GERMANY - EVENTS - BaFin - Federal Financial Supervisory Authority : Islamic Finance: Not such an alien world at all

www.4-traders.com - Some fundamental principles - governing such things as rigorous risk management or good corporate governance - held good for both the Islamic financial system and its western counterpart, the BaFin President continued. They helped to ensure a safe and properly functioning international financial system.(source)

Takaful: The Islamic insurance model There are other rules and regulations that are a speciality of Islamic finance, though. For instance, gambling, speculation and receiving interest are strictly forbidden for Muslims. In addition, a real transaction must underlie every financial transaction. "The principle of insurance is, however, based fundamentally on uncertainty, which in Sharia-compliant contracts is permitted only to a certain, unavoidable degree. Today, the majority of jurists think that this degree of uncertainty is exceeded in conventional insurance," said Dr Ludwig Stiftlof Munich Re. For that reason, a special construction, similar to mutual insurance companies in Germany, was prescribed for takaful. For instance, policyholders had to share in profits and losses and, in addition, their funds had to be invested in accordance with Sharia law.
In reality, takaful insurers were, of course, also competing with conventional insurance undertakings, Dr Stiftlcontinued. "The total sum insured worldwide has increased three-fold since 2005; the number of takaful companies has increased by a factor of around 30 over the same period. This is inevitably leading to intense competition," said Dr Stiftl, who was discussing takaful at the Conference with Dr Philipp Wakkerbeck(Booz & Co.) and Volker Henkeof the German Insurance Association (Gesamtverband der Deutschen Versicherungswirtschaft).
Islamic banking ahead of sukuks, mutual funds and participations While insurance premiums so far account for only a very small proportion of all Sharia-compliant assets invested, the lion's share of capital passes through Islamic banking. "That is followed by sukuks, Islamic mutual funds and participations," said Ufuk Uyan, CEO of Kuveyt Türk Participation Bank. "Despite the financial crisis, over the past decade the market has grown by an average of 20 percent a year." The centre of the Islamic financial services market was Malaysia, he said; the source was the Gulf States - and western nations offered attractive marketing opportunities.
For example, there are more than four million Muslims living in Germany. "The German banking system is well suited to Islamic ideas of investment, since it is at heart risk-averse," Uyan declared during his introductory speech. BaFin President Könighad earlier made it clear that the fact that a product had been developed in accordance with religious principles was no problem in Germany: "German financial supervision legislation is neutral regarding philosophies and religions. Every financial services provider and every product must, however, satisfy the requirements of the relevant laws - insofar as they are covered by them. Same business, same risk, same rules."
However, the Islamic finance industry is still living a shadow existence here in Germany. No Islamic bank is based here. Sharia-compliant financial services are mostly niche products of the big banks. "Although there is a market, for Islam-compliant investment funds, for example, the potential is still limited at present," said Dr Kilian Bälzof Amereller Legal Consultants. Trading in Islamic products on international exchanges does not always run smoothly, either, as Dr Jochen Biedermannof Deutsche Börsereported: "Generally, Sharia-compliant index products and sukuks trade only in small volumes, which tends to make markets rather illiquid."
Islamic financial products go through a screening process The cost factor also plays a roll in investment decisions. The majority of Islamic mutual funds have less than a hundred million US dollars invested in them. Transaction costs are correspondingly disproportionately high. Charges are also incurred by the screening process that all products have to go through. In this process the financial products are, among other things, examined by a committee of experts, the so-called Sharia Board, to establish whether they are Islam-compliant. In addition to indicators such as a company's debt ratio, ethical and social exclusion criteria are also scrutinised.
"Islamic banking can make a valuable contribution for western financial supervision. It has, after all, come through the financial crisis with no notable damage," said Peter Baier, head of BaFin's technical cooperation section. Most derivatives are just as Sharia non-compliant as short-selling, subprime lending and futures. These financial instruments are regarded as potential crisis intensifiers. The price losses suffered by the banks have not been reflected in Islam-compliant investments either, since their business models are based first and foremost on interest and they may not, therefore, be held in the portfolios of Muslims.
For Zaid el-Mogaddedi, of the Institute for Islamic Banking and Finance, the fact that the Islamic financial world brings with it so many unusual features - from participation constructions to tax matters - is no reason for pre-judging it without hearing all the evidence: "Essentially, Islamic banking is just banking. It is open to anyone interested in ethical and faith-based financial products," el-Mogaddedi said: "Alongside service-oriented marketing and competitive products, continuous educational work to raise public awareness is one of the key factors in establishing Islamic banking in Europe."Prof. Dr Matthias Casperof MünsterUniversity also concurred: "We must understand Islamic financial products. A black box is not acceptable."
BaFin's second Islamic Finance Conference gave the 28 speakers and the audience an opportunity to discuss many interesting matters. As expected, though, the question of whether the financial crisis could have been prevented by the rules of Islamic finance remained unanswered.

Source:  http://www.4-traders.com/news/BaFin-Federal-Financial-Supervisory-Authority-Islamic-Finance-Not-such-an-alien-world-at-all--14391222/ - June  28, 2012