The cultural and demographic aspects of the Islamic financial system and the potential for Islamic financial products in the German market

Acknowledgement I

Acknowledgement

As the author of this diploma thesis, I would like to say “Thank You” to all who made this essay possible and supported my studies.

Special thanks go to Prof. Dr. Patrick Moore of the “University of Applied Sciences Stralsund” for coaching me during the whole time of preparing this paper. He has always been approachable and his attitude towards my efforts has been kind, encouraging, and constructive. Further I would like to thank Dr. Tomasz Korol from the University “Politechnika Gdanska” for taking the part of the secondary surveyor. He helped me with the thesis as did he organise formalities at the University in Gdansk.

Also, I would like to thank Dr. Christoph Theo Wagner for giving me valuable advices concerning Islam and my work as a whole.

My warmest thanks got to Eva Daum and Olli Backman for helping me with the structuring and the contents of this thesis. They corrected me in the phase of writing and were always there when I needed them.

I would like to use this opportunity to thank my family, especially my parents; without their engagement my studies and this diploma thesis would not have been possible.

Holger Timm, November 24 ^th , 2004, Stralsund

List of content II

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 III

  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

Contents in brief IV

  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 v

  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

Contents vi

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

Contents vii

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

Contents viii

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

Contents ix

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

Contents x

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  

Contents xi

2  E-Mail Contacts lii  

3  Letters lii  

4  CD-Rom lii  

5  Internet Sources liii  

  List of tables  xii

  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  xiii

  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 xiv

List of abbreviations

a.m. ante meridiem, in the morning Accounting and Auditing Organisation for

AAOIFI Islamic Financial Institutions Vereinigung der neuen Weltsicht in Europa, The

AMGT Association for New World Outlook in Europe ANT N.V. Algemeen Nederlands Trustkantoor ARABIC Al Rahji Banking & Investment Corporation Association of Turkish businessmen and

ATIAD industrialists in Europe

AuslInvestmG of foreign investment shares BbankG Bundesbankgesetz, Bundesbank Act BIC Bank Islam Card BMA Bahrain Monetary Agency CEO Chief Executive Officer cf. confer CICM Commerz International Capital Management CIIB Citi Islamic Investment Bank Bahrain cob cost of borrowing DAX Deutscher Aktienindex DB Deutsche Bank DIB Dubai Islamic Bank DITIB Turkish-Islamic Union for the Office of Religion

List of Abbreviations xv

DJIA Dow Jones Industrial Average DPC Deferred price certificates of indebtedness

EAG Guarantee and Investor Compensation Act EC European Community ECB European Central Bank ed. editor

Entschädigungseinrichtung deutscher Banken,

EdB Compensation Scheme of German Banks ESCB European System of Central Banks etc. et cetera, and so on

General Council for Islamic Banks and Financial

GCIBFI Institutions

Hongkong and Shanghai Banking Corporation

HSBC Limited ibid ibidem, just there IDB Islamic Development Bank IFSB Islamic Financial Services Board Islamische Gemeinde Milli Görüs, Islamic

community Milli Görüs IGMG IIFM International Islamic Financial Market IIRA International Islamic Rating Agency IPBI Islamic Private Bank Investor KNB Khazanah Nasional Berhal Ltd. limited MENA Middle East North Africa n.d. no data

List of Abbreviations xvi

OIC Organisation of Islamic Countries OTC Over the counter PLS profit-and-loss sharing SEDCO Saudi Economic and Development Company SPV Special purpose vehicle SSB Shariah supervisory board TM Trademark UK United Kingdom USD Dollar of the United States of America Gesetz gegen den unlauteren Wettbewerb, Law

UWG against unfair competition

registered association VIKZ WKN Wertpapierkennummer WWW World Wide Web

Zentralrat der Muslime in Deutschland, Central

Consistory of Muslims in Germany ZMD

List of Arabic terms xvii

List of Arabic terms

al-´Umrah lesser pilgrimage al-Bai purchasing contract al-Ijarah leasing contract Az-ziyarah visiting of the tomb of the Prophet in Medina Bai muazzal credit sale on a deferred payment basis advanced payment/forward buying (purchasing

Bai Salam contract) Charidjites Islamic tribe Dar al-Harb war territory Dar al-Islam land of Islam Darura social necessity Djihad effort, endeavour - often translated as Holy War Fard obligatory Fiqh principles of jurisprudence Gharar uncertainty, risk, hazard, speculation Ghosh fraud

companions Hadith Hajj Great Pilgrimage Halal permissible Haram forbidden

year of the flight from Mecca to Medina, start of

Hedjra Islamic calendar Hibah gift Hijal ruses, wiles

List of Arabic terms xviii

Idjma concerning religious and ethical matters Ihram plain garment Ijarah leasing Ijarah Waiktina lease purchase financing religious and/or political leader of the

