Islamic Banking In Europe: Challenges and Opportunities

islamic banking europe

Islamic finance has become an important part of the international financial system and one of its fastest growing components over the last decades. Since the financial crisis in 2008, the sector has witnessed a terrific expandtions outside the Middle East and Arabic countries.

The first spot, of course, were those muslim countries based in South East Asia like Indonesia or Malaysia. However, in the last 10 years, many Islamic banks entered the European Union market, but how to determine the business of such banks?

A Quran and Shariah based financial system

Islamic finance is based on principles, which are all derived from the Quran and Sunnah. It means that an Islamic financial system is one that complies with Islamic religious law (Shari’ah). “It has the distinctive feature that it tries to reconcile a secular financial system with the basic tenets of the Islamic faith. Under Islam, there is no concept of an economy functioning independently of the religious criteria that inform every single aspect of human life: homo economicus is not independent and separate from the mu’min (believer)”, said Filippo di Mauro, Senior Advicer and Resercher at European Central Bank.

The sukuk: Second-largest asset class within the Islamic finance industry

Over time, the complexity of the products offered by the Islamic banks increased a lot. If, back in the 70s Islamic banking started with commercial banking activities, at present we can see that they offer a more diversified range of products and services tailored to the needs of clients: liquidity management tools, asset management, project finance and more. However, among them the sukuk were one of the main keys of success abroad for such banks.

Sukuk are bonds, issued by a bank for the financing of a specific medium- or long-term project, which can be implemented by both public and private companies. They have been a particularly fast growing segment of the market and, after Islamic banking, represent the second-largest asset class within the Islamic finance industry. Today sukuk has become an important vehicle for international fundraising and investment activities that generate significant cross-border flows.

The growing preference for Shari’ah-compliant investments among Muslim populations has been a key growth driver for the global sukuk market and for Islamic finance as a whole and has been translated into the development of fully fledged institutions, such as Islamic banks, Islamic insurance operators and Islamic fund managers.

Already at end-2012, the value of outstanding global sukuk topped USD 229.4 billion – a record high helped by new issuances worth USD 131.2 billion. Malaysia, Qatar, the UAE, Saudi Arabia and Indonesia feature among the countries that have been at the forefront of growth in the sukuk primary market.

Islamic banks in Europe: Germany, UK and France leading the trend

The European Union became an attractive market for expansion for the Islamic banks, due to its big potential. However, the overall magnitude of Islamic finance is still limited in Europe, with some notable difference between countries. In this framework, Germany, UK and France are leading this trend.

Germany was the first Western country to tap the Islamic capital market when the federal state of Saxony-Anhalt issued the country’s first Islamic bond in 2004, while it is well known how French authorities have built in the previous years an appropriate and friendly environment for such finance in this country. The UK has one of the most advanced Islamic financial markets in the western world and is quickly becoming a key destination for foreign Shari’ah-compliant institutions. The country is home to the west’s first fully fledged Shari’ah-compliant retail bank and currently has five true Islamic banks.

The Top 4 European Islamic Banks

1. KT Bank AG

The KT Bank AG was the first bank in Germany and the Eurozone which introduced comprehensive financial products and services according to Islamic banking principles. The bank, founded in 2004 and headquartered in Frankfurt, is a wholly owned subsidiary of the Turkish Kuveyt Türk Participation Bank headquartered in Istanbul. Today the bank has gain popularity not only among the turkish community living in Germany and count branches in Berlin, Frankfurt, Mannheim, Cologne and Munich. Pursuant to the establishment phase in Germany, KT Bank AG plans to offer Islamic banking products in other countries of Continental Europe.

2. Al Rayan Bank

Founded in 2004, Al Rayan Bank is the UK’s oldest and largest Islamic bank, serving more than 85,000 customers throughout the UK. The bank provides Sharia-compliant savings, Finance and current account services to over 90,000 personal, business and premier customers. It is the only Islamic bank in the UK to receive a public rating. By solely focusing on banking activities which are in keeping with the values of Islam, Al Rayan Bank has been a spotlight for muslim community in UK.


In August 2006, House of London and The Middle East (“HLME”) was incorporated as a UK company by Boubyan Bank. In July 2007, HLME had received a banking license from the UK Financial Services Authority and became Bank of London and The Middle East plc (“BLME”). This bank was launched with the aim to bridge the UK and Middle East markets through Islamic Finance to become the market leader in Wealth Management, focusing on Real Estate.

4. Gatehouse Bank

Gatehouse Bank is a Shariah-compliant bank offering savings products and Finance for the UK commercial and residential real estate and sourcing and advising on the UK real estate investments focusing on the build to rent sector. One of the fastest-growing banks in the UK, and are a subsidiary of Gatehouse Financial Group Limited. They have been around since 2007, with teams based in London, Milton Keynes and Wilmslow. Gatehouse Bank is authorized by the Prudential Regulation Authority (PRA) and regulated by the PRA and the Financial Conduct Authority (FCA).

Business Opportunity For Islamic Banking

The prospects for the further development of Islamic finance in Europe are rather solid. Let’s see the example of Germany. The country is the largest economy in Europe and it features the largest Muslim population (4.1 million people, against 3.5 million in France and 2.9 million in the UK). Second, German exporters could use institutions offering Islamic financing solutions as alternative sources of funding and thereby further enhance their funding profiles. Third, Islamic trade finance products offer the potential to strengthen trade ties with countries such as Turkey; a country which is an active trading partner of Germany and that has a budding Islamic finance sector.

Referring to the opportunities for the Islamic banking on the European continent, these can be mentioned as follows: new customer base, diversification of their investment portfolios and new business opportunities; new tools for financing banking activities from cooperation with conventional banks, which offers Islamic banking products and services, and also new customer base.