Rudolf Böhmler: Islamic finance - the European challenge
Speech by Mr Rudolf Böhmler, Member of the Executive Board of the Deutsche
Bundesbank, at the 2nd Islamic Financial Services Forum: The European Challenge,
Frankfurt am Main, 5 December 2007.
* * *
Dear Governor Dr. Zeti,
Dear Governors,
Ladies and Gentlemen
First I would like to thank Professor Rifaat from the Islamic Financial Services Board and Mr.
Tošovský from the Financial Stability Institute and their teams for organising this Forum.
They've done a very good job, I think.
On behalf of the Deutsche Bundesbank, I would like to warmly welcome you to the second
Islamic Financial Services Forum in Europe. I am particularly delighted that we are joined by
numerous guests from the Middle and Far East who have travelled so far to be here in
Frankfurt. This reflects the great importance attached to the market for Islam-compliant
finance products here in Europe.
The interaction between financial investment and religious and ethical issues was and still is
a key topic in Europe. At the beginning of the 20th century, Max Weber, one of Germany's
most influential sociologists of religion, described the intertwining of economic activity,
including saving and investment, and religious beliefs. He and other academics and scholars
made us aware that religious traditions are never "carved in stone" but are constantly
evolving to provide insight and answers to contemporary questions. This is true for the
churches' codes of law, the Jewish Halakha and also the Islamic Sharia. "Sharia" means
"path to the water source" and this in itself proves that it is not a finished, petrified work but is
constantly searching for responsible solutions for issues affecting our daily lives. That we can
come here today to learn with one another and from one another in mutual respect sends out
a positive and powerful signal which extends beyond daily economic activities.
The forum is entitled "The European Challenge". This maxim has been carefully selected as
Islamic finance indeed poses great challenges in more ways than one for Europe and thus
also for the German financial centre, Frankfurt.
1. The banking industry - not only in Europe - is faced with the task of providing an
adequate range of Sharia-compliant finance products to meet the growing demand
and to develop new customer bases.
2. Legislators are called upon to lay the foundations for a level playing field for Islamic
finance.
3. European banking supervisors have to rise to the challenge of adequately assessing
the risks associated with Islam-compliant finance products.
I would like to start with a few ideas as to what the reasons for the existing gap between the
supply of and demand for Islamic finance products may be and the challenges that this
poses for the banking industry in Europe.
As you are all well aware, demand for Halal finance products has been skyrocketing across
the globe for years. This is hardly surprising considering that approximately one person in
four in the world is Muslim. In addition, wealth has increased in a number of - predominantly
Arabic - countries not least due to rising commodity prices. This has meant that both the
need for Halal investment opportunities has grown as well as the desire to finance mostly
larger projects, such as building hotel complexes, in accordance with Sharia principles. This
trend is being supported by the various possibilities of emulating more and more
conventional products in a way that complies with Islamic law through the use of modern
techniques to structure relatively complicated financial transactions.
Furthermore, growing interest in Halal finance products has also been observed among
nonMuslims. Private investors who also wish to factor ethical and/or religious aspects into their
investment decisions can be sure that with products which have been approved by a Sharia
board they are not investing in certain business areas, such as gambling. And devout
Christians and Jews can be sure that the interest ban, which can also be valid for them has
been observed. There is also an increasing number of professional investors who want to
include Islamic finance products in their portfolios for reasons of diversification. This is true
despite the reservation that many Sharia-compliant finance products cannot yet fully
compete with conventional products as far as the price-performance ratio is concerned due
to their intrinsically complicated structure.
The first challenge confronting the financial community, not just in Europe, with regard to
Islamic finance is that the range of Sharia-compliant finance products is currently not
sufficient to meet the substantial rise in demand. This is firstly because there is a shortage in
the number of financial service providers offering solely Halal finance products or offering
these products via Islamic windows. Secondly, there is a lack of qualified specialists for the
Islamic finance market segment. Hopefully, institutions such as the "Institute of Islamic
Banking and Insurance", which is supported by German banks, will remedy this situation in
the medium-term.
In addition to the two reasons I have just given for why the supply of Halal finance products
does not yet meet the demand, in my opinion, there are two further aspects which pose
challenges, particularly for financial centres in the European continent. Firstly, the supply of
Sharia-compliant finance products is still largely geographically constrained. The bulk of
Islam-compliant financial transactions take place in financial centres in the Middle East,
Malaysia and - at European level - in London. Consequently, it is difficult for the large
number of Muslims who live in continental Europe, for example in France or Germany, to
access these services. German financial institutions' involvement in Islamic finance has so
far also largely been limited to these financial centres. There have been, and still are,
initiatives - for example, by the federal state of Saxony-Anhalt and by Commerzbank and
Deutsche Bank - to establish Halal finance products in Germany as well. However, so far
these efforts have had rather limited success.