Imam community Imamites Twelve-Imam Shiites Ismaelites Seven-Imam Shiites Istisna commissioned manufacture Holy building within the Great Mosque in Mecca

consisting the „Black Stone“ Kaaba Makruh discouraged Maslaha public interest Maysir gambling Mubah neutral Mudarabah profit sharing, trust finance (financing contract) Mudarabah Mutanaqisa diminishing Mudaraba (financing contract) Mudarib entrepreneur, agent manager Mudjahedin to exert oneself for something, holy warrior Muqarada as Mudarabah (financing contract) cost plus financing, financing resale of goods

Murabaha (financing contract)

partnership, participating partner (partnership

Musharaka contract) Musharaka Mutanaqisa diminishing Musharaka (financing contract) Mustahabb recommended Qard hassan interest free loan

List of Arabic terms xix

Quran holy book of Islam Rabb-ul-mal lendor, investor Rahn pledge, collateral (contract) ninth month of the lunar calendar, month of the

Ramadan fast Riba increase, addition - interest, usury Riba al-buyu usury of increase Riba al-fadl usury of increase Riba al-nasi’ah usury of deference Salaat ritual prayer

advanced payment/forward buying (purchasing

contract) Salam Saum fast Shahada faith Shariah Islamic law Shia party Shiites movement of Islam Sukuk Similar to bond in conventional finance Sunna tradition Sunnites movement of Islam Sura chapter Ulema religious leaders, scholars Umma the Muslim community Urf tradition Wadiah custody Zahirites Islamic tribe Zakat alms-tithe, tax on capital

List of Arabic terms xx

Zakat al-fitr alms-tithe at the end of Ramadan Zakat al-maal annual levy on the wealth Zaydites Five-Imam Shiites

Preface 1

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 alone ¹ , 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

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

Preface 2

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

² cf. e-mail contacts in references

Preface 3

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.

One example shall point it out:

An interest-free loan in Iran is called Qard al-hasanah, Malaysia uses Al-qardhul hasan, Pakistan uses Qarz-e-hasna, Bangladesh uses Qard-e-hasana and Jordan

Preface 4

Al-qird al-hassan. In this work the term Qard hassan was chosen, as it seemed simplest and it is often used in literature. ³ The Arabic terms are written in Italics.

³ cf. Haron, S. (1995) The framework and concept of interest free banking, p.38

Chapter A – Islam 5

Chapter A – Islam – History, Cultural Aspects, and

Principles for the Financial System

The following chapter focusses on Islam as such. The historical context of its foundation is described as are consequential principles and characteristics explained. Based on elementary values, certain financing methods and tools developed, which are outlined next.

1 Foundation and Meaning

Islam is the youngest of the world religions and was founded by the Prophet Mohammad. At the time of its development Islam etymological meant in Arabic ‘to give something to somebody’; interpreted it means ‘sacrificing oneself to God’. Another translation is ‘disregard death’; that is to sacrifice ones soul and thereby ones life to God. Today Islam is translated as ‘abandonment’, ‘devotion under God’. He who avows oneself to Islam is called Muslim. A Muslim is, according to Quran, somebody who behaves and acts with love and in obedience to God and is characterised by an ideal religious attitude. 4

1.1 The Prophet

The Prophet, Abul Kasim Muhammad Ibn Abd Allah, lived from about 570 until 632 AD. At the age of 25 he married a merchandiser’s widow Chadidsha and started to work as a merchant. At the age of 40, when Mohammad was resting in a cave in the mountain Hira close to Mecca, for the first time the Angel Gabriel appeared in his dreams and revealed Gods will. From then on the Angel appeared to him frequently until his death about 20 years later. 5

At that time Mecca was a place where many Gods were rendered homage to. Three years after the first revelation, Mohammad got the order to preach in public. Since Mohammad prayed to only one God and did not accept any others, locals started prosecuting him and his followers. Their lives were endangered and they fled for Medina in 622 AD. In that year, Hedjra, the Muslim calendar starts. In 630

⁴ cf.Arkoun, M. (1999) Der Islam: Annäherung an eine Religion, pp. 34-37, cf. Microsoft ^® Encarta ^® 98

Enzyklopädie (1998), cf. Hughes, T.P. (2000) Lexikon des Islam, p. 340

⁵ cf. Microsoft ^® Encarta ^® 98 Enzyklopädie (1998), cf. Mernissi, F. (2002) Islam und Demokratie - Die Angst vor der Moderne, p. 115

Chapter A – Islam 6

AD, the year of Fath (success), Mohammad returned to Mecca, destroyed the 360 images of false Gods, whom were prayed to in the Kaaba ⁶ , and left only one God -Allah. Before that, freedom of thought had been common in Mecca as well as violence among the people. Mohammad established peace by means of a monotheistic religion in exchange for the freedom of thought. 7

1.2 Statutory Sources in Islam

During Mohammad’s lifetime people were listening to him and behaved according to his rulings. Right after his death the order was given to collect all revelations confessed by him in one book – the Quran. The version we know today and which is recognised by every Muslim has been written under the third Caliph, ‘Utman (634-644). ⁸ The Quran, consisting of 114 Sura (chapters), is the holy book of Islam, and it describes various aspects and situations of human life. It is mandatory for Muslims to behave according to its teachings. Since not all possible aspects of life can be included in one book, further sources of lawful behaviour are recognised.

