month Libor was fixed at 0.46563 percent of dollar. Although not obviously unintentional, none of these countries has reduced its interest rate to zero for religious or ideological reasons. (Cizakca, 2011, p 230)
On the following pages, the findings are presented in clusters. Starting with the above-mentioned two main-conditions, they involve previously mentioned details, followed by market participants and the view of customers.
3.1. Islamic Finance
Islamic economic theory and Islamic finance are in accordance with Islamic law. Economies may relate the application of Islamic law to economic activity; this applies to countries where Islamic rules are already in force, as well as not.
3.1.1. Islamic economic thought
The early Muslim scholars have based their economic analyzes on the Kuran and the Sunnah, the sayings and doings of Prophet Muhammad (s.a.v.).This important transmitting of original sayings and doings is based on an excellent procedure for filtering the outcomes by sources and contents, over more than many centuries by selected personalities.
The most well-known Islamic scholar, who has written about the national economy, is Ibn Khaldun (1332-1406), who is considered the father of modern economic theory.
Ibn Khaldun wrote on economically and politically relevant theories in his introduction to "Mugadimah" and in his “Kitab al-Ilbar (History of the World)”. In his books he talks about "asabiyya" (social cohesion), which he developed as the cause of itself, to explain flourishing civilizations. Ibn Khaldun has found that many social forces behave cyclically, although there may be sudden, abrupt curves, which can break the overall development of a cycle.
His ideas about the benefits of the division of labor are also related to "asabiyya" (social cohesion); the greater the social cohesion, the more complex the successful division of labor. He has found that growth and development positively stimulate both supply and demand, which in turns determines the prices of goods. In macroeconomic terms, he also comes to the conclusion that macroeconomic forces stimulate population growth, develop human capital and promote technological development.
In fact, Ibn Khaldun wrote down that population growth is directly a function of wealth. In this context, it is noteworthy that "An investigation into the nature and Causes of the Wealth of Nations" was written by Adam Smith in 1776.
Other important early Muslim scholars, who have written about the economy are: Abu Yusuf (731-798), Ishaq Bin Ali Al-Rahwi (854-931), Abu-3asr Muhammad Al-Farabi (873-950), Qabus Ibn Wushmagir (977-1012), Ibn Sina, Abu 'Ali al-Husayn (980-1037) , Ibn Miskawayh (940-1030), Ibn Mu ammad al-Ghazali (c. 1058-1111), Al - Mawardi (1075-1158), Mu ammad b. al- asan 3a ir ad-Din usi (1201-1274), Ibn Taimiyah (1263-1328), Ibn Muhammad alMaqrizi (1364-1442) and Taqi ad-Din (1526-1585).
Among this scholars have been developed the foundation of today's investing methods and stock exchanges.
3.1.2. Cornerstones of Islamic finance
The basic tenets of Islamic finance are clearly set out in the following two verses of the Kuran:
Allah has carrion, blood, pork ... forbidden ... But who is forced, without exploitation and without exceeding ... there is no sin. Verily, Allah is EverForgiving, Most Merciful. Kuran (172 ;)
Interest beneficiaries will rise up as the devil would have beaten them personally. This is for those who say, "Trade is like taking interest." But God has declared the trade "helal" and the rate and any type of it as "haram"… Kuran (274)
The first verse (172) explains that certain offenses in certain circumstances can be tolerated. To this end, Muslims must be included, even when in so-called non-Muslim countries. Where focus is intense, there is always a permanent Muslim motivation for obtaining the fully comprehensive union with the Kuran.
The second verse (274) stipulates that an Islamic financial system must be based on trade and production, and only prohibits interest. It defines that the financial products have to be "Helal" and have to follow the principles by avoiding "Haram" bids. A core principle is that Islamic finance is an equity-based system, where all financial agreements are based on profit and loss sharing of the economic results. All financial assets are dependent claims, and there are no debt securities with fixed or revolving interest rates.
Although credit is not prohibited in Islam, it must be purely interest-free and straight, named in the Kuran as "quard-ul-hassan".
