BERLIN, 24 March 2004 — Germany’s struggling eastern state of Saxony-Anhalt hopes to attract Arab investors and send a signal of openness with Europe’s first Islamic bond issue, the regional Finance Minister Karl-Heinz Paque said yesterday.
The state parliament has approved plans to issue around 100 million euros ($120 million) worth of debt in a bond adapted to meet Islamic laws, which forbid interest payments.
“On the one hand we are doing it for economic reasons. There are investors out there and it makes sense to provide them with a product,” liberal deputy Paque told Reuters in an interview.
“On the other hand it is a matter of international courtesy. We want to send out a message of respect for other cultures who have different regulations on investing,” he said.
Islamic bonds have already been issued in Muslim countries such as Malaysia but never before in Europe. Also known as Sukuk, they do not formally pay interest, considered usury by Muslims. They instead make regular payments based on profits from approved investments.
“The bond is a way of tapping into the strong Arab market,” Paque said. The state hopes also to draw non-Arab investors when it issues the bond as early as May or June.
The issue is being supported by US financial giant Citigroup. The bank acknowledged the bond issue was in preparation but declined to comment further.
In a sale and lease back scheme, Saxony-Anhalt will transfer the rights on some state properties to a Dutch foundation. Bond-holders will receive rent from the properties instead of interest. The Finance Ministry said the state can buy back the rights to its properties after five years.
Saxony-Anhalt is struggling with the legacy of four decades of Communist rule and a stubbornly high unemployment rate, which at around 20 percent of the work force is twice the national average.
It is one of the country’s most indebted states per capita with a debt of around 16 billion euros ($20 billion). Paque said 80 percent of the debt was in international bonds, a percentage well above the national average.
“The Islamic bond is a small part of our debt and is like a pilot project. It remains to be seen if we will issue more but we hope it can act as an inspiration in Europe,” Paque said.
An international bank official close to the Islamic bond market said it was too soon to say if the scheme would spark a trend in Europe.
“The market is incredibly big. There is an investor base that sits in the Gulf region but also beyond across the Middle East into North Africa including Iran and it also extends out to Malaysia and Indonesia,” the official said.
He said after US probes into Islamic money laundering after the Sept. 11, 2001, attacks, many Middle East investors had repatriated funds and were looking for new ways to invest.
“Demand has been there and until recently there has been no supply,” said the official, who declined to be identified.
