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Two years after opening, Germanys only

Islamic bank posts strong growth, mulls
expansion
(//www.salaamgateway.com/) | by Ali Bahnasawy | 20 September, 2017 | General

Photo: Officials cut a green ribbon to open KT Bank AG, Germany's first full-fledged Islamic bank, in Frankfurt, Germany, July 21, 2015. The bank, which is a wholly-
owned subsidiary of Turkish lender Kuveyt Turk, aims to tap Europe's second-largest Muslim community of roughly 4 million Muslims, many of whose members are of
Turkish descent. REUTERS/Kai Pfaffenbach

FRANKFURT - An animated video on the website of a German bank introduces the Aydin familya popular family
name of Turkish rootslooking for a bank that avoids riba and doesnt invest in alcohol, pork, arms or gambling. The
Aydins, hijab-wearing mother, father, and two young children, find their answer in KT Bank AG, Germanys first, and
only, Islamic bank.

Germany is home to one of the most competitive banking sectors in the world. The country has around 1,800 banks with
nearly 35,000 branches serving an 82 million population but didnt have an Islamic bank until KT Bank AG opened its
doors in July 2015.

Germany is a strong emerging market for Islamic banking, Ahmet Kudsi Arslan, KT Bank AG management board
chairman, told Salaam Gateway.

A subsidiary of Istanbul-based Kuveyt Turk, KT Bank has filled a market gap that has existed in Germanys banking
sector for decades. By providing Shariah-compliant products and services, the bank is attracting Muslims, as illustrated
by the Aydin family in the promotional video, searching for an Islamic banking solution in their European homeland.

Now, after only two years of operations, KT Bank is doubling its assets and mulling expansion.

ISLAMIC FINANCE IN GERMANY

Islamic banking is new to Germany but Islamic finance isnt. In 2004, the German state of Saxony-Anhalt issued the first
sukuk out of the country, and indeed the Western world. The sukuk was fully subscribed, with 60 percent of the issue
going to investors from the United Arab Emirates and Bahrain.

The countrys Federal Financial Supervisory Authority (BaFin) organized its first Islamic finance conference in Germany
in 2009. Another conference was held in 2012, signaling Germanys slow, but growing interest in Islamic finance.

Executives from Istanbul-based Kuveyt Trk Bank recognized the potential and applied in late 2012 for a license to
operate retail banking in Germany, after working on a non-European Economic Area (EEA) deposit broking license
since 2010. In March 2015, BaFin awarded Kuveyt Trk Banks German subsidiary its license to provide full banking
services.

This placed KT Bank in a unique position: its parent company, Kuveyt Trk is 66.2 percent majority-owned by one of the
worlds pioneering Islamic banks, Kuwait Finance House, with its forty years of providing Shariah-compliant financial
services. This means the German bank shares the same branding with Kuveyt Trk, which is Turkeys biggest Islamic
bank, making it immediately recognisable to more than 3 million customers of Turkish origin who live in Germany.

Photo: A Turkish flag waves in front of the minaret of the Muslim Haci Bayram Mosque in the southwestern German city of Hockenheim August 31, 2007. REUTERS/Alex
Grimm

MUSLIM CLIENTELE

Arslan declined to give KT Banks exact number of customers, saying only that it has reached a high four-digit number
and that this is within [the banks] target figures. The majority are Muslims of Turkish and Arab descent, who have
been the banks target customers from the outset.

The Federal Office for Migration and Refugees (BAMF) in Germany says that more than 3 million Muslims lived in
Germany by 2012. But with more than 1.2 million Muslims arriving from war zones in Syria, Iraq and Afghanistan, the
Muslim population in Germany is now between 4.4 and 4.7 million.

We have assumed from the beginning that the significant portion of our clients will be of Turkish and Arabic origin and
of Muslim faith. We estimate Muslim/non-Muslim ratio of 85/15, as we are not enquiring or registering our clients
religions, said Arslan.

