University of Applied Sciences Stralsund
Faculty of Business Administration

Diploma Thesis

for the Achievement of the Diploma Degree
Diplom Betriebswirt (FH)
at the Course of Study: “Baltic Management Studies”

The Cultural and Demographic Aspects of the Islamic
Financial System and the Potential for Islamic
Financial Products in the German Market

Submitted: November 24th, 2004

By: 

Holger Timm

 

"My feeling is that in the modern marketplace it is certainly
within the realm of possibility
to reproduce or replicate in some way, shape, or form,
all modern instruments, derivatives or otherwise,
used for trading or creating wealth
and distributing it in ways that conform with Shariah."

Shaikh Yusuf Talal DeLorenzo

 

Acknowledgement

[...]

List of content

Acknowledgement
List of content
Contents in brief
Contents
List of tables
List of figures
List of Abbreviations
List of Arabic terms
Thesis
Appendices
References

Contents in brief

Preface ... 1

1 The Author’s Motivation  ... 1
2 Aim of the Thesis  ... 1
3 Proceedings of Information Gathering  ... 2
4 Structure of the Work ... 2
5 Terminology ... 3

Chapter A – Islam – History, Cultural Aspects, and Principles for the Financial System ... 5

1 Foundation and Meaning ... 5
2 The five Pillars of Islam ... 8
3 Islamic Banking ... 12

Chapter B – Muslims in Germany  ... 43

1 Population ... 43
2 Culture and Education  ... 46
3 Financial Status Quo  ... 56
4 Potential ... 70

Chapter C – Requirements and Proposals for Islamic
Financial Products in the German Market ... 86

1 Requirements Set by German Law – Chances and Obstacles for Islamic Finance ... 86
2 Requirements Set by Islamic Law  ... 89
3 Harmonisation of German Laws to Islamic Necessities ... 89
4 Proposals for Islamic Financial Activities in the German Market  ... 90
5 Transformation of a Conventional Equity Financing Concept into an Islamically Compatible One ... 117

Chapter D – Final Conclusions of this Thesis  ... 125

Appendices  ... xxi

References  ... l
1 Bibliography – Print Media ... l
2 E-Mail Contacts  ... lii
3 Letters ... lii
4 CD-Rom ... lii
5 Internet Sources  ... liii

Contents

Preface  ... 1

1 The Author’s Motivation  ... 1
2 Aim of the Thesis  ... 1
3 Proceedings of Information Gathering  ... 2
4 Structure of the Work ... 2
5 Terminology ... 3

Chapter A – Islam – History, Cultural Aspects, and Principles for the Financial System ... 5

1 Foundation and Meaning ... 5
1.1 The Prophet  ... 5
1.2 Statutory Sources in Islam ... 6
1.3 Discrepancies among Mohammads Successors and the Development of Various Movements ... 7
1.3.1 Sunnites  ... 7
1.3.2 Shiites  ... 8

2 The five Pillars of Islam ... 8
2.1 Shahada - Faith  ... 8
2.2 Salaat – Prayer  ... 9
2.3 Zakat - Almsgiving  ... 9
2.4 Saum - Fast  ... 10
2.5 Hajj - Pilgrimage  ... 10
2.6 Djihad - A sixth Pillar?  ... 10