3.2. "Interest-free" as an Islamic financial details
3.2.1. Internal view "interest-free"
In Islamic finance, companies and banks obey a long-established principle: the prohibition of interest. Based on this principle, Islamic financial institutions have managed to gain a market share even in so-called non-Muslim countries.
Figure 1; the z-score has been used as a dependent variable for measuring the individual bank risk, and relating it to the potential of insolvency. This means that the higher the Z-score is, the more stable the bank. The efficiency of the z-score is that it is screening - among others - the bank’s asset values and shows if the values of debts are possibly lower (Maechler, Mitra, Worrell, 2005). A total of up to 520 observations for 77 Islamic banks of mostly Islamic countries and 3.248 observations for 397 commercial banks internationally, mostly non-Muslim countries, in the period from 1993 to 2004, has been used. That small Islamic banks are more stable than conventional banks is understood as being determined by their “interest” and “haram” and also as explaining why larger Islamic banks are weaker. The possible answers are given by the authors in 3.4.6 (Cihak, Hesse, 2008).
illustration not visible in this excerpt
For this purpose, the fundamental question of how an operational implementation of interest-free "daily business" within a bank is important to analyze. We did not find a relevant and detailed answer to this question in the literature.
Also an important question that we screened here is how to serve “interest-free” financial products, like mortgage loans, in detail. In the interviews with a conventional bank and an Islamic bank, this approach was questioned, based on a list of analyzed key performance indicators (kpi) and the results presented in the fourth chapter.
Based on these kpi´s, the impact on both the customer and the bank are identified. These results have an impact on the assessment of the sustainability and competitiveness of Islamic financial institutions.
The analysis takes place in Germany and will give us a deeper insight between Islamic banks and conventional banks.
The following questions will guide us in this regard: what does the ban of interest rates in Islamic banking mean in practice? What sustainable income options do Islamic banks have? What sustainability over conventional banks is available?
These results are relevant for the whole market in Germany and comparability is drawn from the Turkish market analysis.
In the following figure the performance of Islamic banks and conventional banks is shown from 2005 up to 2010. This chart is based on attractiveness or how efficiently the banks are acting in the markets; the variable bank stock return is therefore an excellent value for sizing and informing third parties, such as investors.
Figure 2: depicts a nearly identical performance of Islamic and conventional banks, and we see a differing move in the crisis period in which the conventional banks are been negatively affected earlier, but they are recovering earlier in higher speed crises, much like Islamic banks. This is interesting for the purpose of defining the main differences in the product portfolios of Islamic and conventional banks, and the author will analyze further this subject within this research.
illustration not visible in this excerpt
The author will look to the main possible differences between Islamic and conventional finance in regards to operating interest free, which is valid within the topic cash flows in time and refinancing from central banks. Here the aim is to conceive a perfect environment for an Islamic bank.
Suppose that a company has a long-term, fixed-rate debt. It would be excellent, that the current dividends and current earnings (before interest) which are issued by real. (Hassan, Lewis, 2007, p. 536)
3.2.2. External view "interest-free"
As a complement to the internal view of banks in connection with the interestfree approach, it is essential to seek the external view of the customer. If you would now consider the Muslim population in Germany, the general product demand is found; which has under conventional conditions certain problems for Muslims (Imram, 2008).
Furthermore, Imran, in her work "The Islamic economic system”, dated from 2008, identifies a compilation of financial product needs for Muslims and problems with the conventional market offers:
=> Giro account
Interest rates on deposits are given, along with overdraft avoidance. => Credit Cards
The prohibition of interest in overdraft. The charge card itself is not a problem from an Islamic perspective.
The waiver of interest is a strict commandment, both for buying a home or a business.
=> What to do if you receive interest after all?
This is just not acceptable for a Muslim. Prevention or meaningful donation of interest is required.
The lease may not contain any floating rate components as a function of time.
=> House or Apartment purchase
The financing through a conventional bank loan - desire for home or not, is forbidden (haram) and accurately reflects the classic prohibition against interest (Imran, 2008).
This also applies to financial speculation or products that contain structures that violate the basic pillars of Islam (Imran, 2008).
