German financial institutions are active in Islamic finance – but not within Germany. All German global players in banking and insurance offer Islamic financial services and products to customers in the Gulf region and in Asia through subsidiaries in London, Dubai and Kuala Lumpur. In the opposite direction, there is virtually no business. Islamic banks do not offer products to customers in Germany. Neither German corporations nor public entities have tapped the Islamic capital market. The sovereign Sukuk of Saxony-Anhalt of 2004 matured and did not find a successor.
2011: A review
While no new Islamic finance business started in Germany, media reports and public events have focused on Muslims in Germany and the Islamic retail market. Well-known figures were often repeated: for example the number of Muslims in Germany (4 million in total, 2.8 million Turks), their high savings rate of 18% (Germany’s average 10%), a savings capacity of EUR2.2 billion (US$2.9 billion), and an estimated total Muslim wealth of EUR25 billion (US$32.9 billion). Muslims were questioned about their religious attitudes and their interest in Islamic finance products. Surveys found that 60-70% of the Muslims (or Turks) in Germany consider themselves as (very) religious and that more than 70% have an interest in Islamic finance products. A business consultancy in 2008 published the estimate of a EUR1.2 billion (US$1.58 billion) potential market for Islamic banking in Germany.
Although frequently quoted, there are at least two problems with this figure.
First, it is doubtful that the surveys meet the criteria of representative polls. In addition, real world decisions can differ widely from answers to hypothetical questions.
Second, the figure is not very plausible. If the annual savings amount is EUR2.2 billion and the Islamic market potential is estimated at EUR1.2 billion, this implies a share of approximately 50% of total savings. However, the aggregate market share of the four Islamic banks in Turkey is less than 5% of total bank deposits. It is very questionable whether Muslims in Germany have a 10 times stronger preference for Islamic products than Muslims in Turkey.
Extrapolating the Turkish figures, a more plausible figure for the market’s potential is in the range of EUR200-300 million (US$263.6-395.5 million). This is the size of a small cooperative bank in a rural area of Germany. For such a small market, the costs of Islamic operations may be too high for conventional German banks. In spite of the ‘friendly attitude’ of the German regulator, there is a host of unsolved accounting, legal and tax issues, including guaranteeing Shariah compliance. German banks also fear critical media reports and a loss of conventional customers. They have shown little interest in Islamic banking.
This does not mean that Islamic banking is not viable in Germany. Prospects for a subsidiary of an Islamic global player with access to Gulf capital may be bright. If an Islamic bank could come up with innovative products for corporate finance with attractive risk/cost and risk/return profiles (such as targeting family-run SMEs with excellent growth prospects), the market would not be limited by the savings of Muslims living in Germany. But this requires an approach focused more on corporate finance and less on retail banking.
2012: A preview
The nucleus of Islamic banking in Germany is the Kuveyt Türk Beteiligungsbank, a subsidiary of the Turkish member of the Kuwait Finance House Group. Established in 2010 in Mannheim, it started operations on a modest scale in 2011. To become the first Islamic bank in Germany, Kuveyt Türk has to extend its present license for the brokering of deposits with enterprises outside the European Economic Area into a full banking license. An application has been made, and it seems possible it can meet the regulatory requirements. However, the unsolved (or even untouched) legal and tax issues make it doubtful that the full banking business can start early in 2012.
Other Islamic banks (including some with European passports) have verbally expressed their interest in operations in Germany, but none have taken concrete steps. It seems that Kuveyt Türk has to prepare the ground alone. It may benefit from the growing interest from German business associations, legal and tax consultants and academics, who produce an increasing number of studies, articles and conference papers on specific topics of Islamic finance under the German corporate law and tax regime. The Federal Financial Supervisory Authority (BaFin) will organize a follow-up to its 2009 conference on Islamic finance in May 2012. This could place Islamic finance (once again) on the political agenda. Another noteworthy event in Germany, although not restricted to the German market, is a Workshop on “Islamic Finance and Financial Stability”, jointly organized by the Islamic Financial Services Board and the European Central Bank in Frankfurt by the end of January 2012.
The German market will see the introduction of a new savings product for Muslims: At roughly the same time in December 2011, when the “Meridio Global Islamic Multi Asset Funds”, launched only in May 2010, was liquidated, WestLB opened the subscription for its “Islamic Strategy-Index-Certificate”. In the past, WestLB had structured a number of Shariah compliant deals as an investment bank. This time it acts in its retail capacity as the central institution for the savings banks in two German states (North Rhine-Westphalia and Brandenburg). The savings banks will become the main distribution channels for WestLB’s open ended index tracker certificate with a stop loss mechanism.
The new “WestLB Islamic German Index” comprises the largest German (DAX and MDAX) companies whose businesses and financial ratios meet the criteria of Shariah compliance. Initially, the certificates will represent a basket of 10 stocks that will be purchased physically. The issuing date for certificates (with an issue price of 10.00 Euros) is the 17th January 2012, and trading will start on the Frankfurt and Stuttgart exchanges on the 20th January 2012. The stop loss mechanism of the certificate will be triggered by a loss of 8% (or more): In this case the stocks will be sold and the proceeds will be kept on an interest-free money account until the index has reached or exceeded its previous level. Since the new retail product differs from the liquidated one in all relevant respects – portfolio composition, distribution channel, risk limitation and Shariah certification —, its prospects may be much better.
Professor Dr Volker Nienhaus is a visiting professor at the University of Reading, UK and a member of the governing council of INCEIF. He can be contacted at