The most important sources additional to the Quran are the Hadith. These are collections of what Mohammad said and did in his life. They also contain exemplary dictums and deeds of his companions. All together there are about 1465 collections. Only a few are recognised by the different movements of Islam as being authentic. 9

Another source is the so-called Idjma. This is a collection of unanimous theologian opinions concerning religious and ethical matters. 10

The last source of Islamic law is called Quiyas – a system of analogical deductions on the basis of Quran, Hadith, and Idjma. 11

⁶ Holy building within the Great Mosque in Mecca containing the „Black Stone“ handed over to Ismael by the Angel Gabriel (Hughes, T.P. (2000) Lexikon des Islam, p. 380f)

⁷ cf. Hughes, T.P. (2000) Lexikon des Islam, p. 481ff, cf. Mernissi, F. (2002) Islam und Demokratie -Die Angst vor der Moderne, p. 125ff

⁸ ibid, p. 116

⁹ cf. Hughes, T.P. (2000) Lexikon des Islam, p. 720ff

¹⁰ cf. ibid, p. 317f

¹¹ cf. ibid, p. 600

Chapter A – Islam 7

1.3 Discrepancies among Mohammads Successors and the Development of Various Movements

Mohammad was the political and religious leader of the Umma, the Muslim community, and he represented the divine will. After his death the question arose: Who will become his successor?

The three following Caliphs ¹² were chosen by prominent and intellectual followers of the Prophet because of their charisma and reputation among the community. The first discrepancies arose with the fourth successor, Ali (656), who was cousin and son-in-law of the Prophet. He was doubted and not recognised by parts of the community. Different movements within the Umma started to develop. 13

In the following two of the most important movements are introduced.

1.3.1 Sunnites

The name of this movement of Islam is derived from Sunna; tradition. It developed at the end of the ninth century. The Sunnites base their belief on collected behavioural patterns of the Prophet (Hadith; Chapter A: 1.2). Different Hadith exist among the different orientations of Islam. Sunnites only recognise the Hadith based on the Sunna of the Prophet; his life, his actions, and his achievements. These are mainly collections of al-Bukharis (810-870) and Muslims (820-875). The successor of the Prophet can be every ordinary man. Prerequisites are that he is extraordinarity God-fearing and that he has experiences with religious sciences. Sunnites reject the belief in the absolute power and infallibility of the Imam ¹⁴ as opposed to the Shiites (Chapter A: 1.3.2). 15

Today Sunnites account for about four fifths of the Muslim world population.

¹² successor of the Prophet with absolute authority concerning religious and civil matters (cf. Hughes, T.P. (2000) Lexikon des Islam, p. 386)

¹³ cf. Arkoun, M. (1999) Der Islam: Annäherung an eine Religion, pp. 86-87, cf. Sekretariat der Deutschen Bischofskonferenz (ed.) (2003) Arbeitshilfen 172: Christen und Muslime in Deutschland, ^® Encarta ^® 98 Enzyklopädie (1998) pp. 15-16, cf. Microsoft

¹⁴ religious and/or political leader of the community

¹⁵ cf. Arkoun, M. (1999) Der Islam: Annäherung an eine Religion, p. 91, cf. Microsoft ^® Encarta ^® 98

Enzyklopädie (1998), cf. Sekretariat der Deutschen Bischofskonferenz (ed.) (2003) Arbeitshilfen 172: Christen und Muslime in Deutschland, p. 19, cf. Mernissi, F. (2002) Islam und Demokratie - Die Angst vor der Moderne, p. 153

Chapter A – Islam 8

1.3.2 Shiites

Shiites got their name from Shia; party. The main difference to the Sunnites is that only a direct descendant of the Prophet may become his successor, and thereby Imam. Shiites believe, because of the charisma and infallibility of their Imam, they are the only authentic heirs of quranic and prophetical tradition. For Shiites relevant sources for law and order are Hadith based on the life of the Prophet and of the Imams, whereas for Sunnites only the Hadith of the Prophet count. The most important ones are collected by al-Kulaini (died in 939), supplemented by Ibn Babuyas (died in 991) and Tusis (died in 1067). The Shiites did not recognise the first three successors of Mohammad but started to count the line of rightful Imams with the fourth, Ali. From then on all Imams had to be descendants of Ali. Since polygamy is common in Islam and every Imam may have manifold offspring, controversies were predictable. Who is the son to become the rightful Imam? Thus it does not surprise that the branch of Shiites split into further movements. The three most important ones are the Imamites (Twelve-Imam Shiites), Ismaelites (7) and Zaydites (5). The number in brackets represents the Imam where the line starts to differ from the Imamites. The twelveth Imam lives, according to the Imamites, since 874 AD in concealment (the Hidden Imam), but he will return to mankind as Mahdi (leader) in their last days of being. 16

Today Shiites account for about one fifths of the Muslim world population.

