The beginnings of modern Islamic finance date back to the 1970s when some financial institutions in Egypt and the Middle East started to offer interest-free financial services in order to comply with the rules laid down in the Sharia. Services, however, were not yet totally Sharia-compliant. Besides a lack of the necessary infrastructure and trained staff, a commonly accepted definition of what constitutes Sharia-compliance was missing. Even today, opinions differ widely if certain presumably Sharia-compliant financial products really deserve the branding. Nevertheless, a wide array of Islamic financial products ranging from home financing to insurance are nowadays available. Though the industry is currently managing Sharia-compliant assets of USD 895 billion, Islamic finance certainly must still be considered as niche market. However, globalization in general and the flow of funds into Muslim oil producing countries in particular could further strengthen the position of Islamic financial products. In comparison, the concept of joining forces to finance ships dates back to the 16th century. Only few could afford to individually provide all the funds needed to finance an entire vessel. Although financing schemes in the shipping industry have become more sophisticated over the centuries, the basic strategy to put the financial risks on many shoulders has prevailed until today.
As this work will point out, sharing risks and rewards along with a strong emphasis on asset-backed financing are the key features of both, Islamic and shipping finance. Therefore, using Islamic financing techniques to fund vessels, at least at first glance, does not seem to be far-fetched. Indeed, a few presumably Sharia-compliant ship financing schemes have been implemented in the past. To my knowledge, however, no scientific research about the expedience of linking Islamic finance to funding ships has been provided yet. Thus, this work aims at analyzing the feasibility of connecting these two fields with each other.
Table of Contents
1. Introduction
2. Does the German Shipping Industry Need Islamic Finance?
3. The Principles of Islamic Finance
3.1 Sources and Interpretations of Sharia Law
3.2 Islamic Commercial Law
3.2.1 Basic Principles
3.2.2 Islamic Contracts
3.2.3 The Underlying Asset Rule
3.2.4 Forbidden Assets
3.2.5 The Prohibition of Riba, Gharar and Maysir
3.2.6 Summarizing Islamic Commercial Law
3.3 Islamic Financing Modes at a Glance
3.3.1 Credit-based Modes
3.3.2 Equity-based Modes
3.3.3 Islamic Leasing
3.3.4 Forward Transactions
4. Ship Financing and the Industry around It
4.1 An Overview of the Shipping Industry
4.2 Distinctive Features of Ship Financing
4.2.1 Shipping Company Structures
4.2.2 Investment Environment
4.2.3 Risk Environment
4.2.4 Summarizing Distinctive Features of Ship Financing
4.3 Current Ship Financing Modes
4.3.1 Modes at a Glance
4.3.2 The Prevalent System in Germany: KG-Funds
4.3.3 Leasing: A new Trend in Ship Financing
5. The Construction of Sharia-compliant Schemes for Ship Financing in Germany
5.1 Some Common Ground between Ship Financing and the Sharia
5.2 Existing Sharia-compliant Offers in Ship Financing
5.3 Possible Sharia-compliant Ship Financing Schemes
5.3.1 Making the German KG-System Sharia-compliant
5.3.2 Countervailing Shipping Cycles with the Help of Islamic Leasing
5.4 General Impediments for Sharia-compliant Ship Financing
6. Conclusion
Objectives and Topics
This master thesis investigates the feasibility and potential of applying Islamic finance principles to the German ship financing industry, which has faced significant funding challenges following the recent financial crisis. The work evaluates whether Islamic financing techniques can serve as an alternative source of capital by analyzing the alignment between Islamic commercial law and the unique structures of global ship financing.
- Principles of Islamic finance and their compatibility with modern shipping structures.
- Analysis of the German KG-system and its current funding gap.
- Evaluation of Islamic financing modes such as Musharaka, Ijara, and Murabaha.
- Construction of Sharia-compliant ship financing models for the German market.
- Risk management and impediments in Sharia-compliant shipping investments.
Excerpt from the Book
3.1 Sources and Interpretations of Sharia Law
Sharia law is the canonical law devout Muslims follow. It plays a decisive role not only in religious matters but also in many aspects of everyday life. Inheritance, sanitation, criminal law, commercial activities and many other matters are directly or indirectly regulated by the Sharia. To understand the implications of Sharia law for commercial interaction it is essential to know its constitution and the mechanisms behind it.