3.3. Islamic financial details "helal"
That several Islamic financial institutions are already operating successfully for several years in other nations, such as the UK, adds to our research a differentiated view regarding the characteristics of German market.
With a Muslim population of more than 4 million people, and with significant direct investment in comprehensive and economic relations with the world, Germany could be an interesting location for an Islamic bank? (3aggar, 1984 in Khan and Porzio, 2010).
3.3.1. Islamic finance, the German and European law
During the last 15 years, the federal supervisory authorities for banking, the Federal Banking Supervisory Office "BaKred” and the Federal Institute for Financial Services "BaFin", with various facilities, have had only preliminary discussions.
These parties were, on the one hand, Muslim groups living in Germany, which wanted to set up an Islamic bank, to build interest-free banking services for their own use. The perception of these described facts is quite negatively addressed in a wider context and assumes that only a little group of “extreme” Muslims in Germany are looking for their benefit, but the bigger and representative amount of Muslims feels comfortable with the given conventional solutions.
Secondly, there are major efforts by Islamic banks in the course of internationalization aimed at establishing a branch office in Germany. (Engels, in Porzio, Khan 2010).
Until mid-2009, however, there has not been any impact that would have established an Islamic bank branch in Germany.
Additionally the two state institutions, "BaKred" and "BaFin", have some doubts about the economic viability of an Islamic bank, which would like to offer services to a fairly small number of potential customers in Germany.
This is interesting in light of what has been discussed, considering those German banks offering Islamic financial products in other markets, such as Turkey, Qatar and so forth. It is worthwhile considering the real motivation for this position.
There are some conflicts between the German Banking Act and crucial banking techniques, especially refinancing from the central bank with interest. A further example: the German Banking Act requires that the entire carrying value of investments in shares result from capital contributions, as there are silent partners and profit participation rights (plus some other types of investment) which must not exceed the responsible participation of the bank’s.
Furthermore, there are serious concerns about the safety of deposits in connection with the "Profit and Loss"-Share holding principle within Islamic banking accounts, so there would be no guarantee for the full repayment of the deposited amount. Meanwhile, there was a paragraph that is added to the German Banking Act according to the EC directive. It forces financial institutions, which do not participate in a depot-protection scheme to clearly inform their customers of this fact (3ienhaus, 2010).
The last argument is the most serious, because it has far-reaching consequences within Europe. It was often said in recent years that the execution of one European, single economic space, the mutual recognition of licenses and the home country supervisor would facilitate the access of Islamic banks in Germany or in any other EU market. This bank would open subsidiaries in other EU Member States without authorization procedure (Porzio, Khan 2010).
But what looks at first glance to be a positive law raises additional serious difficulties. As the consequences of a European passport would affect all EU member states, all EU banking supervisory authorities shall cooperate closely and coordinate their own admissions procedures, in particular with regard to a new type of financial institution. Thus, the concerns of the German "BaFin" and all other supervisors must be held throughout Europe in all European countries considered. Indeed, this would mean that the strictest authority to determine the conditions of access of an Islamic bank in the EU market. (Porzio, Khan 2010).
It is hard to imagine that European authorities will take the initiative to develop an accounting and reporting system for Islamic banks, which incorporates the conventional environment.
The decision is that the argument of the inconsistency of Islamic banking techniques with the traditional bank and the supervisory control methods is highly relevant for strategic considerations of Islamic banks as well as for approving decisions of regulatory authorities across the European Union (Porzio, Khan 2010).
We will incorporate this further context, the successful examples from the UK, within our developments.
3.3.2. Islamic finance, detail "helal" in the global context
In a world of global finance the cash flows are increasingly linked. This also applies to the rising Islamic financial institutions.
With this background of "helal" principles, we will scrutinize the following configurations to ensure their passing into practice.
In particular, the results of the robust regressions in Panel A suggest that Islamic banks rely more on fee-based income, lower cost, higher provisions for loan losses, lower non-performing loans and have higher profitability and capitalization (Beck, Demirgüc-Kunt, Merrouche, 2010).
In addition, the Islamic economy only allows financial trading and working with "helal" money. This means that the money originating through the trade in, for example, alcohol, pork, pornography and so forth, is prohibited.
