Although there have already been some attempts to introduce Islamic finance products in Germany in the 1990s, Islamic banking products were considered a non-starter by most commercial bankers — until the financial crises in 2008. But despite the ensuing search for an alternative to conventional banking which has helped the Islamic finance industry worldwide, Islamic banking was still not considered to be a hot topic for quite some time.
The proponents pointed out that most of the Muslim community in Germany originated from then-secular Turkey and did not show any interest in Islamic banking whatsoever. Some studies showed that only a maximum of 5% of the then-4.3 million German Muslims would consider using Shariah compliant products. Additionally, as most of the Muslim households were earning low- to middle-range wages, the resulting number of persons with a small- to medium-sized budget was not considered an attractive market opportunity.
But those responsible for state finances were more willing to take risks than the private sector. Already in 2004, the state of Saxony-Anhalt issued a Sukuk facility which was fully paid back by 2009. The regional government of Saxony-Anhalt had hoped to attract new investment from the Gulf to the economically weak state in the east of Germany. When this hope was not fulfilled, no new plans were made to venture further into the Shariah compliant financing methods.
After 2015, with an influx of Muslims from Arab and North African backgrounds augmenting the number of Muslims in Germany by one to 1.5 million, some analysts hoped to finally see a rise in interest in Islamic finance products. In 2015, the first-ever Islamic bank obtained a banking license in Germany. The process of obtaining a license can be several years long, especially since the German regulator BaFin does not grant special conditions to Islamic banks.
So, competitors of the Turkish–Kuveit Bank watched closely to see if the effort was worth it. When KT Bank failed to reach its breakeven point within the set time frame of three to five years, banks which were beforehand considering to enter the German market were not following suit.
Review of 2022
KT Bank finally broke even in 2020 but then had to face the worldwide effects of the COVID-19 pandemic. As the economy in general slowed down, the hopes for a surge in the Islamic banking field were not fulfilled. KT Bank has so far managed to stay in the market and its revenues picked up in 2021 along with booming stock markets but it still suffered under the impact of the global downturn.
The 2021 annual report for KT Bank therefore states: “In the financial year 2021, the business development of KT Bank AG was again characterized by the expansion of the customer portfolio. In addition to the acquisition of new customers in the corporate and retail customer business, the focus was on expanding product use among existing customers. Activities included the optimization of the existing product portfolio with regard to customer needs as well as the development and implementation of technical optimizations that enable our customers to use our products more easily and conveniently.”
The number of employees remained the same as the years before (around 110 employees).
Although KT Bank did not manage to achieve its goals fully, in 2022, INAIA, the first German Islamic finance fintech, expanded the launch of its first Islamic real estate platform, launching a crowdfunding version of a real estate platform and also including the Franklin Sharia Technology Fund in its portfolio. As its name suggests, this fund focuses on digital technologies such as artificial intelligence, cybersecurity, secure cloud services, software as a service and internet of things. The fund invests two-thirds of its assets in technology companies that are compatible with Shariah principles.
Another new hope in the Islamic technology field, the Shariah compliant cryptocurrency Caizcoin, has not let on much about its business success so far. But it managed to secure a public relations stunt by saving the known ‘Euro’ symbol in Germany’s banking capital, Frankfurt. The sculpture was in dire need of maintenance and repair and Caizcoin’s managing director, Jorg Hansen, stepped in in September with EUR200,000 (US$210,780) per year to save the known landmark.
Preview of 2023 and conclusion
Co-CEO of INAIA Emre Akyel has assumed a market volume for Islamic finance of EUR3.64 billion (US$3.84 billion) for savings, investments and capital-forming insurance products in an article on Germany’s Islamic finance market, thus holding up hopes of possible future success for Islamic finance products.
Concluding from recent developments and in light of a worldwide recession, it seems that new technologies are the way forward in particular for the Islamic finance market, whereas traditional banking will prevail albeit without the promising prospects of new Islamic finance tech products.
Traditional Islamic banking has so far not managed to expand its customer base in retail banking but a young generation of integrated and high-performing Muslims in Germany might be tempted to check out not only new tech alternatives to conventional banking, but also Shariah compliant tech alternatives.
Rebecca Schonenbach is CEO of Independent Information Service on Islamic Finance. She can be contacted at [email protected].