Those who live off the interest on loans will never stand up, except in the way those whom Satan knocks down with a fit rise up again. That is because they say: "Trading is just like taking interest." Yet God has permitted trading and forbidden taking interest (qurantoday.com, 2011). The German state Saxony-Anhalt, in July 2004, took the unprecedented step to benefit from this Islamic rule and raised debt in a new way. By issuing a “sukuk” debt instrument, conforming to Islamic principles, the Bundesland located in East Germany and by West German standards considered as under-developed was the first one among the OECD countries to enter a new path of raising public funds (rundschau-online.de, 2009). While there are until today no genuine Islamic banks in Germany – unlike the situation in Great Britain -, the ministry of finance of the state was convinced of the opportunities linked to such a financial structuring, aiming to raise €100m.
This report analyzes the given German sukuk issuance and compares and contrasts it to conventional products. For this, I will first give a general overview of the chosen product, describing the rationale behind the instrument, and then explain in detail the specific features relating it to Islamic finance. I will then discuss key differences and similarities of the financial instrument vis-à-vis regular products, including demand and supply considerations, before concluding by giving a view on the overall situation of Islamic finance in Germany.
Table of Contents
1. Introduction
2. Overview of the Saxony-Anhalt Sukuk
3. Development
4. Discussion and Conclusion
Research Objectives and Themes
The report examines the 2004 pioneering issuance of a Sukuk bond by the German state of Saxony-Anhalt, analyzing the rationale, structural implementation, and the comparative performance of this Islamic financial instrument against traditional debt products within the German market.
- Rationale behind Saxony-Anhalt's decision to issue an Islamic bond
- Structural setup and the role of the Special Purpose Vehicle (SPV)
- Comparative analysis of Sukuk versus conventional debt instruments
- Economic and regulatory challenges of Islamic finance in Germany
- Assessment of the Sukuk's success and future market potential
Excerpt from the Book
Development
The “Saxony-Anhalt Sukuk”, as it was named, was structured as a Sukuk Al Ijara. As described in the introduction, interest payments are forbidden under the Shari´ah (Islamic law). On the other hand, returns based upon and generated by the ownership of assets and income from genuine trading transactions are permitted, and indeed transactions of this nature are actively encouraged (arabnews, 2004). An Ijara is essentially a lease contract whereby assets are leased out, with the lessor retaining all the rights and responsibilities that go with ownership. As an Ijara Sukuk represents ownership in well defined securities, it can also be freely traded in the secondary market at the specific current market price.
Following this type of structuring, the transaction was essentially a sale (to a special purpose vehicle) and leaseback (to Saxony-Anhalt) of certain previously state-owned real estate assets and is illustrated in the graph (see also Appendix a) (sukuk.me, 2008). In detail, the underlying transactions consisted of a certain number of specified buildings owned by the Ministry of Finance, which was sold through a master lease contract for 100 years to a special purpose vehicle (step nr. 1). This entity was incorporated in the Netherlands for tax reasons, as German law was not yet fully developed regarding securitization, especially from a tax perspective. By choosing the Dutch “Stichting Sachsen Anhalt Trust” foundation, the Sukuk remained competitive with regards to municipality tax, which would not apply for a conventional bond (zawya.com, 2011).. The finance minister admitted openly that this was a sort of tax evasion done by the state government for avoiding a higher tax burden (Freitag.de, 2004). Investors participated in the SPV through the Sukuk and, thus, held claims on cash flows generated by the asset (step nr. 2).
Summary of Chapters
1. Introduction: This chapter introduces the historical and legal context of the 2004 Saxony-Anhalt Sukuk, highlighting the state's pioneering role in issuing an Islamic debt instrument in an OECD country.
2. Overview of the Saxony-Anhalt Sukuk: This section details the three primary motivations behind the bond issuance, including debt management strategies, diversification of the investor base, and branding the state as an open-minded location for global investors.
3. Development: This chapter explains the mechanics of the Sukuk Al Ijara structure, including the use of a Dutch SPV for tax efficiency and the specifics of the sale-and-leaseback transaction.
4. Discussion and Conclusion: This section evaluates the Sukuk in comparison to conventional German debt, noting higher costs but success as a niche instrument, and reflects on the future potential of Islamic finance in Germany.
Keywords
Islamic Finance, Sukuk, Saxony-Anhalt, Ijara, Debt Instrument, Germany, Shari'ah, Special Purpose Vehicle, Bond Market, Investment, Eurobond, Public Funds, Securitization, Financial Structuring, Tax Evasion
Frequently Asked Questions
What is the primary focus of this research report?
The report focuses on the 2004 issuance of an Islamic bond, known as a Sukuk, by the German state of Saxony-Anhalt, analyzing its structure and purpose within the German financial landscape.
What are the central themes of the work?
Key themes include the diversification of sovereign debt portfolios, the application of Islamic legal principles to Western financial instruments, and the use of innovative financing to attract international capital.
What is the main objective or research question?
The main objective is to evaluate the rationale behind the Sukuk issuance and to compare the effectiveness and structural differences of this Islamic instrument compared to traditional, fixed-rate German bonds.
Which scientific method is used?
The author employs a descriptive and comparative case study approach, analyzing the historical context, legal/structural implementation, and economic outcomes of the Saxony-Anhalt Sukuk.
What topics are covered in the main section?
The main section covers the motivation for the issue, the technical structuring via a Dutch SPV, the logistical hurdles regarding Shari'ah approval, and the subsequent discussion of cost-effectiveness and market performance.
Which keywords characterize the work?
The work is characterized by terms such as Islamic Finance, Sukuk, Saxony-Anhalt, Ijara, Debt Instrument, and financial innovation.
Why was the SPV incorporated in the Netherlands?
The SPV was based in the Netherlands primarily for tax reasons, as German law at the time was not sufficiently developed to handle the specific requirements of the securitization process effectively.
How did the state justify the bond to the public?
The government presented the bond as a tool for cost-effective debt management and a way to broaden their investor base, while simultaneously using it to combat negative international perceptions of the state.
What was the role of the Luxembourg Stock Exchange?
The Sukuk was listed on the Luxembourg Stock Exchange because it was the preferred platform for the target Arab investor group, despite the lengthy registration and approval process it entailed.
What does the author conclude regarding future Sukuk issuances in Germany?
The author concludes that while conventional bonds remain more cost-effective for German states, the growing awareness and the potential untapped market among Muslim residents provide a positive outlook for future growth in Islamic financial products.
- Arbeit zitieren
- Anonym (Autor:in), 2011, Islamic Finance made in Germany: The 2004 Sukuk Issue by the State of Saxony-Anhalt, München, GRIN Verlag, https://www.hausarbeiten.de/document/176319