One reason for this brings me to the second aspect of why, in my opinion, a gap still exists
between the supply of and demand for Halal products: the products are still aimed at a
limited target demographic. The bulk of Islam-compliant financial products that are available
outside traditional Islamic states and the United Kingdom are primarily aimed at wealthy
private and institutional investors, mostly in the form of "Sukuks", also known as Islamic
bonds. Hardly any services are aimed at the more middle-class Muslim population of
continental Europe. Thus for the approximately 3.5 million Muslims who make their home in
Germany, an estimated 15-20% of whom have a keen interest in Islam-compliant bank
products, there are hardly any possibilities for financing homes or to invest their assets in
accordance with the rules of their faith, while at the same time productively. Although the
above-average saving rate of Muslims living in Germany clearly indicates that market
potential is waiting to be tapped, the investment products available to this target group are
virtually inaccessible or not known.
One explanation is that institutions that offer Islam-compliant finance products in Germany do
not advertise these products. Therefore, anyone who wants to invest in Halal finance
products in Germany still has to explicitly ask for them at a bank. Furthermore, since, as
already mentioned, the products are almost exclusively aimed at very wealthy investors from
Islamic countries abroad and not at the German Muslim population, the product information
is mostly only written in English. Above all, banks located in continental Europe face the
challenge of using attractive Islam-compliant services - especially in the retail banking area -
as well as target group-oriented marketing to tap the dormant capital of the Muslim
population.
However, a flourishing Islamic finance market is predicated on the existence of a comparable
legal framework for conventional and Halal finance products. This brings me to the second
"European challenge": the creation of a uniform level playing field by legislators. The
example of the UK shows that a market for Halal finance products can also function in
nonMuslim countries. Back in 2004, the Islamic Bank of Britain obtained a licence from the
Financial Services Authority (FSA), making it the first Sharia-compliant bank to open for
business in the UK. Since then, the European Islamic Investment Bank has been established
and numerous credit institutions (eg HSBC) have a so-called "Islamic window". The British
government's efforts to create a level playing field for Islamic finance and conventional
products have been successful in the City of London. The Deutsche Bundesbank would
welcome a similar development here in Frankfurt, the German banking centre. However - as
the example of the United Kingdom also shows - a precondition for this is a corresponding
legal and, in particular, tax law framework. Existing obstacles must be analysed and - where
reasonable - removed or mitigated.
Last but not least, banking supervisors, too, face new tasks as a result of Islamic finance.
This brings me to the third aspect of these "European challenges". German credit institutions
already keep Halal finance products in their books or - as mentioned earlier - offer them
themselves. The German supervisor - and, as you know, the Deutsche Bundesbank plays a
particularly important role here - must now, therefore, begin to figure out how to assess
Islamic finance products, their risks and amount of capital these institutions need to hold. As
the turmoil on the markets for structured finance products has shown dramatically over the
last few months, a decisive factor for adequate risk assessment is that banking supervisors
and, in particular, institutions are able to fully comprehend the structure of the products on
offer. For this reason too, the Deutsche Bundesbank welcomes the fact that the Islamic
Financial Services Board has organised this forum here in Frankfurt.
The German government and German banking supervisors were quick to recognise the
increasing importance of Islamic finance for the German and European markets. For this
reason we - along with the UK - successfully pressed for the inclusion of provisions
governing Halal finance products in the Capital Requirements Directive, which transposes
the Basel II framework into European law.
Please allow me to conclude this welcome speech with a personal observation. Before I was
appointed to the Executive Board of the Deutsche Bundesbank in the middle of this year, I
worked for many years as State Secretary in the federal state of Baden-Württemberg where,
above all, I dealt with issues relating to the integration of citizens with migrant backgrounds. I
have always taken these issues very seriously. In fact, in 2004, I was the first politician in the
Baden-Württemberg government to hold a speech at the Yaruz Sultan Selim mosque in
Mannheim - Germany's largest - on intensifying cooperation. As I mentioned previously,
there are currently around 3.5 million Muslim citizens in Germany. According to a study
carried out by the University of Tübingen, by 2030 this number will have almost doubled.
Although a large part of the Muslims living in Germany have integrated well, unfortunately,
there is also often a tendency for Muslims to segregate themselves from their Western
surroundings. Often families and young people whose parents or grandparents came to
Germany from the Arab states and Turkey shut themselves off from German society. To be
quite honest, it was for this reason that I was initially rather sceptical towards the issue of
"Islamic finance in Germany". My concern was that the creation or support of additional
Islamic financial services would support the creation of parallel societies in Germany.
I now believe that the development of a range of Halal finance products - particularly in retail
banking - would make an important contribution to supporting the integration of our Muslim
fellow citizens. If this enables these citizens to play an active role in business life in Germany
and to build up material assets without conflicting with their beliefs, it will support, in
particular, those middle-class Muslims who are ready and willing to integrate. The example of
a stable and financially successful middle class, in my opinion, will provide positive incentives
which should prevent the development of parallel societies.
Ladies and gentlemen
"Islamic finance - the European challenge": the challenges faced by banks, supervisors and
legislators as a result of Islamic finance are by no means minor. I do believe, however, that it
is worth the effort to face these challenges, not only both from a business and financial
perspective but also most significantly for socio-political reasons. Let us take on these
challenges together.
I would like to finish by wishing you all a successful and fruitful conference and hope you are
able to make useful contacts.
Thank you very much for your attention.