2 The five Pillars of Islam

Fundamental and central in the Muslim society as a whole are the “Five Pillars of Islam”. These pillars represent duties which are incumbent on every Muslim, as there are faith, prayer, almsgiving, fasting, and pilgrimage. By reason of their importance, they are called “pillars”. In the following they are briefly introduced and their content is shortly described. 17

2.1 Shahada - Faith

Shahada stands for faith. The mere repetition of the sentence „a ilah illa Allah wa Muhammad rasul Allah“, which translates to “There is no God but Allah, and

¹⁶ cf. Arkoun, M. (1999) Der Islam: Annäherung an eine Religion, p. 93, cf. Sekretariat der Deutschen Bischofskonferenz (ed.) (2003) Arbeitshilfen 172: Christen und Muslime in Deutschland, p. 17, cf. ^® Encarta ^® 98 Enzyklopädie (1998), cf. Hughes, T.P. (2000) Lexikon des Islam, p. 455 Microsoft

¹⁷ cf. Lammens, H. (1968) Islam beliefs and institution, p. 56, cf. Microsoft ^® Encarta ^® 98 Enzyklopädie (1998)

Chapter A – Islam 9

Muhammad is his Prophet” is interpreted to be an avowal of faith. That short dictum is the basic requirement of Islam. Apart from the Shahada no further creeds exist. 18

2.2 Salaat – Prayer

The second pillar is that of Salaat; ritual prayer. One can distinguish between Du’a, private and individual prayer, which is not subject to any sort of regulation and Salaat, which is a ritual prayer and must be in Arabic. ¹⁹ The ordinance is strictly regulated. It is the duty of every Muslim to pray five times a day at strictly defined times turning towards the “Holy Shrine” in Mecca. Prayers are held in a state of purity after ritual washings and in certain postures. They should be prayed in community, but prayers might be recited at home as well. 20

2.3 Zakat - Almsgiving

Zakat is the third pillar and represents the Islamic way of how to achieve social justice. It is said that Mohammad introduced this alms-tithe, or tax on capital, to redistribute wealth in society. Every Muslim is obliged to give a portion of the wealth he possesses, in excess of what is needed for sustenance, to “purify” what one retains. Allah permitted to accumulate wealth. A portion of what Allah has granted shall now be donated for the upkeeping of the less fortunate. The amount of Zakat to be donated is specified in the books of Fiqh (principles of jurisprudence). The Quran (9:60) describes the utilization of funds and the classification of people, who shall benefit from Zakat. 21

According to Rothlauf, all Islamic schools of law do agree on the principle that one fortieth of ones wealth should serve as computation base. Zakat may be donated either in cash or in kind. 22

¹⁸ cf. Lammens, H. (1968) Islam beliefs and institution, p. 56, cf. Microsoft ^® Encarta ^® 98

Enzyklopädie (1998), cf. Rothlauf, J. (1999) Interkulturelles management: mit Beispielen aus Vietnam, China, Japan, Rußland und Saudi Arabien, p. 377

¹⁹ some scholars accept exception in favour of foreigners, whose tongue cannot master the pronunciation of Arabic (cf. Lammens, H. (1968) Islam beliefs and institution, p. 59)

²⁰ cf. Waines, D. (1995) An introduction to Islam, p. 89, cf. Lammens, H. (1968) Islam beliefs and ^® Encarta ^® 98 Enzyklopädie (1998), cf. Lewis, B. (ed.) (2002) Welt institution, pp. 58-59, cf. Microsoft des Islam, p. 26

²¹ cf. Glassé, C. (1989) The concise encyclopaedia of Islam, p. 430, cf. Lammens, H. (1968) Islam ^® beliefs and institution, p. 60, cf. Waines, D. (1995) An introduction to Islam, p. 90, cf. Microsoft ^® 98 Enzyklopädie (1998) Encarta

²² cf. Rothlauf, J. (1995) p. 41 in Rothlauf, J. (1999) Interkulturelles management: mit Beispielen aus Vietnam, China, Japan, Rußland und Saudi Arabien, p. 379

Chapter A – Islam 10

2.4 Saum - Fast

What some people do in the West for reasons of health or in order to reshape their body, is a duty in Islam and represents the fourth pillar. Saum is a thirty days lasting fast in the month of Ramadan (ninth month of the lunar calendar). Saum is obligatory to every Muslim. Exclusions in the case of illness, travel, pregnancy, Djihad etc., are granted but are temporary. The fast begins with the break of dawn and lasts until sunset. It comprises the total abstinence from food, drink, perfumes, tobacco, and conjugal relations. After sunset these interdictions are raised. 23

