Islamic Finance in Germany

By Mr. Zaid el-Mogaddedi

With a Muslim Population of more than 4.2 million, Germany’s Muslim community is by far larger than the total population of many Emirates in the Gulf region. Additionally, savings among these people are in absolute figures by far higher than in many countries in the Middle East or Northern Africa. In the West however the starting conditions for Islamic Financial Institutions have shown to be entirely different.

Among all Western countries, today the UK and the US have the most sophisticated Islamic finance infrastructure. In both countries a wide range of financial institutions are offering Shariah complaint Products. While there have been attempts to create Islamic Financial Institutions in other countries, none in fact have reached the sophistication and the volumes that can be ascertained in the US and the UK. There are many issues which have served to make the Islamic financial industry become particularly strong in the UK and in the US and less so in other countries. However, two factors stand out prominently. On the one hand an openness of governmental institutions towards Islamic finance, and on the other hand a favourable socio-economic structure of the local Muslim Diaspora.

It is the declared target of the British government to promote the industry and to position London as a central hub for Islamic finance . The intention on the one hand being to retain London’s status as a leading international financial centre, and on the other hand to prevent social and financial exclusion of people that feel uncomfortable using conventional finance due to religious reasons.

With such government backing and readiness to adapt regulations, the Islamic financial industry in the UK could prosper in a pace that has no equal in the Western world. The average UK citizen has now access to fully Islamic bank accounts, home-financing schemes, mutual funds and consumer credit finance.

The situation in other countries, e.g. Germany, looks less bright. The government in Germany has been rather reluctant to accept Muslim presence and the consequences associated with it. Also, in contrast to Muslims in the UK, Muslims in other countries have not been able to position themselves as attractive customer groups, as they usually constitute an economically rather disadvantaged part of the population.

The increasing visibility and competitiveness of the global Islamic finance industry raise the question as to whether there could be a market for Islamic Financial Products in Germany too, which is home to some 4.2 m Muslims.

With approximately 4.2 million Muslims (Assumption: 7 million will live in Germany by 2020), Islam forms the second-largest religious community in Germany. While the great majority is of Turkish descent – 2.4 million, constitutes around 75% of the German Muslim – there is also a considerable number of Muslims with other countries of origin. These comprise inter alia Bosnia-Herzegovina (167,000), Iran (116,000), Morocco (81,000), Afghanistan (72,000), Lebanon (54,000), Iraq (51,000), Pakistan (38,000), Syria (24,000) and Tunisia (24,000).

The net income of Turkish citizens is estimated to amount to Euro 10.5 – 13 billion p.a. The savings rate in the 70s and 80s was about 30 percent, and a major part of the income was transferred to and invested in Turkey. With the perspective of staying on in Germany the attitude changed and the saving rate declined. In contrast to the first generation of guest-workers, their children and grandchildren transfer less money to their ancestors’ countries.

When taking a similar age and employment structure as of Turks to raise figures proportionally, following figures result:

– The average income of Turkish households is significantly lower than that of German households (EUR 2,020 vs. EUR 2,675 in 2002).

– The Turkish households on average save EUR 359 per month (i.e. 18% of their income, as opposed to a German average of 10.6%).

– With 660,000 Turkish households, this translates into savings of EUR 2.8 bn each year.

– The age structure of the Turkish population is heavily skewed to the young (58% are younger than 35 which implies that the segment is about to grow significantly in future.

– If the saving rate of the whole Muslim community is set equal to that of the Turks the annual income of Muslims in Germany accounts to Euro 16-20 billion, the savings per year sum up to Euro 2.2 in a low – 6 billion in a high scenario, and the cumulated savings in German banks account to Euro 22-38 billion.

At present there is no fully fletched Islamic bank operating in Germany. Many banks based in Muslim countries do have branch offices in Germany, but those offices do not offer Islamic banking. They can be seen as representatives of the parent company, and they mainly concentrate on capital transfers from Germany to their home country. Thus, due to the lack of alternatives, Muslims living in Germany have to revert to residing conventional banks.

When asked specifically about the view of German Muslims on Sharia-compliant investing, 23% indicated that they perceive it to be very important (10%) or rather important (13%). The importance of Sharia-compliant investment increases with the degree of religiosity.

Of those who view themselves as very religious, 55% viewed Sharia-compliant investment to be very important (29%) or rather important (26%). This figure is lower for those who view themselves as rather religious, where 26% view it to be very important (10%) or rather important (16%).

Beside the figures mentioned above the experience of so-called Islamic holdings in Germany must be taken into account when trying to give a correct answer to the question on the market potential for Islamic financial products in Germany.

Other experience with Islamic finance in Germany comprises the Commerzbank Al-Sukoor investment fund, the UBS Lux Islamic Fund and the Sukuk of the federal State of Saxony-Anhalt. The distribution of Al-Sukoor in Germany started in 2000 and was terminated in 2005. The reason for the termination was weak uptake. Analysts explain this by the fact that little to no marketing had been conducted to promote the fund and that it mainly addressed Middle Eastern investors. The UBS Lux Islamic fund received authorization for distribution in Germany in 2001 but was closed a couple of weeks ago. The Saxony-Anhalt Sukuk too was mainly intended for Middle East investors.