3 Islamic Banking ... 12
3.1 Development of Islamic Banking ... 12
3.1.1 Roots of Islamic Principles and Problems with Interpretations  ... 12
3.1.2 The Early Days  ... 12
3.1.3 Emergence of Conventional Banking Facilities in Islamic Countries .  ... 13
3.1.4 Implementation of Theory into Practice  ... 13
3.1.5 Reorganisation of Old Values  ... 14
3.1.6 The Basis for a Modern Islamic Banking System  ... 16
3.1.7 New Customers’ Needs and the Establishment of Control and Supervisory Bodies ... 17
3.2 Principles in Islam connected with financial activities  ... 18
3.2.1 Haram – Halal  ... 18
3.2.1.1 Description  ... 18
3.2.1.2 Background ... 18
3.2.2 Gharar – Maysir  ... 19
3.2.2.1 Description  ... 19
3.2.2.2 Background ... 20
3.2.3 Riba ... 21
3.2.3.1 Description  ... 21
3.2.3.2 Background ... 22
3.2.4 Zakat  ... 23
3.2.4.1 Description  ... 23
3.2.4.2 Background ... 24
3.3 Financing Tools and Methods ... 25
3.3.1 General Rules  ... 25
3.3.2 Various Kinds of Bank Accounts ... 26
3.3.2.1 Current Account  ... 26
3.3.2.2 Savings Account  ... 27
3.3.2.3 Investment Account ... 27
3.3.3 Overview of Selected Financing Tools ... 27
3.3.4 Profit and Loss Sharing ... 29
3.3.4.1 Mudarabah ... 29
3.3.4.2 Mudarabah Mutanaqisa  ... 30
3.3.4.3 Musharaka  ... 31
3.3.4.4 Musharaka Mutanaqisa ... 32
3.3.5 Fixed Charges – Mark-up Schemes  ... 33
3.3.5.1 Murabaha ... 33
3.3.5.2 Bai Muazzal  ... 35
3.3.5.3 Bai Salam ... 35
3.3.5.4 Istisna ... 36
3.3.5.5 Ijarah  ... 37
3.3.5.6 Ijarah Waiktina  ... 38
3.3.6 Free Charges - Qard Hassan ... 39
3.3.7 Concepts Applicable Directly or Indirectly to the Operations of Islamic Banks ... 40
3.3.7.1 Wadiah ... 40
3.3.7.2 Rahn  ... 41
3.4 Summary of Selected Features of Islamic Contracts ... 41
3.5 Shariah Supervisory Board ... 42

Chapter B – Muslims in Germany  ... 43

1 Population ... 43
1.1 World Wide Trends and Developments  ... 43
1.2 Number of Muslims in Germany  ... 43
1.3 From Migration to Immigration ... 44
1.4 The Age Structure ... 46

2 Culture and Education  ... 46
2.1 The Islamic Charta ... 47
2.2 Cultural Distinction ... 48
2.3 Associations and Societies  ... 49
2.4 Concerns of the ‘Federal Office for Protection of the Constitution’  ... 50
2.5 Media  ... 51
2.6 School ... 51
2.7 Work  ... 53
2.8 Integration ... 54

3 Financial Status Quo  ... 56
3.1 World Wide Trends  ... 56
3.2 Muslims’ Savings in Germany ... 57
3.3 Roles of Financial Systems ... 58
3.4 Approach of Muslims in Germany ... 59
3.5 Exceptions as Examples ... 60
3.5.1 “CICM Fund Management Ltd.”  ... 61
3.5.2 “UBS Islamic Fund Management Company S.A.”  ... 64
3.5.3 Islamic Bonds of Deutsche Bank AG  ... 67
3.5.4 Sukuk of Saxony-Anhalt ... 69

4 Potential ... 70
4.1 Population ... 70
4.1.1 Shifts in the Population Structure ... 70
4.1.2 Reasons for Shifts in the Population Structure  ... 70
4.1.3 Assumptions for a Future Development ... 71
4.1.4 The Migrants  ... 74
4.2 The Labour Market  ... 77
4.2.1 The Activity Rate in Germany  ... 78
4.2.2 Relation of Activity Rate to Migration  ... 79
4.2.3 People at Working Age and Unemployment  ... 80
4.3 The Income Structure and Wealth of the Muslim Population ... 83

Chapter C – Requirements and Proposals for Islamic
Financial Products in the German Market ... 86

1 Requirements Set by German Law – Chances and Obstacles for Islamic Finance ... 86
1.1 The German Banking Act  ... 86
1.2 Minimum Reserve ... 87
1.3 Protection of Deposits ... 87
1.4 Provisions Concerning Competition and Advertisement ... 88

2 Requirements Set by Islamic Law  ... 89

3 Harmonisation of German Laws to Islamic Necessities ... 89

4 Proposals for Islamic Financial Activities in the German Market  ... 90
4.1 Requirements and Proposals for Structuring a Financial Institution Offering Islamic Products  ... 90
4.2 The Gafoor Model ... 92
4.2.1 Deposit Accounts  ... 93
4.2.2 Riba and Cost of Borrowing  ... 94
4.2.3 Deductive Features of the Gafoor Model and Further Explanations  ... 95
4.2.4 Conclusion of the Gafoor Model  ... 97
4.3 Conventional Banking Models  ... 97
4.4 Examples of Products Compliant with Shariah and Conventional Law  ... 98
4.4.1 Sukuk - Bond  ... 99
4.4.1.1 Mudarabah Bonds ... 99
4.4.1.2 Musharaka Bonds  ... 101
4.4.1.3 Murabaha Bonds ... 102
4.4.1.4 Salam Bonds ... 104
4.4.1.5 Istisna Bonds  ... 105
4.4.1.6 Ijahra Bonds ... 107
4.4.1.7 Mixed Forms  ... 109
4.4.2 Credit Cards ... 111
4.4.3 Hedge Funds  ... 113
4.4.4 Index Certificates and Funds  ... 115