2.5 Hajj - Pilgrimage

The fifth and last pillar of Islam is the Hajj, the Great Pilgrimage to Mecca. As an elaborate series of rites, every believer should undertake the Hajj at least once in his lifetime. It is performed in the twelfth and last month of the year, Dhu al-Hijjah. It is obligatory to those who “can make their way” (2:196, 3:97); minors, slaves and poor persons are exempted from this obligation. Wearing the Ihram, a plain garment indicating the equality of all believers before Allah, the pilgrims circle the Kaaba (Chapter A: 1.1), wander from Safa to Marwa, and visit the outlying sanctuaries of Arafat, Muzdalifa, and Mina. Abstinences as imposed in Ramadan are compulsory as is the prohibition of cutting hair and nails. 24

Apart from the Hajj, Muslims know al-´Umrah – “the lesser pilgrimage” or “visitation” which can be performed at any time of the year within the ‘Grand Mosque’ in Mecca. Whereas the Hajj takes several days, the al-´Umrah can be made within hours. Az-ziyarah, “visit”, is not a rite but the visiting of the tomb of the Prophet in Medina. It is a non-canonical custom and does not have ritual elements. Nevertheless, it is often carried out according to traditional program. 25

2.6 Djihad - A sixth Pillar?

Djihad, often translated as “Holy War”, really means effort, endeavour. It should not be seen as a war, because a war is an unjustified aggression, and Djihad is for the expansion of the “Good”. Djihad is mentioned here, not only because it is an often used word in news and press when reporting about “radical Muslims”, but

²³ cf. Lammens, H. (1968) Islam beliefs and institution, p. 60, cf. Microsoft ^® Encarta ^® 98 Enzyklopädie (1998)

²⁴ cf. Lammens, H. (1968) Islam beliefs and institution, p. 61, cf. Waines, D. (1995) An introduction to ^® Encarta ^® 98 Enzyklopädie (1998) Islam, pp. 91-92, cf. Microsoft

²⁵ cf. Glassé, C. (1989) The concise encyclopaedia of Islam, p. 313

Chapter A – Islam 11

because it has almost become the “Sixth Pillar of Islam”, as with the Charidjites. ²⁶ It is the communal duty, not the liability of every individual separately, to spread Islam. Muslims divide the world in “Dar al-Harb”, the war territory, and “Dar al-Islam”, the land of Islam. Djihad is to expand the Dar al-Islam into the Dar al-Harb. It is the duty of the believers to fight for that until the whole world is under Muslim reign. 27

There are certain preconditions for Djihad. It must be headed by a Muslim sovereign or Imam, and it must have a reasonable prospect of success. Also a Djihad is not lawful unless it involves the summoning of unbelievers to belief. Nonbelievers thereby can become fully-fledged members of the Islamic state. Nonbelievers may keep their religion (except for Arabic idolators) but then they have to pay a poll tax to obtain the protection of the authorities. If non-believers do not convert to Islam and reject to pay the poll tax, they have to die by the sword. 28

In war, truces may not be concluded for periods longer than ten years, but such truces may be renewed indefinitely. For the Imamites (Twelve-Imam Shiites), it is legally impossible to participate in Djihad until the return of the “Hidden Imam” (Chapter A: 1.3.2). 29

Today Muslims distinguish between ‘Small Djihad’, which is directed against nonbelievers, and ‘Big Djihad’, which heads against inferior emotions of the own mind. 30

²⁶ it is still so among their modern descendants, the ´Ibadites - Charidjites belong to the oldest movement of Islam claiming to be the closest branch chronologically to Ali and therefore possess the highest credibility as his adherents. (cf. Arkoun, M. (1999) Der Islam: Annäherung an eine Religion, pp. 91-94, cf. Microsoft ^® Encarta ^® 98 Enzyklopädie (1998))

²⁷ cf. Glassé, C. (1989) The concise encyclopaedia of Islam, pp. 209-210, cf. Lammens, H. (1968) Islam beliefs and institution, p. 62, cf. Kramers, J.H., A.J. Wensick (ed.) (1976) Handwörterbuch des Islam, p. 112, cf. Tibi, B. (2001) Die neue Weltunordnung, p. 135

²⁸ cf. Hughes, T.P. (2000) Lexikon des Islam, p. 130

²⁹ cf. Glassé, C. (1989) The concise encyclopaedia of Islam, pp. 209-210, cf. Lammens, H. (1968) Islam beliefs and institution, p. 62, cf. Kramers, J.H., A.J. Wensick (ed.) (1976) Handwörterbuch des Islam, p. 112

³⁰ cf. Sekretariat der Deutschen Bischofskonferenz (ed.) (2003) Arbeitshilfen 172: Christen und Muslime in Deutschland, pp. 79-81

Chapter A – Islam 12

3 Islamic Banking

3.1 Development of Islamic Banking

3.1.1 Roots of Islamic Principles and Problems with Interpretations

The majority of the principles of Islamic finance are based on simple morality and common sense. ³¹ Since financial principles are not explicitly defined, various passages in the Quran and the Hadith concerning this are understood differently by scholars throughout the Muslim world. Especially looking at sources in their historical context often leads to a different understanding than a more modern approach. Scholars’ opinions differ and these differentiations about certain aspects have led to the development of various financing tools and methods. Nevertheless, some basic principles have been established which are recognised by all Muslims and which will be explained in Chapter A: 3.2. ³² So is Zakat, as being one “Pillar” of Islam, included and it must be observed in all financing activities.