The Islamic holdings have their roots in Turkey, when in the early 1990s an increasing number of Muslim Turkish entrepreneurs sought means to finance their business undertakings without resorting to conventional finance. Instead, they turned to the public and issued share certificates.

These certificates made shareholders participate both in profits and losses of the respective enterprises. The denotation as Islamic holdings appeared because shares were marketed mainly by reference to the Islamic character of the companies. While in principle this sounds like a fair arrangement, in practice this was a highly opaque system which did not sufficiently account for the rights of shareholders. Potential investors were addressed in private places and in mosques, local Imams and religious associations were used to build up credibility, share certificates were exchanged for cash without government supervision, and access to books (i.e. to verify accounts) was limited.

Despite these shortcomings, the holdings have proven to be very popular within the Turkish Muslim community, both inside and outside Turkey. Turkish capital market supervisory bodies estimate that at least 78 holdings left Turkish ground to acquire capital from the Turkish Diaspora in Europe. As to Germany, the Centre for Turkish studies speaks of 52 holdings which have collected some EUR 5 bn from Turkish savers in Germany. It is estimated that between 200,000 and 300,000 Turkish savers in Germany had placed funds with these holdings (i.e. approx. EUR 20,000 per person). Unfortunately, even though some of these holdings have become very successful conglomerates (e.g. Kombassan and Yimpas), German and other European savers largely lost all their investments, partly because of deliberate fraud, and partly because of sheer mismanagement.

It is important to understand what it was that made these holdings so successful in attracting this large number of people with such significant amounts of money. This is necessary in order to be able to assess whether or not an introduction of Islamic Financial Products in Germany – if marketed appropriately – could invoke an equally enthusiastic response.

The major success factors of these holdings and the implications for the market potential for Islamic Financial Products in Germany were:

– Holdings pledged to fully abide by Islamic business ethics (including the prohibition of interest).

– Holdings promised high profit rates (between 20% and 50% annually) with very little risk.

– The agents of the holdings were Turks and Muslims made investors feel comfortable and rendered them blind to the possibility of fraud.

– Holdings promised investors to deploy the capital to finance projects that would do good (e.g. create new jobs) and clearly bring their home-country forward. Thus, there was a clear social motive involved in the decision-making process.

– Holdings used very effective distribution channels. They went to the mosques, secured the support of local Imams and members of the various Islamic associations, and launched advertisements with the (Turkish) media.

The case of the holdings not only demonstrates the financial power of the Turkish community, but also shows that uptake on Islamic Financial Products if structured and marketed correctly would be real and not theoretical.

One of the key success factors for the Islamic holdings was indeed the fact that investors were addressed by fellow Muslims or Turks. The confidence that was inspired by this approach made investors feel comfortable with investing in the holdings even though they neither knew the holdings nor those who ran them; they simply trusted the selling agents. The optimal way to do it would be to mimic the case of the Islamic holdings. Muslims can best explain to Muslims why a product is Islamic and another is not. In fact, at the Islamic Bank of Britain many over the counter jobs have been given to Muslims for precisely this reason.

One of the major reasons why demand is not palpable for financial institutions could be that the Muslim community (be it individuals, religious associations or other associations) has far not actively and publicly voiced demand for Islamic Financial Products.

The sales-force itself in the financial institutions must too display a certain credibility. Ideally sales agents would be Muslims. Such was the case with the Islamic holdings, and this is the model that is currently followed by the Islamic Bank of Britain. The reason is that Muslims are more credible than non-Muslims when it comes to explaining religious matters but let us be realistic Islamic Banking is Banking so we need not only Experts in Islamic Finance but also Experts who understand the modern way of Banking.

If that is not possible, sufficient training should be given so as to avoid arousing the natural suspiciousness of Muslims towards the Islamicity of the institution or the product.

Due to their ethical character, Islamic Financial Products could also be relevant for the non-Muslim population. Like Islamic banking, ethical banking too is an emerging industry, and it is increasing in importance and popularity also in the German context but we should be aware that copy-paste is not the right strategy to expand the Islamic Finance Product range here in Europe otherwise we will end in an Islamic subprime dilemma too.

The latest announcement to establish an Islamic Bank in Switzerland put a big smile on my face. Remember the never ending story of the mega bank in the GCC to be founded a couple of years ago.

We are still waiting for this Islamic giant. The question is not only to what extend is there any demand for such a business case the main question that has to be answered seriously is will this Islamic Bank be able to offer an excellent service and real Shariah complaint products. from my experience in the German market I am absolutely sure that there will be no regulatory obstacles in this case but being able to survive in a Swiss or German shark pool with excellent back office skills and capabilities will be the biggest challenge for these GCC investors.

Inter alia a clear vision, a well trained staff, a wide range of products and explicit definitions of corporate governance guidelines are needed to succeed in a European market but what I have seen in the past based on many discussions with potential investors from the GCC showing interest in entering the German market was almost part of the big IBM-oriental-story: inschALLAH – bukrah – mallesch!

There is no doubt that the time is ripe for an Islamic Bank in the German speaking area, so may ALLAH taála help and guide our community to spread the Islamic finance wings in Europe but let us do this step as professional as possible.

Meanwhile all the best & Wasalaam


Zaid el-Mogaddedi

Founder & Managing Director

Institute for Islamic Banking and Finance (IFIBAF