Can non-Muslims use Islamic banks

Islamic Banking: About Hype, Hope and Sharia Councils

The love of Allah is a precious commodity, is an Islamic proverb. In addition to this one precious commodity, the 1.6 billion Muslims worldwide have other goods and money that they want to invest. Interest and gambling are prohibited in Islam. In this respect, some believers see it as haram (forbidden) to invest their money conventionally in banks.

Islamic banking closes this gap. Islamic banks and funds are based on Islamic law, the Sharia. The most important differences to conventional banks are the interest prohibition and the prohibition of gambling, i.e. betting and thus also of financial derivatives. In addition, Sharia does not allow investments in arms or drug trafficking, alcohol, tobacco, prostitution or pork consumption. The central idea is that the bank should act ethically and morally.

Anyone who wants to borrow money for a house from an Islamic bank can still do so. In that case, the bank would buy the house itself and then sell it on to the customer in installments at a higher price. So the bank makes a profit even without interest.

Since speculative transactions with derivatives are forbidden in Islamic finance, great hopes were placed in this part of the financial sector after the financial crisis. The system remains closer to the real economy, say some experts. "That is an advantage for the stability of financial markets", says Matthias Casper, professor at the University of Münster who researches Islamic banking. "Islamic banking seems to have a stabilizing effect on the financial market."

In Islamic banking, no mortgages are bundled into packages and resold in tranches, nor is there any speculation on corporate bankruptcies with credit default swaps or betting on the stock exchange on the loss of value of a share. Businesses relate to specific goods. The risks remain manageable compared to conventional banking. That may also have been the reason why the G20 finance ministers in 2015 advocated integrating Islamic banking more into the global financing structure.

Great expectations

And the number of Muslims worldwide is increasing. As recently as 2015, Islamic banking was being treated as the next big thing in finance. In the four years before, the market had grown rapidly. Management consultancies like Deloitte assumed that the volume of Islamic financial products would continue to increase. Although the big players in this field come from the Gulf States and Malaysia, the Europeans were also interested in the Islamic financial system. Britain’s Prime Minister David Cameron announced plans to turn London into a hub for Islamic finance and to issue an Islamic government bond. In Germany, the first Islamic bank, the KT Bank, started its work, it wanted to win 20,000 private customers by the end of 2017, it was said at the time.

... and disappointments

Few of those hopes have been fulfilled since then. "Muslims also like to use non-Muslim banks," says the Islamic scholar Thomas Volk from the Konrad Adenauer Foundation. "In Indonesia, the country with the most Muslims, only five percent have an Islamic bank." Great Britain issues an Islamic government bond The rating agency Standard & Poor's estimates that 2017 could be another difficult year for Islamic banking.

Institutions are missing

There is no such thing as a global institution that can reliably and permanently assess whether a package is in conformity with Islam. That is a problem for Islamic banking. A problem that is related to Islam itself. "The Sharia is not a uniform set of tools that all Muslims around the world use for orientation," says Thomas Volk, "but a collection of texts from the Koran and Sunna. Sharia is interpreted differently depending on the Islamic school of law."

Banks and companies that want to offer an Islamic financial product need a certificate. They get this from a Sharia council, which usually consists of three Muslim legal scholars. However, there is no internationally recognized Sharia council. Different Sharia councils may rate financial products differently. "In addition, the majority opinion within the Islamic community could change," says Casper.

Internationally, Islamic finance is currently making a name for itself through chaos. In June, the gas company Dana Gas from the United Arab Emirates announced that two of its Islamic bonds with a total volume of USD 700 million were no longer Islamic. They would therefore have to be restructured - on conditions that are much worse for investors.

Deutsche Bank and other creditors reacted angrily, and the matter will go to court in October. The case makes it clear that there are no uniform international standards in Islamic banking.

"Is that really practiced interest prohibition?"

Thomas Volk sees another weak point in Islamic finance in the way Islamic banks lend money without taking interest. At first sight it is about a merchandise transaction, but the merchandise is only available on paper. The borrower buys the "goods" from the bank, but pays in installments. The bank buys the "goods" back immediately, but at a lower price, which it pays out to the customer immediately. So the customer receives a loan and, when the last installment has been paid, has paid more than he borrowed. Volk does not see much difference in this to interest: "Is the ban on interest in practice or a surcharge through the back door?"

Matthias Casper does not want to have high hopes in this area either. "Despite the reference to the real economy, speculation is possible, including a real estate bubble. There is de facto speculation on real objects when a large number of customers invest money in real estate. That was the case in Dubai, for example." In Dubai, the largest city in the United Arab Emirates, real estate prices have plummeted since 2014.

Saturated markets in Germany

So far, Islamic banking is not very popular in Germany. "It's because of the structure of the Muslims here," says Casper. "Many Muslims in Germany are skeptical about Islamic banking because they come from Turkey and emigrated when Turkey was still a secular state and Islamic finance did not yet exist. The Muslims from the Gulf regions, who like to ask, are not very well represented here. "

The KT Bank states that it is on schedule with its plan of gaining 20,000 customers by the end of this year. However, she does not give any specific figures. A bank like KT Bank first has to build trust, says Casper. "Many Muslims trust the savings bank around the corner more than any joint venture that is new and unknown."

Philipp Wackerbeck from the management consultancy Stategy & sees it similarly. "The big breakthrough never really happened in Europe." After the initial hype, no large bank could be found that wanted to take up the topic for the European market. He sees an opportunity for Islamic banking in Germany if the structure of the Islamic population here changes because more Muslims come from other countries. "Muslims from Africa or the Gulf are more open to this than the Turks living here," says Wackerbeck. "The market potential should not be underestimated."

New markets in Africa

Thomas Volk sees market potential elsewhere. “There are 250 million Muslims in Africa and there are forecasts that there will be around 380 million by 2030.” Africa is therefore an ideal region for Islamic finance - but not an easy one. The necessary infrastructure and investments are needed to be successful on the African continent.

Senegal is an example of this. The country is politically stable and has an economic growth of 6.7 percent. There, the Islamic Development Bank has invested heavily in Islamic banking in recent years. Thomas Volk works for the Konrad Adenauer Foundation in Senegal. "Senegal's potential is clear," says Volk. "The population will more than double. At the same time it is shaped by Islam, between 90 and 95 percent are Muslim and very religious."

Volk therefore sees Islamic banking as a future model for Africa. "I believe that Islamic banking has a huge chance of success in countries in sub-Saharan Africa. Because there is a very religious population who would be willing to invest in this concept."

"The decisive factor is competitiveness with conventional banks," says management consultant Wackerbeck. "Nobody buys products from a bank just because it is Islamic." That applies at least to the Muslims in Europe, most of whom already have an account with a conventional bank.

It could be different in Africa. "A large part of the population still has no bank account," says Volk. "If a middle class is developing, these people could open their first account with an Islamic bank."