3.1.2 The Early Days

Basic practices and principles of an Islamic banking system date back to the early part of the seventh century ³³ , a time when the Prophet Muhammad was still alive. It was a banking system only roughly comparable to what we know these days, but limited activities, such as the acceptance of deposits, started. ³⁴ Also a form of investment was common with the creditor (initiator) being part of the management of an enterprise. One model was the equipping of trading caravans by rich urban merchants. The merchants forwarded the capital needed, and, after a successful project, split the proceeds in pre-agreed manner with the caravan leader. In case of loss of the goods the lender was bearing all costs. The “creditor” only could loose the value of his efforts (like Mudarabah, Chapter A: 3.3.4.1). 35

In the Middle Ages Islamic finance was fostering trade and business activities. Not only in the Muslim world but throughout Europe, from the Baltic to the

³¹ cf. The institute of Islamic banking and insurance (n.d.), What is Islamic banking? online available

³² cf. Wippel, S. (2002) Geschäfte zwischen Markt und Moral, Islam und Ökonomie: Ethisches Wirtschaften ist ein globaler Trend, online available

³³ cf. The institute of Islamic banking and insurance (n.d.), What is Islamic banking? online available

³⁴ cf. Haqiqi, A.W., F. Pomeranz (n.d.) Accounting needs of Islamic banking, online available

³⁵ cf. Wippel, S. (2002) Geschäfte zwischen Markt und Moral, Islam und Ökonomie: Ethisches Wirtschaften ist ein globaler Trend, online available

Chapter A – Islam 13

Mediterranean Sea, Islamic merchants became middle man for many trading activities. ”It is claimed that many concepts, techniques, and instruments of Islamic finance were later adopted by European financiers and businessmen.” 36

3.1.3 Emergence of Conventional Banking Facilities in Islamic Countries

In the world of the late 19 ^th and early 20 ^th century, Western economies were predominant in the Muslim world. Their industries established branches of any kind in former colonies, therefore requiring better developed import and export facilities. Accompanying those requirements, a more sophisticated banking system, appropriate for Western demands, was needed. As a consequence conventional banks opened. The newly established branches concentrated on commercial businesses in major cities, thus the local population remained largely untouched. Over the years the firms’ networks spread, as did the engagement in trading. The use of financial services became indispensable being a participant in economic life. Local economies were lacking appropriate banking facilities, therefore the people had to make use of commercial banks. 37

Economies grew, countries became independent, people gathered “wealth” – transactions with banks became unavoidable and urgent. For the locals there has always been a bitter by-taste using conventional banks due to the lack of Islamically compliant ones; they only dealt with the conventional banks as much as they had to. 38

3.1.4 Implementation of Theory into Practice

The overall situation and conditions on the financial market drew attention to Muslim intellectuals and scholars, and that is where “the story” of Islamic banking begins. 39

The earliest references which aim at the reorganisation of banking in accordance with Islamic law (on the basis of profit sharing rather than interest) are found in the

³⁶ cf. The institute of Islamic banking and insurance (n.d.), What is Islamic banking? online available

³⁷ cf. Wippel, S. (2002) Geschäfte zwischen Markt und Moral, Islam und Ökonomie: Ethisches Wirtschaften ist ein globaler Trend, online available

³⁸ cf. Gafoor, A.L.M. A., (1995) Islamic Banking in Interest-free Commercial Banking, Chapter 4, online available, cf. Wippel, S. (2002) Geschäfte zwischen Markt und Moral, Islam und Ökonomie: Ethisches Wirtschaften ist ein globaler Trend, online available

³⁹ cf. Gafoor, A.L.M. A., (1995) Islamic Banking in Interest-free Commercial Banking, Chapter 4, online available

Chapter A – Islam 14

late forties. ⁴⁰ The involvement of various institutions and governments led to the implementation of theory into practice. The first interest-free banks were established, which worked exclusively in compliance with Shariah (Islamic law). ⁴¹ Especially Pakistan and Egypt played a leading role. Attempts were made to organize smaller commercial banks and savings banks on the basis of Islamic law. Until the 70s no common standards were set, the economies were still young, industries and sources of income were just starting to establish and to develop. Most of the early attempts to build up financial institutions failed, often due to political reasons and to the lack of experience. 42

3.1.5 Reorganisation of Old Values

The renaissance of Islamic finance began with following attitude: whatever financing method inexistent in the early days of Islam is considered to be un-Islamic. Advancements have been made since then. Current efforts are trying to make Islamic finance compatible with conventional finance or at least to find ways to cope with customers’ demands. Examples thereof are provided in Chapter C 4.4.