The composition of Germanys Muslims has changed with the arrival of mostly Arab Syrian and Iraqi refugees but in
2009 when the substantial majority of the nations Muslims were of Turkish descent, 50 percent considered themselves
quite religious and 36 percent very religious, according to a BAMF study.

This is an important consideration as Islamic banking in Turkey remains a niche sector despite its market presence of
over three decades, indicating that professed religious beliefs and religiosity dont necessarily translate into Islamic
banking buy-in. On the global Islamic finance landscape, Turkey is not atypical in this regard. Indonesias Islamic
banking makes up only around 5 percent of its total banking assets, close to Turkeys market share of 4.76 percent as at
May this year, according to the Participation Banks Association of Turkey (TKBB).

KT Banks position as an Islamic bank in a majority non-Muslim western nation is more akin to UKs Al Rayan, formerly
the Islamic Bank of Britain. Al Rayan has not had an easy ride since opening in 2004. A couple of capital injections from
its Qatari shareholders (in 2010 by former owner Qatar International Islamic Bank and in 2014 by current owner Masraf
Al Rayan) have kept it afloat, and the bank has only recently pulled itself into the black. Its retail business surpassed the
1 billion British pound ($1.25 billion) mark in 2016.

Regardless, Arslan said that according to KT Banks own research, Muslims in the country have a savings rate of nearly
double the national average. Arslan anticipates the overall Muslim population in Germany is a huge growth potential
following the refugee influx, even if the newly-arrived Muslims will have a long journey before they will potentially tap
into Islamic financial services.
Photo: Wafy Al-Hamoud Alkhaldy, 36, and his wife Asma Al Saleh, 33, and their six children aged from five months old to 11 years old from the eastern Syrian town of Deir
ez-Zor present their newly issued "Ankunftsnachweis", an initial German registration document for migrants following their registration at the former British Harewood
barracks in Herford, western Germany February 22, 2016. Wafy and Asma left Syria after their home was destroyed by an airstrike. The family finally were able to cross
the Syrian-Turkish border following a 10km march after 14 unsuccessful attempts early in January 2016. After paying $600 for each person to people trafficers the family
reached the Greek island of Lesbos from where they took the so-called Balkan-Route to Germany. REUTERS/Wolfgang Rattay

ADHERING TO SHARIAH

So far, 20,000 individuals have approached the bank to enquire about its Shariah-compliant services, according to the
bank.

KT Banks total assets nearly doubled from 54.4 million euros ($65.5 million) in 2015 to 108 million euros ($130 million)
in 2016, with plans to increase the asset base by 80 percent in 2017. The banks rapid growth, albeit from a zero base,
matches its plan to open new branches beyond its existing ones in Frankfurt, Berlin, Cologne and Mannheim.

Total assets in Germanys banking sector increased by nearly 1 percent in 2016, according to data from Germanys
central bank.

To attract and win the trust of its target Muslim clientele KT Bank posts on its website certificates that detail how its
products are Shariah-compliant. The banks Ethics Council aligns its standards with those drawn up by Bahrain-based
industry body the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), whose guidelines
are adopted, to varying degrees, by jurisdictions and Islamic financial institutions around the world, including key
Islamic markets Bahrain, Indonesia, Malaysia, Oman, Pakistan, United Arab Emirates, and Saudi Arabia.

The Ethics Council carries out the same tasks as Shariah Advisory Boards in other Islamic financial institutions around
the world but the German bank believes the different name will attract more clients. We preferred to name it Ethics
Council in order to emphasize that the Islamic values on which our business model is based are universally ethical
values. Clients which are generally interested in Socially Responsible Investments can identify with these values very
well, said Arslan.

The use of the word Shariah is problematic for Germany, which continues to debate to what extent religious freedom,
which is guaranteed by constitutional law, stands with regards to a legal code such as Shariah.

From a regulatory perspective, Germanys Federal Financial Supervisory Authority (BaFin) considers KT Bank a normal
bank operating according to the same banking rules and regulations as all other banks. All banks are licensed under
the same supervisory laws and thus treated equally, irrespective of their national, cultural, or religious background,
said BaFins representative Mario Kyriasoglou in a statement to Salaam Gateway. BaFin also does not operate as a
product supervision [institution].