To ensure the "helal" principle, the bank must pursue this through handling and operational conditions.
Islamic finance is an alternative to conventional finance. Islamic finance is open to all mankind. The thrifty and careful handling of Islamic finance has increased its market share in the world economy since its inception in the 1970s.
The world's population is about approximately 23% of Muslims. The non- engagement by this population with conventional banks and their special customer needs indicates a further rise in Islamic financial institutions.
Since the opening of the first Islamic bank, "Kuveyt Turk", in Mannheim, Germany, 2010, real market experiences should now be taking place and will be presented in chapter 4.
3.4. Inside view of banks
Within this chapter the author wants to comb through the characteristics of banks from an internal point of view. Accordingly, necessity is given to screening the findings by a focus on fundamental structure, disadvantages and advantages of Islamic finance versus conventional finance, the staff, and operational details.
3.4.1 Basic construction of Islamic banks, disadvantages
The modern Islamic banking system is essentially divided into two categories. Regarding Askari, Iqbal, Krichene and Mirakhor and their work, "The Stability of Islamic Finance", dated 2010:
1) The first category is used for payment and storage of cash. Islamic banking is now based on 100% secure deposits in an ideal state of things. This system must be based on charges to service the costs of keeping payment services.
2) The second category is the investment banking division, whose accounts are considered long-term savings and deal directly with the banks, taking risk by trading, leasing and productive investment in agriculture, industry and services.
Short-term deposits can be used only for short-term trade finance operations with the bank, buying and selling goods or raw materials to other companies (Askari, Iqbal, Krichene, Mirakhor, 2010).
Favored by high liquidity, medium and long-term investment operations can be exerted. The longer-term investments used for longer-term engagements requires loans. The issue of investing in real estate and, for example, surcharge fees, affects the rates in turn for returning liquidity (Askari, Iqbal, Krichene, Mirakhor, 2010).
In all these investments, an Islamic bank is a direct owner of the investment process. In such a system, a financial institution will therefore participate directly in the assessment, management and monitoring of the investment process. Profits’ coming from invested capital arises through the later profits. Losses of the operation are distributed to the relevant account holders, as if they were shareholders of equity capital.
In the case of credit defaults, there is a significant risk for the account holder present. It remains to note that without appropriate government guarantees the account holders have the risk of complete loss. (Askari, Iqbal, Krichene, Mirakhor, 2010).
3.4.2 Advantages of Islamic banks
Based on the elaborations of Mr. Abbas Mirakhor, "Islamic Banking" in 1988, an Islamic financial system as a profit and loss system has been modeled for the first time, in which account holders are considered as shareholders. Here, no profit sharing is determined in advance. There are no debt securities with fixed or variable interest rates available. Financial assets are representing titles to property and founded on real values (Mirakhor, 1988 in Askari, Iqbal, Krichene, Mirakhor, 2010).
The principle of an Islamic financial model is quite simple: a company with its own finance equity. The profit share would be held by the respective profit and loss of the company within a period. The investment share is calculated on the invested equity capital. The rate of return is represented by the marginal productivity of capital, and the capital invested is represented by the consumption of the company.
This model appears and lives without the term of interest, because there is neither an agreement nor a capital loan of predetermined profit on borrowed capital. Capital belongs directly to the owner of the company, and the rate of return is created in the aftermath as a reward for the capital invested. The economy is in equilibrium, since real rates of return are relevant.
3.4.3 “Gelehrten-Rat” of Islamic banks
“BaFin” has in addition to the already mentioned concerns about the deposit guarantees other elemental concerns. The Supervisory Board existing out of Islamic scholars in Islamic banks is an important part. Each bank offering Islamic banking products and services, has to implement a Shariah Supervisory Board (SSB) in order to control the operations and activities of the Bank and to stay in compliance with Islamic principles (Engels, 2010, p174, in Khan, Porzio 2010).
In Malaysia, for example, the Shariah Advisory Council, which is linked to the Bank Negara Malaysia (BNM), defines the operations of these facilities and their products and services. In Indonesia the Ulama Council serves a similar purpose (Kamali, 1999).