This shows the adaptability of Islam and rebuts the preconception that Islam is obsolete and stiff. Today most banks expand in areas which were considered to be un-Islamic in former times. ⁴³ For countries like Malaysia and Bahrain for instance, the Islamisation was a way to dispose the anticompetitive private financing sectors, which were only interested in high interest gains and against any change of established conditions. A return to the principles of Islam begun, and Islamic values gained in importance. Business activities ought to be fair and the whole society should benefit from them – not only a small sector of the population.

Thereby these countries started their modernisation process. In Islamic diction these are the principles of renunciation of tradition (Urf) in order to integrate into regional customs of public interest (Maslaha) or of social necessity (Darura). 44

⁴⁰ Anwar Qureshi (1946), Naiem Siddiqi (1948) and Mahmud Ahmad (1952), Mawdudi (1950, 1961), Muhammad Hamidullah (1944, 1955, 1957 and 1962) in ibid

⁴¹ cf. ibid

⁴² cf. Warde, I. (2001) The Prophet and the profits, online availabe

⁴³ cf. Warde, I. (2001) Eine unwahrscheinliche Erfolgsgeschichte, online availble

⁴⁴ cf. ibid

Chapter A – Islam 15

It also proved that “focussing on an unduly restrictive reading of the Shariah, focussing on the prohibition of interest – can lead to a large number of possible worse transgressions such as fraud (Ghosh) or speculation (Gharar). It was thus a combination of internal problems and external events that led to a transformation of Islamic finance.” 45

Excurs: Egyptian IMMCs

As mentioned, the introduction of a finance system compliant with Shariah did not undergo trouble-free. The economical situation was new, people were unacquainted and sceptical, there were no experiences with Islamic banking under such conditions.

How things worked in the beginning shall be shown with the example of Egypt:

Egypt’s financial situation was transformed due to monetary help mainly by the US and by Egyptian migrant workers, who needed to exchange their earnings in hard currency. Outdated rules and regulations still prevailed in the financing sector; credits and interest rates were strictly regulated by the government (often not even compensating for the inflation). A parallel financing sector, starting from blackmarket transactions, was quick to emerge. A flourishing currency trading begun; soon after “Sharikat tawzif al-amwal al-islamiyya”, “Islamic Money Management Companies” (IMMCs), were founded. The government tolerated those activities and saw them as a source of Dollars flowing into the country. After lifting governmental finance regulations, many of those dealers evolved into full-service financial institutions. To their depositors they issued ‘investment certificates’ under the scheme of Musharaka, Mudaraba or Murabaha (see below), since the dividends paid therewith were not considered to be interest. Those companies neither were subjected to religious supervision nor to government regulations. Also reserve requirements, as banks have them, did not apply to them. Islamic principles, such as the prohibition of Riba, were observed to attract Muslim investors with Shariah-compliantness.

The “IMMCs” invested their customers’ deposits and paid dividends twice as high as the official rates were. Visible investments were made in productive sectors of the Egyptian economy, but a large fraction went into speculation. Much money

⁴⁵ Warde, I. (2001) Islamic Finance in the global economy, p. 84

Chapter A – Islam 16

went into bank accounts abroad, too. As in 1985 the Egyptian economy went towards a fiscal crisis, the economy sled into recession. A shortage of funds left the majority of the IMMCs facing liquidity problems. Many of their owners fled the country - leaving a considerable impact on the economy. Some estimations speak of 15 percent of Egypts GNP which had evaporated. 46

Despite the fact that Islamic banks should not speculate, due to the lack of suitable investments opportunities, a number of banks engaged in dangerous speculation in gold, foreign currencies, and commodities. Some suffered heavy losses - some were on the brink of insolvency - some collapsed.

3.1.6 The Basis for a Modern Islamic Banking System

“The successful and lasting implementation of the idea, and therewith the story of modern Islamic finance, began in the early 1970s” ⁴⁷ because of two major incidents which coincided: the rise in petroleum prices and the extension of pan-Islamic movements. The secular pan-Arabic movement of Nasserism ⁴⁸ ceased to exist with the defeat in the “Six-Day War” in 1967. ⁴⁹ Saudi Arabia gathered regional predominance under pan-Islamic banner. Emphasis was laid on research work concerning Islamic economics and finance throughout the Muslim world. In 1970 the “Organisation of Islamic Countries” (OIC) was founded with one aim being the adaptation of the traditional Islamic banking system to the present. In 1974, the price of natural petroleum had quadrupled since the foundation of the “OIC”, the inter-governmental “Islamic Development Bank” with its headquarter in Jeddah (Saudi Arabia) was established. Its aim was to provide the basis for a modern Islamic banking system. Only one year later, with the “Dubai Islamic Bank”, the first modern non-governmental Islamic bank started to operate. In the following international associations of Islamic banks emerged and started to frame binding standards as well as to defend common interests. In 1979 Pakistan started as the first country to operate its whole banking system according to Islamic principles, followed in 1983 by Sudan and Iran. 50

