Islamic banking, i.e. banking that follows the principles of Islamic law, is gaining ground in the European market. Notably, it prohibits the collecting or paying of interest, and insists that profits and losses be shared. KT Bank AG, a subsidiary of Kuveyt Türk Katılım Bankası A.Ş., is the first Islamic bank in the Eurozone. I recently had the opportunity to speak to Mr Kemal Ozan, CEO of KT Bank AG. He spoke to me about the experience of being the first, and about what opportunities he sees in Europe.
Mr Ozan, your bank received its full banking license in 2015. What has been your experience with the German regulator (BaFIN) in terms of your application?
As the first Islamic bank in Germany and in the Eurozone, we have officially established a previously unknown business model in this region. Kuveyt Türk Katılım Bankası A.Ş. has been laying groundwork in Germany since 2004, with our German branch there explaining who we are and what Islamic banking is, and acting as pioneers. In 2010 we entered the market and were granted, by the BaFIN, a license for non-EEA deposit broking. Then in March 2015, after having applied in 2012, the BaFIN granted KT Bank AG a full banking license under German law for the provision of deposit and credit business in Germany. KT Bank is also a member of the “Entschädigungseinrichtung deutscher Banken GmbH” (EdB), which secures our clients’ deposits up to €100,000.
In terms of our banking license application, we have been working with the German regulator to ensure that we comply with all regulatory, legal, and fiscal requirements applicable to conventional banks.
With regards to specific challenges, such as Islamic car purchase and real estate financing, we had to develop approaches to comply with the German legislation—e.g. our real estate financing products are set up in line with the model of the German civil-law association “Gesellschaft bürgerlichen Rechts” (GbR).
This is also in line with the Luxembourg regulator (CSSF), who leaves the offer of Islamic banking products up to each bank, as long they comply with the regulations of conventional banking. But do you face a double burden of Islamic and banking requirements, and the subsequent effects in terms of the time-to-market of products?
We have not faced consequences in terms of time-to-market due to the years of planning and preparation of our market entry.
You chose KPMG to assist you with your license application. What was crucial for you in that decision, and what was your experience with KPMG?
For such a pioneering project and milestone in Islamic banking, it was evident to us that we needed to engage renowned consulting firms. KT Bank AG is a 100% subsidiary of Kuveyt Türk Katılım Bankası A.Ş. Istanbul, one of the leading participation banks in Turkey, and its main shareholder Kuwait Finance House is one of the world’s major Islamic banks. We are among the best in our business so we chose matching partners.
Why have you chosen Germany as the location for your registered office? Were there any alternatives?
Currently only 5% of the German Muslim population adheres to Islamic banking. When this is measured against the number of more than four million Muslims in Germany, a huge growth potential can be anticipated.
What are your plans for the future and are you also considering expanding to other EU member states?
Pursuant to the establishment phase in Germany, we would like to offer Islamic banking products in other countries of continental Europe.
What (future) role will Islamic finance play in supporting sustainable and long-term investment decisions? Is there also relevance for non-Muslim clients?
KT Bank AG welcomes individuals of all world views. Our products address all persons whatever their origin and religion is. However, we have assumed from the beginning that the significant portion of our clients will be of Arabic and Turkish origin and of Muslim faith. As an Islamic bank our business model is based on Islamic values, which are universally ethical as well. Since we started our business and information campaign about being the first Islamic bank in Germany, we have received a lot of requests from potential clients who are interested in our products and who asked if it is also possible to be our client without being a Muslim. Obviously yes! Our clients gain a high degree of credibility due to our Islamic authenticity and the religion that is integrated into our business processes. Finally, we want to be the principal bank for all clients who are interested in ethical investments. Islamic banking means ethical sustainability, the trading of real goods, and investing in the real economy. Socially responsible investment (SRI) is only one of our keywords. Additionally, we are the first bank in Germany with its origins in the Gulf region. 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 Arabic investors. In this respect KT Bank AG wants to serve as a bridgehead between Germany and the MENA region.
Which offers are included in your product range, and which are requested most by your customers?
Our product range appeals to both private and business customers. Considering Muslims’ financial requirements, we are offering the broad product range of a universal bank, from free current accounts and investment opportunities based on profit-sharing and participation schemes, to real estate financing, instalment credits for larger acquisitions, and investor loans for business financing. Currently real estate financing and investment accounts are those requested most by our customers.
Meanwhile the core markets of Islamic finance are well-developed and even saturated. In Malaysia and the Emirates almost every kind of Islamic financial product is offered, even credit cards. Do you believe that this business model will be progressed in the EU to the same extent and/or do you see barriers and the need for improvements?
Islamic banking is a business segment that is growing worldwide, not just due to good prospects in Germany and Europe with the large—and currently growing—target group of Muslims there, but simply because of its Islamic values, which are universally ethical. The business model wants to show that profits and ethics are compatible.
With regard to that compatibility between profit and ethics, Islamic banking is not only about the prohibition of interest, but also about the restraint of uncertainty (Gharar). However, it is generally said that there is no return without risk. What strategy are you pursuing to manage the gap between profitability and the ethical aspiration of your bank and your clients?
On one hand our bank is operating as a trader, buying commodities and reselling them with a profit mark-up. On the other hand we are acting as an entrepreneur by participating in projects and subsequently sharing in their success. Therefore KT Bank AG is not lending money conventionally, but financing real goods. All our transactions are asset-backed. This is a stable and profitable approach and a collaborative win-win situation for our customers and the bank. Of course, we also follow the market conditions to remain competitive.
From your point of view, what is the future role of Scholars? For example, are they to be a part of a unification of Islam-compliant banking standards and the admission of independent third parties that would verify the compliance of products? Would such a unification not create more transparency, especially for non-Muslims?
Compliance with the principles of Islamic banking is the basis of our business. Actions are reviewed and verified by our ethics board, which operates on the international AAOIFI standards. Members of ethics boards are experienced Islamic scholars and the have the necessary know-how of the religious matters in banking. Furthermore the ethics board is involved in product development, advising and supervising the management, training employees, auditing departments on Islam-compliant implementation of processes, and clarifying current issues and cases that still lack a recognized standard. In this way, transparency is provided.