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Islamic lending

Christina Ruta / hcSeptember 1, 2012

A Turkish financial institute wants to open an Islam-compliant bank in Germany. Experts say it's a conventional model of banking that could appeal to Muslims and non-Muslims alike.

ARCHIV - Eine Hand entnimmt dem Geldschlitz eines Bankautomaten die gewünschten Banknoten (Archivfoto vom 07.11.2008). Das Bundeskartellamt erhöht im Gebühren-Streit um das Geldabheben am Automaten den Druck auf die Banken. Die Behörde werde Geldhäusern, die von Kunden anderer Banken oder Institutsverbünde zum Teil immer noch bis zu zehn Euro Gebühr pro Transaktion verlangen, ein Ultimatum von sechs Monaten setzen, sagte ein Sprecher des Kartellamts der Tageszeitung «Die Welt» (Samstag). Foto: Uwe Zucchi dpa +++(c) dpa - Bildfunk+++
ATM Euro transactionImage: picture-alliance/dpa

With the effects of the ongoing euro crisis impossible to discern, many people in Europe would probably be willing to sign on to a banking institute that offers only transactions backed by tangible assets rather than highly speculative financial management.

At least that's what the Istanbul-based financial institute Kuveyt Turk is hoping since as it's the fundamental principles behind an Islam-compliant bank it wants to open in Germany. Such a banking institution would be the first of its kind in Germany.

"The idea of an Islamic bank is that it adheres to Islamic investment guidelines and principles," Zaid el-Mogaddedi, founder and director of the Institute for Islamic Banking and Finance (IFIBAF) in Frankfurt, told DW.

Zaid el-Mogaddedi
Zaid el-Mogaddedi, from IFIBAFImage: privat

Investments in gambling, pornography or weapons are prohibited as well as companies that produce pork or alcohol or heavily indebted, he said. Furthermore, all financial products would be examined by an ethics committee.

No interest, only premiums

In particular, the financial products of an Islamic bank are more closely tied to the real economy compared to that of a conventional bank. Based on the Sharia, the moral code and religious law of Islam, the bank would only conduct transactions with businesses dealing with goods and services. Speculative financial transactions would be excluded from the bank's business - as would interest income from the lending of money.

Customers of an Islamic bank do not have access to loans in the traditional sense. Instead, the bank buys an item or property directly for the customer and the customer then repays back the sum in installments with an added premium.

"You have to see that in the Islamic financial system there are also mechanisms that mimic the interest rate effect - though it is not the same," said Martin Schulte, an Islamic banking expert at the Association of Foreign Banks in Germany.

"Money is fruitless"

The premiums paid back to the bank enable Islamic banks to make the profits they need to stay in business and to make up for any possible losses incurred when the objects they own lose value. Islamic banks, however, also split some of the profits and losses with their customers, who the banks see as partners. As such, customers also receive income equivalent similar to interest on the money they deposit.

It's necessary to understand the Islamic understanding of money to understand the concept of an Islamic bank, Schulte said.

"Money is fruitless, that is to say that simply transferring money does not create economic value," he said. "It is a medium of exchange, which itself has no economic power."

Conventional banking, on the other hand, is partly based on the concept that lending money is a service in itself that is worthy of compensation. "But in the Islamic understanding it is possible to develop products that are economically useful and complement the conventional banking business from a macro perspective very well."

Not a success model, so far

An Islamic bank exists in the UK, which had to be supported with money from its parent company. Banks in the United States and France sporadically sell halal financial products but without much success.

Employees outside the Mannheim branck of Kuveyt Turk Photo: Kuveyt Türk
A branch of Istanbul-based bank Kuveyt Turk in MannheimImage: Kuveyt Türk Beteiligungsbank

An Islam-conform investment fund was established in Germany in May 2012 by the Malaysian asset manager CIMB Principal and has been approved by the German Financial Supervisory Authority (BaFin). The fund, however, is still in the test phase.

A study published in 2012 by the Stresemann Institute found that "Islamic finance" had failed in European countries because Muslim customers had lower income levels and thus little investment potential.

Zaid el-Mogaddedi from the Institute for Islamic Banking and Finance said the failure of Islamic financial products in Europe came down to bad marketing. However, he had a better view of Kuveyt Turk's plans in Germany.

"The decisive point will be whether the Islamic banks offer an attractive product portfolio and good services and whether the communication is clear enough to bring Muslims and non-Muslims to the bank as an attractive alternative," he said.

Considered globally, the bank would be a pioneer since Islamic financial institutions are a relatively new phenomenon even in Muslim countries. Most Muslims go to conventional banks.