5 Transformation of a Conventional Equity Financing Concept into an Islamically Compatible One ... 117
5.1 The Conventional Model ... 117
5.1.1 General Features of the Conventional Model  ... 117
5.1.2 Items of the Model Calculation ... 119
5.1.2.1 Revenues and Costs of Operation ... 119
5.1.2.2 Liquidity Computation ... 119
5.1.2.3 Financial Statement for Taxable Income ... 120
5.1.3 Details for Selected Items  ... 120
5.1.3.1 “Ship Mortgage Loan I”  ... 120
5.1.3.2 “Ship Mortgage Loan II”  ... 121
5.1.3.3 Taxable Income and “Tonnage Tax”  ... 121
5.1.3.4 Income Distribution and IRR  ... 121
5.2 The Transformed, Shariah Compliant Model ... 122
5.2.1 Changes in the Financing Structure ... 122
5.2.2 The Mortgage Loan ... 123
5.2.3 Taxable Income and “Tonnage Tax”  ... 123
5.2.4 Income Distribution and IRR  ... 124
5.3 Conclusion  ... 124

Chapter D – Final Conclusions of this Thesis  ... 125

Appendices  ... xxi

References  ... l
1 Bibliography – Print Media ... l
2 E-Mail Contacts  ... lii
3 Letters ... lii
4 CD-Rom ... lii
5 Internet Sources  ... liii

List of tables
table 1 Scheme of Selected Islamic Financing Tools  ... 28
table 2 – Development of Muslims Living in Germany from 1945 - 2000 ... 44
table 3 – Savings of “High Net Worth Individuals” from the MENA Region Abroad  ... 57
table 4 – Presumptions of Structural Shifts Concerning the German Population until 2040  ... 73
table 5 – Migrants in Germany According to Origin ... 74
table 6 - Development of Foreign/Muslim Immigrants in Germany (1962-2000)  ... 76
table 7 – Development of Foreigners/Muslims in Germany until 2040  ... 77
table 8 - Scenarios of Shifts in the Activity Rate in Germany until 2040 ... 78
table 9 – Activity Rates as Percentage of Population in Germany/Immigrated Population ... 79
table 10 – Percentage of Capable Foreign Workers in the German Labour Market  ... 80
table 11 – Unemployment Rates - Total Compared to Foreigners’  ... 81
table 12 – Participation in Advanced Vocational Trainings ... 82
table 13 – Predicted Cumulated savings of Muslims in Germany until 2040 ... 84
table 14 - “HC Elida-Original” – Application and Source of Funds  ... 118

List of figures
figure 1 - Development of Muslims Living in Germany from 1945 – 2000 ... 44
figure 2 – Allotment of Branches of the Turkish Self-Employed  ... 53
figure 3 – Allocation of Funds of ‘Al Sukoor European Equity Funds’ by Country. ... ...62
figure 4 – Performance of “Al Sukoor European Equity Funds” Compared with “DAX”  ... 63
figure 5 - Performance of “Al Sukoor European Equity Funds” Compared with “DJIA”  ... 64
figure 6 - Allocation of Funds of “Noriba Global Equity Fund” by Country ... 66
figure 7 – Performance of “Noriba Global Equity Fund” Compared with “DAX”  ... 66
figure 8 - Performance of “Noriba Global Equity Fund” Compared with “DJIA”  ... 67
figure 9 – Performance of “DB-Certificates” Compared to “DAX” and “DJIA”  ... 68
figure 10 – Future Scenarios of Structural Shifts in the Population in Germany until 2040 ... 72
figure 11 - Future Scenario of Structural Shifts in the Foreign Population in Germany until 2040  ... 73
figure 12 – Development of Foreign/Muslim Immigrants in Germany (1962-2000) ... 76
figure 13 – Scenarios of Shifts in the Activity Rate in Germany until 2040 ... 78
figure 14 – Example of Istisna Bonds ... 107
figure 15 - Example of Mixed Forms of Usage of Bonds ... 110

List of abbreviations

[...]

List of Arabic terms

[...]

 

Preface

1 The Author’s Motivation

During an internship in a bank in Berlin the author had the chance to work together with Turks. “Ziraat Bank International AG” is one of the leading banks in Turkey, and it has various branch offices in Germany. The daily business activities undertaken were similar to those in a conventional bank, although the relations between clerks and their customers varied strongly. Intense interpersonal contacts, displayed in friendly chats and the offering of tea, were daily routine. 