⁴⁶ cf. ibid, pp. 80-84

⁴⁷ Phieler, S. (2003), Islamic Finance and Banking, online available

⁴⁸ Nasser, president of Egypt 1954-1970

⁴⁹ war in which Israel defeated its Arab neighbours Egypt, Jordan, and Syria (Wikipedia - The free encyclopedia (n.d.) online available)

⁵⁰ cf. Warde, I. (2001) Eine unwahrscheinliche Erfolgsgeschichte, online availble

Chapter A – Islam 17

3.1.7 New Customers’ Needs and the Establishment of Control and Supervisory Bodies

Islamic financial advisors work closely together with scholars, who are studying Islamic sources, to develop applicable concepts to handle the assets of their customers in a Shariah compatible manner. ⁵¹ With growing disposable income depositors become more aware of and interested in financial services offered by banks, which have to incorporate customers’ needs.

Today’s Islamic investors are becoming more sophisticated, globally minded and risk averse. Thomas Gainor points out “that it may be appropriate to introduce the term ’Islamic Private Bank Investor’ or ’IPBI’ to describe a particular segment or need within the Private Banking industry.” ⁵² In order to be in a position to offer required services, the most developed countries in that respect worked together and created bodies, which are supervising the immature industry. Malaysian and Bahraini authorities created the “International Islamic Financial Market” (IIFM), set up in Bahrain. The “Islamic Development Bank” (Saudi Arabia) initiated the establishment of the “International Islamic Rating Agency” (IIRA) in Bahrain. Numerous banks in Kuwait, Saudi Arabia and Malaysia, the international rating agency “Capital Intelligence” and the domestic rating agencies of Malaysia and Pakistan ⁵³ were working together to achieve such goal as defined by the “OIC”. ⁵⁴ The adaptation of the Islamic financing system to Western practices to provide a basis for a modern Islamic financing industry was aimed at. The relatively new and reasonably immature but dynamic industry will underlie improved regulatory controls by the “IIFM”, “IIRA” and the “IFSB” (Islamic Financial Services Board, Malaysia ⁵⁵ ) which facilitate a sustainable growth. Bahrain is to be established as the major hub of Islamic banking. Controlled by the before mentioned institutions it is supported by the “Bahrain Monetary Authority”, the “Bahrain Financial Habour” and the “Dubai International Financial Centre”. 56

⁵¹ cf. Gainor, T. (2000) A Practical Approach to Product Development at Fourth Harvard University Forum on Islamic Finance, online available

⁵² Gainor, T. (1999) Islamic Private Banking – Now and in the Future at AiC Worldwide Limited Conference, online available

⁵³ Malaysian Rating Corporation and JCRVIS Credit Rating Company

⁵⁴ cf. ABQ Zawya Ltd. (n.d.) Part 2: Working Together, online available

⁵⁵ international standard setting body of regulatory and supervisory agencies to ensure the soundness and stability of the Islamic financial services industry

⁵⁶ cf. ABQ Zawya Ltd.(n.d.) Part 3: To meet the Challenge, online available

Chapter A – Islam 18

3.2 Principles in Islam connected with financial activities

3.2.1 Haram – Halal

3.2.1.1 Description

The principles of Haram and Halal are universal in Islamic society and apply to all facets of life. 57

Haram means literally ‘forbidden’ and belongs to one of the five categories of religious valuations distinguished by Fiqh (Islamic jurisprudence). On a scale of do’s and don’ts Haram means “prohibited” and is thereby the most negative. Everything what is deemed Haram is intolerable in Islamic culture and therefore taboo. The other four categories shall only be mentioned; Makruh (discouraged), Mubah (neutral), Mustahabb (recommended), Fard (obligatory). ⁵⁸ By Haram all forms of activity are prohibited, which are morally or socially injurious. The best known in non-Muslim countries might by the prohibition of interest or the consumption of pork, but also gambling, liquor, pornography and anything else what is deemed by Shariah contrary to the teachings of Allah and of the Prophet is forbidden. 59

Barring the mentioned, all other activities, professions, contracts, and transactions etc. are Halal. Halal is everything which is permissible. Often spiritual and moral factors are involved when differentiating between these two principles. 60

3.2.1.2 Background

Many Suras and verses in Quran could be mentioned here. Some describe a specific activity, some are more broadly composed.

To give only one example; it is explicitly described what animals are prohibited to be eaten (5:3), and how an animal has to be slaughtered so that it is Halal for man to consume. When slaughtering, the name of Allah has to be spoken out (6:118). If it was not, Muslims shall not eat that meat (6:121) which is also true when another

⁵⁷ cf. Islamic Food and Nutrition Council of America (n.d.) What Is Halal?, online available

⁵⁸ cf. Kramers, J.H., A.J. Wensick (ed.) (1976) Handwörterbuch des Islam, p. 167, cf. Glassé, C. (1989) The concise encyclopaedia of Islam, p. 148

⁵⁹ cf. The institute of Islamic banking and insurance (n.d.), What is islamic banking, online available

⁶⁰ cf. The institute of Islamic banking and insurance (n.d.) glossary, online available