As long as KT Bank doesnt break any laws, the financial watchdog is not concerned if the bank gives its clients loans
with interest or uses Shariah-compliant contracts. This is also why BaFin doesnt keep track of the size of Islamic
financial services in Germany.
Photo: Members of LEGIDA, the Leipzig arm of the anti-Islam movement Patriotic Europeans Against the Islamisation of the West (PEGIDA), take part in a rally in
Leipzig, Germany January 11, 2016. REUTERS/Fabrizio Bensch

FINANCING

For retail clients, the bank pushes services such as savings accounts, car and real estate financing and a Shariah-
compliant debit Mastercard.

For real estate and property financing to comply with Shariah, the financier must first own the asset it will then sell on
to the customer at a profit. In Germany, as well as in other jurisdictions such as the UK, this has resulted in double
taxation, a situation in which land transfer tax is paid twice: once when the bank buys the property and later when it
sells it on to the client. To overcome this, a civil-law partnership (GbR) must first be established between the Islamic
bank and its customer. The GbR then buys the property, after which the bank sells to the customer its shares in the
partnership over time as long as the customers payments are paid. KT Bank allows real estate financing of up to 10
years (https://www.kt-bank.de/wp-content/uploads/2017/01/Immobilienfinanzierung-10Jahre_englisch.pdf), after
which all the banks shares in the GbR would have been transferred to the customer.

In 2016, the bank disbursed 19.6 million euros to real estate financing, a huge increase from 598,000 euros in 2015.
Most of the financing in 2016 went to large commercial real estate projects. We are very happy to have brought the
first Islamic real estate financing product to the market. Our next big goal is to make our product more competitive,
said Arslan.

According to the banks 2016 financial statement obtained from BaFin, the total financing portfolio is 95.7 million
euros, but the amount has already exceeded the 100 million euro mark, according to Arslan. The banks risk
management report of 2016 specifies that around 20 percent of the financing go to individuals and 80 percent to
companies.

Photo: People attend the Iftar dinner, the traditional evening meal for breaking the daily fast during the Muslim Holy month of Ramadan, at the Embassy of United Arab
Emirates in Berlin, Germany, June 13, 2017. REUTERS/Axel Schmidt

MIDEAST-EU TRADE FACILITATOR

As part of its growth and expansion plan, residents in France and Netherlands can now open current and savings
accounts online but Arslan is keeping mum on the banks expansion details.
For now, growing the business, as opposed to profits, is what matters to the bank. Its financial statement shows losses
in 2015 of 9,278 million euros, deepening in 2016 to 11,409 million euros.

The losses were expected, said Arslan. We have planned to reach breakeven in three years. After a year, we are happy
to say that we are already in 95 percent compliance with our planned budget, he said.

He is optimistic about the banks future and emphasizes its Gulf Cooperation Council (GCC)-Turkey-EU link. We are the
first bank in Germany with its origins in the Gulf region, said Arslan.

Being the only Islamic bank in Germany and the Eurozone puts KT Bank at the intersection of a massive cash flow and
the opportunity lies in its positioning as an intermediary for trade finance between the wider Middle East and the
Eurozone. Recognizing the opportunity, the bank facilitates international trade transactions between the two regions
using wakalah and murabahah contracts, and trading in gold and silver and EUR banknotes as well as secondary
market sukuk transactions.

The economic exchange between Germany and the Gulf region opens new opportunities for the mid-tier segment with
regard to sales markets, and for Europe as a recipient for Arab investors, said Arslan.

KT Banks Shariah-compliant services can be very important when considering the trade volume between GCC
countries and the EU, which reached 138.6 billion euros in 2016, with a significant trade surplus for the EU, according to
the European Commission.

In this respect, KT Bank wants to serve as a bridgehead between Germany and the MENA region, said Arslan.

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