When working together with Muslims the author started to compare financing activities undertaken by “Ziraat Bank International AG” with prescriptions provided by Islamic scholars. Clear differences were obvious from the beginning and the author investigated, if there are financial institutions in Germany providing the services demanded in those prescriptions. It did not seem so. The Turks around showed a proudness in their Muslim-being, but there was no possibility for them to undertake their money transactions in a way their religion prescribes. 

Thereby the idea for the following work was born. More than 120,000 Turks are living in Berlin alone¹, and none of them has the chance to approach an Islamic bank. Is that true for the whole of Germany? What potential lies in the Muslim population in Germany speaking about their number and their financial strength? How may this potential develop in future?

2 Aim of the Thesis

The aim of this thesis is to show the potential Muslims in Germany have concerning their number and financial power. As assumed, whilst developing the idea for this work, no financial institution is existent in Germany which offers banking services in compliance with Islamic law. Would it not make sense to introduce such instruments in a market which accommodates more than 3 million Muslims? Are the hurdles for introduction too high or is the financial potential of the Muslim population too low to care about such questions? They will be answered in this thesis.

3 Proceedings of Information Gathering

To gather information necessary for writing this thesis, the author read various books about Islam, its roots, and its financial systems. The “World Wide Web” was a valuable source, especially publications of data by statistical offices, ministries, and institutions dealing with the topic. For certain parts specific data were not accessible to the author. For investigation purposes he wrote letters and mails to various institutions to find out that specific data were not available and certain statistical investigations were not undertaken. In that case approximations and extrapolations were used and marked as such.²

4 Structure of the Work

The author has divided the thesis in four parts. The first chapter, “Chapter A – Islam – History, Cultural Aspects, and Principles for the Financial System“, introduces Islam, its roots and foundation about 1,400 years ago. In that chapter basic Islamic principles are explained and their relevance in all aspects of Muslim life is shown. With those principles underlying, a financial system developed which is different from the Western one. The development of the financial system is described as are various Islamic financial tools explained.

In “Chapter B – Muslims in Germany” it is shown how the Muslim community in Germany developed. It is explained when processes of migration started and to what extent they developed. The cultural and educational “Status Quo” of the Muslim community is analysed, and it is looked at their stand concerning school, work, associations, etc. Thereby Islamically cultural distinctions are outlined and resulting obstacles for integration deduced. Following that, the financial “Status Quo” is looked at. Facts about Muslim savings are provided and examples of instruments available at the German market, which are in compliance with Islamic law, are described. Out of the outlined facts in the “Status Quos” a potential analyses is developed. Future scenarios about shifts in the population structure are calculated and thereby resulting changes at the labour market predicted. After combining the analyses it was assumed that changes in the population structure and at the labour market may result in changes in the income structure, which is looked at in the following.

After the Muslim community and its financial situation is analysed, “Chapter C - Possibilities for Islamic Products in the German Market“ describes legal requirements set by German authorities as does it look at Islamic prescriptions for the running of a financial institution. Proposals are given how to harmonise differences to create possibilities for a financial system which encompasses both – conventional and Islamic finance. Afterwards descriptions of product examples are provided which are in compliance with German law and with Islamic law. Finally a conventional equity financing model is analysed and ways of its transformation into an Islamically acceptable model are developed. It is calculated if such a model can be operated efficiently and profitably.

In “Chapter D – Conclusions Deduced from the Thesis” final remarks are given concerning results achieved in the process of analysing the market and writing this paper.

It has been the author’s aim to outline complex correlations as simply as possible. It was tried to clarify theoretical conditions with help of practical examples. Only selected areas of a financial system were looked at, and the author concentrated on “financing instruments” applicable by “financial institutions” for “financing purposes”. Other tools also relevant in the financing sector, such as insurances, were not considered in this paper.

5 Terminology

Asymmetries in terminologies exist throughout Muslim countries. These differences are, however, only in terms of spelling and not in meaning and utilization. In this work the assumed simplest spelling was chosen to make it more convenient for the reader.

[....]

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1 Statistisches Landesamt Berlin (2004) Melderechtlich registrierte Ausländer am Ort der Hauptwohnung in Berlin am 30. Juni 2003 nach ausgewählten Staatsangehörigkeiten (Gebieten), online available

2 cf. e-mail contacts in references