Islamic
Banking in
The
Regulatory Framework in
Dr.
Kilian Bälz, LL.M.
Attorney,
Frankfurt/Main
•Muslim
population of some 3 million;
•Comprehensive
overhaul of welfare/pension system: increasing importance of private
saving/pension funds;
•
•Stable
regulatory environment for financial services;
•Integration
into the common market for financial services of the EU;
•EURO-zone;
•German
industry provides many good opportunities for private equity investments (not
limited to industries that, in the past, were labelled „New Economy“);
•Increasing
ethical awareness of investors: Socially responsible investment has gained much
momentum in recent years;
•Political
neutrality.
The Regulatory Environment for Islamic Financial
Institutions in
•
•
•Detrimental
side effects of discussion on „hawala banking“: hawala banking may NOT be confused with Islamic banking!
The Regulatory Environment for Islamic Financial
Institutions in
•Uniform
regulatory standards standards
–all
financial institutions, as a matter of principle, are subject to the same
regulatory rules;
–universal
banking system: no distinction between commercial banking and investment
banking;
–little
flexibility to cater for the special needs of Islamic financial institutions
(in contrast to dual system, such as
–however: long-standing tradition of mutual saving funds
(„Raiffeisen“) and mutual insurance companies („Versicherungsvereine auf Gegenseitigkeit“).
What are the special needs of Islamic Financial
Institutions in a secular environment?
•To offer
competitive products:
–competition
of Islamic with conventional products;
–Muslims may
not be put at a disadvantage.
•To safeguard
Sharî‘a compliance:
–is the very
basis of Islamic finance
–constitutes the competitive advantage of Islamic banks.
•Compliance
with applicable laws:
–regulatory
requirements;
–mandatory principles of contract law.
The Regulatory Framework in
•Sources of
law: national legislation and EU directives:
- common
market for financial serives in the EU;
- mutual
recognition of regulators;
•Banking Act
(„KWG“): broad definition of „banking activities“ in § 1 KWG;
•Investment
Companies Act
- establishment
of investment funds in
- distribution
of foreign investment shares (EU investment funds/non-EU funds);
•Insurance
Supervisory Act („VAG“): applicable, also, to mutual insurance companies;
•Money
Laundering Act: amended in the light of 9/11.
The Regulator: BAFin
•As from
2002, single regulator: Federal Agency for the Supervision of Financial
Services („BAFin“);
•„One stop
shop“:
- banking;
- insurance;
- investment;
- securities
trading;
- financial
services.
•Based on the
English model;
•Close
co-operation with other European regulators (mutual recognition and sharing of
information).
Mandatory Provisions (1)
•Consumer
protection:
–Standard
contractual terms („AGB“): murabaha
–Special
consumer legislation: home financing.
•Unfair
competition:
–distribution
of Islamic financial products;
–advertising: §§ 1 and 3 of the Law against Unfair
Competition („UWG“) - appeal to religious beliefs permissible? More tolerant
tendencies following the „Benetton Case“ of the
Mandatory Provisions (2)
•Corporate
law:
–until quite
recently, German courts held that a corporation incorporated under German law
has to have its real seat in
–of
importance in connection with investment vehicles;
–recent decision of the ECJ („Überseering“): future
of the „real seat theory“ to be awaited.
Carrying Out Banking Activities in
•Application
for a banking license § 32 KWG:
–Sufficient
funding;
–Place of
Business in
–Trustworthy
and experienced management;
–Trustworthiness
of any holder of a „significant participation (exceeding 10%);
–Adequate
business plan and organisation;
–If the bank
is a banking subsidiary, it is required that the parent company is „effectively
supervised.“
–Procedure
can be a time consuming and lengthy.
Carrying Out Banking Activities in
•Banking
subsidiary: will be treated as German bank (requirement of license according to
§ 32 KWG);
•Branch (§ 53
KWG);
•Representation/cross
boarder activities:
- non EU banks
(§ 53a KWG);
- EU licensed banks (§ 52b KWG -
„European Passport“):
principle of mutual recognition>> no l license
of German regulator required/principle of home
country supervision/limited supervision in
Establishing an Islamic Bank in
•Corporate
governance issues: Safeguarding compliance with Sharia
rules
- two tier
system: „Vorstand“ (administration) and „Aufsichtsrat“
(supervision, advice);
- optional:
advisory boards;
- wording of
objects clause to include Islamic orientation
of the financial institution;
- integration
of Sharî‘a standards (e.g. AAOIFI) in business policy (code of
conduct, board regulation).
Establishing an Islamic Bank in
•Regulatory
requirements:
–Broad
definition of „banking activities“. As a consequence, an Islamic bank, even if
only offering a limited product range, will require a banking license;
–Capital
adequacy requirements;
–Liquidity;
–Limitations
on significant participations;
–Deposit
insurance („Einlagensicherung“).
Distribution of Islamic Investment Shares
•At present,
the investment shares of two Islamic funds are distributed in the German market
(both EU incorporated)
–Precise
definition of Sharia rules/investment policy
–Self-restraint
as regards advertising, also in order to reduce risk of prospectus liability.
–Advisory
role of Sharia board
Murabaha Financing
•„Symphony
Gems“: according to the London High Court, a murabaha
agreement, if properly drafted, is enforceable under English law;
•Situation in
–Choice of
English law;
–Application
of the §§ 307 seq. of the German Civil Code dealing with unfair terms in
standard contracts.
Contact Details
•Dr. Kilian
Bälz, LL.M.
•GLEISS LUTZ FRANKFURT/MAIN
Gärtnerweg 2
D-60322
Tel. +49 (0) 69-95514-444
Fax+49 (0) 69-95514-198
kilian.baelz@gleisslutz.com