By the increased market share of Islamic Finance, an increased flow of SSB advisory firms for providing consulting services has taken place. This applies in particular to their independence, impartiality and conflicts of interest are more accurately understood. In light of this, the WDIBF (Word Database of Islamic Banking and Finance) has been developed for the Islamic finance and banking sphere.
An important question within this research is how this could work within the European and German market with all their regulations? In chapter 3.4.7 we will observe how the British example proceeds with this situation.
3.4.4 Staff of the Islamic banks
As with all things economic, in the Islamic financial industry the importance of qualified staff is a key indicator of and is critical to future success. For the strategic development of the Islamic finance industry as a whole, the national and international context has been already addressed. The development of global standards both in theoretical and practical terms, have already been established in the form of I3CEIF, The Global University for Islamic finance (Ariff and Iqbal, 2011, p 265).
3.4.5 International Interface between Islamic and Conventional Banking
Figure 5 provides the financial needs in general. The horizontal axes depict the age clusters, and with the vertical characteristics we can see different titles and reasons for financial demands. If we take these findings as conventional, the author would like to test the Muslim behavior in selecting financial services and most importantly whether their motivation is different or the same?
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Citibank has offered Islamic financial services since 1983 in London, Great Britain; this was 15 years before the opening of their first Islamic branch in Bahrain. During this period, a fortune of more than $ 1 billion for Islamic investors had been created. With the opening of the Islamic Investment Bank in Bahrain, the product range and strategic positioning in terms of Islamic financial services has been expanded.
The intention was to add to existing products the characteristics of "Mudarabah" and connect "Musharakah". It is designed to provide objectivity, the liquidity created by private investment management, private banking and asset management, and investment-based financial and investment advice (Dr Mohammad Omar Zubair in Iqbal, Llewellyn, 2002 -, p 196).
In London, Islamic financing services of the Saudi International Bank, United Bank of Kuwait, Kleinwort Benson and ANZ, Australia and New Zealand Banking Group are offered, which has significant interests in Pakistan and Malaysia.
Figure 6 is similar to the financial needs chart, but focuses on the savings motivation. These findings have been researched for the conventional banking sector. Is it also relevant for the Islamic banking sector?
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As Iqbal and Llewellyn in their research named "the convergence or divergence of conventional and Islamic banks", they also found these developments are of great importance for the Islamic finance as well as for the conventional shape. Also, especially with this background some customers want to be handled exclusively by an Islamic bank, as other customers will prefer both the Islamic and conventional concept (Iqbal, Llewellyn, 2002).
If this position is still valid and relevant for Muslims, especially those living in Germany is an important question and will be handled in chapter 4.5.
Real estate requirements
The most preferred product in the Islamic world and most demanding product range is probably the purchase of property and therefore the funding for this. In most Muslim countries, therefore, the demand for consumer loans is lower than in typical conventional markets. The large proportion of demand is aimed at mortgage home purchases in order to secure the value of the property. Customers pay over a period of 25 years a monthly rental rate that is deducted directly from the salary received. In this rental rate, the loan and the fixed charge of the bank are included. There are Islamic banks that offer these in Muslim countries and widespread product performance even in so-called non-Muslim countries. The first was the London office of Al Baraka Bank early 1990s. Here, the rental value was calculated with a fixed mark-up on the term and is returned through the rates (Dr Mohammad Omar Zubair in Iqbal, Llewellyn, 2002).
Figure 7 explains in mainly four clusters (life-phases) the Need- and Asset- developments of humans with contrast to conventional emphasis. The deviation in these clusters is similar to the Muslim financial behavior in Germany.
illustration not visible in this excerpt
Summarizing these considerations previously listed together, we see relatively quickly that the Islamic and conventional banks, despite their competitive position, have many approaches for learning from each other.
Also Iqbal and Llewellyn indicate the possible lessons for Islamic banks, particularly in the field of technology in industrialized countries. An easier access to these markets would be the result. On the opposite side, human values can be learned from the conventional banks in terms of personnel management and customer relations within Islamic institutes.
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