Germany hosts some of the biggest Muslim communities in Europe but the market for Islamic finance is still in fledgling stages. According to the Ministry of Interior, about 1.2 million Muslims arrived in Germany between 2011 and 2015, raising the total number of Muslims living in Germany to between five million and six million. With the new arrivals, Muslims of Turkish origin now account for half of the Muslim population in Germany. Traditionally rather skeptical toward Islamic finance, the trust within communities of Turkish origin was further shaken by a fraud scheme in the 1990s when community members lost large parts of their savings due to investing in an Islamic finance alternative. With the resulting distrust and a general rather low curiosity toward Islamic alternatives in banking, demand still ranks rather low in this group although the young generation are showing more interest in alternative products to conventional banking.

Thus, KT Bank, Germany’s first Islamic bank which was granted a license in 2015, raised some interest within the communities. But the management of the subsidiary of Kuveyt Turk Bank also recognized the need to educate the community about the possibilities of Islamic finance, for example by holding talks in mosques, as general awareness remains low. A study from June 2020 shows that more than 60% of Muslims do not even know that an Islamic bank exists in Germany.

One of the reasons is the rather diverse setting of the Muslim communities and the fact that the new arrivals have other things on their mind than discussing investment alternatives when first arriving in Germany.

Nevertheless, after KT Bank moved to open several branches in the biggest German cities, others followed suit but no other fully established bank of yet. Al Baraka launched a digital Islamic banking service in Germany in 2018, and several smaller finance consulting companies opened up. The first Islamic fintech was even already developed in 2012 and reached the breakeven point three years later.

Review of 2021
KT Bank in 2020 only managed to generate an annual surplus of EUR282,000 (US$318,773) for the first time after it reported losses during the previous years to the Bundesanzeiger. For 2021, KT Bank hoped to reach a surplus of EUR1.3 million (US$1.47 million). Whether this goal can be realized will only become clear in 2022 but the bank also encountered, on top of the risk due to the COVID-19 pandemic, one more substantial drawback due to its alignment to the Turkish Islamic banking market.

As the number of Islamic banking institutions is rather small within the EU, KT Bank works with Turkish Islamic banks. Those banks, however, suffered in 2021 due to the unstable political situation in Turkey with the AKP government changing not only the head of the central bank but also recently the finance minister amid a worsening economic and financial crisis.

On top of this risk, the economy within Germany did not pick up as hoped as the COVID-19 pandemic is not, as everyone hoped, over yet. Both factors might lower the envisioned result, especially as the management planned to tap the business segment to strengthen its stance.

But INAIA, the first German Islamic finance fintech, launched a new Islamic real estate platform in 2021 as the demand to settle remains stable during the years and especially as families of Turkish origin now envision their future in Germany rather than, as with the older generations before, in Turkey.

In addition, Caizcoin is shaking up the crypto world. Caiz, meaning lawful in Arabic, is set to bring the meaning into cryptocurrency. Caizcoin is built on Caizchain, which is claimed to be a blockchain fully compliant with Shariah standards. The firm plans to launch in Germany by the end of 2021 or the beginning of 2022 but has yet to overcome German banking regulations. All companies which offer cryptocurrency exchanges are obliged to apply for a license from the German Federal Financial Supervisory Authority (BaFin) as the legislator has subjected cryptocurrencies to extensive regulation in Germany due to, among others, strict anti-money laundering objectives. As a consequence, the bureaucratic obstacles are rather high for new market entries.

Preview of 2022
Nevertheless, digital companies could be the new kids on the block to look out for in 2022 as the younger generation of Muslims is highly interested in cryptocurrencies as an alternative to traditional assets. An Islamic, affordable alternative could be a promising choice for the digital natives.

Conclusion
In the more traditional sphere, old problems remain. One of them is that double taxation is still in place in Germany when dealing with real estate as the regulator did not change any of the banking or fiscal rules to accommodate Islamic finance in Germany. As tax regulation remains the task of the lawmakers in parliament whereas the banking regulations fall under the control of BaFin, the situation is unlikely to change. But, as the short history of KT Bank proves, there is a small but stable niche market that could be tapped further with innovative ideas.

Rebecca Schonenbach is CEO of Independent Information Service on Islamic Finance. She can be contacted at [email protected]