Shortly after 11:30 a.m. last Thursday, Kemal Ozan finally held the letter he had worked to get for almost two and a half years.
Mr. Ozan is managing director of Kuveyt Türk Bank, or KT Bank. His letter was from Germany’s German Federal Financial Supervisory Authority, a license to operate KT Bank in Germany – the first Islamic financial institution to get a full banking license in the euro zone.
“This is an historic moment,” said Mr. Ozan, his voice shaking. Then it suddenly hit him: He had forgotten to call his bosses in Istanbul in his excitement. “Our supervisory board members don’t even know yet.”
“For us, it is about equal opportunity, not about preferential treatment.”
KT Bank is the largest Islamic bank in Turkey and is 62 percent owned by Kuwait Finance House.
Now with a permit to operate in Germany, KT Bank plans to open branches in Frankfurt, Berlin and Mannheim by July, and expand to Cologne later in the year.
Mr. Ozan hopes to have assets in the hundreds of millions within three to four years – about the size of a small savings bank or credit union. That might sound modest, but for Mr. Ozan it is nothing less than a revolutionary experiment.
KT Bank will not charge interest, which is forbidden by the Koran, but rather a surcharge on trade. To understand the distinction, take the example of home financing.
If a normal bank finances the purchase of a property, it gives a loan to the customer, who then uses it to buy the property. The bank’s income comes from interest it charges to loan the money.
In Islamic financing, the bank buys the house and then sells it to the customer with an added charge. The costs and earnings to all sides are ultimately the same, but it gets around the religious prohibition on interest.
In a country that is home to four million Muslims, it may seem surprising that Islam-compliant banking is only now available.
Most Muslims in Germany come from Turkey, where banking generally follows Western tradition, said Zaid El-Mogaddedi, an Islamic finance expert.
Even in larger cities in Turkey such as Ankara or Istanbul, Islam-compliant banking has largely been a fringe phenomenon, he said. This is in contrast to the Gulf region or Malaysia.
It has not been easy to work out how big the market is for Islamic-compliant banking. Several years ago, a study by the consulting firm Booz found that 60 percent of Muslims in Germany were interested in Islamic home financing. The consultant noted, however, that the poll was conducted in mosques – and in some cases imams even helped fill out surveys.
At German banks such as Commerzbank or Deutsche Bank, managers said there is far less potential and the banks do not offer Islamic financing models for private customers.
But KT Bank’s market research determined that “21 percent of Muslims in Germany would view an Islamic financial institution as a natural local bank,” said Mr. Ozan. There is even greater interest among business customers, he said.
Tax laws will be a challenge. For example, in Islamic home financing, taxes would theoretically accrue on two land transfers.
Mr. Ozan has consulted with law firms such as Norton Rose and Hengeler Mueller, and believes he has a concept to cancel double taxation. At the core, it comes down to the bank and customer setting up a shared company to process the purchase of the house.
“We’re optimistic after our talks with the tax authorities,” said Mr. Ozan. He emphasized, “for us, it’s about equal opportunity, not about preferential treatment.”
Another hurdle is deposit protection. For Islamic compliant accounts, account holders don’t receive interest but share in profits or losses of the bank, similar to shareholders in a corporation – which would seem to stand in the way of deposit protection.
But according to Mr. Ozan, a solution could be found to give the bank’s customers legal coverage and give them access to the banking association’s deposit protection fund. Part of this solution would involve a profit equalization reserve to protect customers’ savings.
Mr. Ozan aims to increase KT Bank’s network of branches in the coming years. He underlined that Islamic banking is not only a religious model, but also a sustainable and socially responsible finance system.
“We will very specifically address non-Muslim customers too,” Mr. Ozan said.