Islam is not a homogenous belief system. There is no highest authority, representing god’s will on earth that has the ultimate say over right and wrong. Furthermore, the Sharia is not a single codified body of law but, instead, consists of various sources and is very much open to interpretation. Hence, within Sunnis and Shias there are various different schools of thought that generally agree on the broad principles of Islam and the Sharia but frequently disagree about specific matters. Certainly, there is no dispute about the status of the Quran as most important source of Sharia law. In the Quran the words of god are written down as they were delivered to the Prophet Mohammed. None of the other sources may interfere with or contradict the ideas of the Quran. Second in line is the sunna, which is also considered to be a primary source of law. The sunna is a collection of accounts stating what the Prophet did, said or silently approved. These accounts are called hadith. They were transmitted not by Mohammed himself but by people that were directly or indirectly in touch with the Prophet. The stronger the line of transmission of a hadith to Mohammed the more followers acknowledge its authenticity. Different schools of thought may weigh the importance of a hadith differently or may even reject its legal validity altogether.
Chapter Summary
1. Introduction: Outlines the rise of Islamic finance and the historical necessity for risk-sharing in the shipping industry, establishing the research goal of linking these two fields.
2. Does the German Shipping Industry Need Islamic Finance?: Examines the post-crisis challenges of the German KG-system and the potential demand for new capital sources.
3. The Principles of Islamic Finance: Explains the core sources of Sharia law and the prohibitions against Riba, Gharar, and Maysir, while categorizing various Islamic financial instruments.
4. Ship Financing and the Industry around It: Provides an overview of the global shipping industry and explains unique structural and financial features, including the prevalent KG-funds and emerging leasing trends.
5. The Construction of Sharia-compliant Schemes for Ship Financing in Germany: Analyzes the compatibility of Islamic finance with ship financing and develops practical, compliant models like Musharaka-based and Ijara-based structures.
6. Conclusion: Summarizes findings, noting that while Islamic finance is not superior to conventional models, it offers practical, Sharia-compliant alternatives to fill the current funding gap.
Keywords
Islamic Finance, Sharia Law, Ship Financing, KG-Funds, Musharaka, Ijara, Murabaha, Risk-sharing, Asset-backed Financing, Shipping Industry, Riba, Gharar, Maysir, Maritime Economics, Funding Gap
Frequently Asked Questions
What is the primary objective of this thesis?
The work aims to analyze the feasibility of linking Islamic finance with ship financing to address the funding gap in the German shipping sector following the global financial crisis.
What are the main thematic areas covered?
The thesis covers the foundations of Islamic finance, the mechanics of the German shipping industry, and how these fields can be combined through compliant investment schemes.
Which financing modes are analyzed as suitable for shipping?
The author identifies Murabaha, Musharaka, Ijara, and for new builds, Istisna, as the most appropriate Islamic modes for ship financing applications.
What is the scientific approach used?
The research relies on a comprehensive literature review and comparative analysis between conventional shipping finance practices and Islamic commercial law principles.
What does the main body of the work address?
It provides a deep dive into Islamic legal sources (Quran/Sunna), the specific risks of shipping (volatility/cycles), and step-by-step constructions of compliant funding schemes like the Musharaka-based KG-fund.
Which keywords characterize this work?
Key terms include Islamic Finance, Ship Financing, Sharia Law, KG-Funds, Musharaka, Ijara, and Asset-backed Financing.
How does the author propose to make the German KG-system Sharia-compliant?
The author suggests using a Musharaka-based structure where banks contribute equity rather than debt, ensuring that risks and rewards are shared among all participants.
What is the role of the "Underlying Asset Rule" in this context?
This rule ensures that financial transactions are directly linked to tangible assets (vessels), which aligns well with the asset-intensive nature of ship financing.
Why are "Haram" goods a potential problem for Sharia-compliant shipping?
Shipping often involves transporting diverse goods; if a vessel transports prohibited items like alcohol or pork, it may conflict with Sharia regulations, creating a compliance risk for the investors.
- Citation du texte
- M.A. Gregor Sahler (Auteur), 2011, Ship Financing in Germany: A possible Area of Application for Islamic Finance?, Munich, GRIN Verlag, https://www.grin.com/document/178589
