Germany’s Islamic finance market — a niche with great potential
What are the two systems, what are we talking about?
International banking consists of credit institutions, securities services companies, investment banks, financial services institutions and all other types of banking-related companies organized under private law for which the purpose of operation includes wholly or predominantly financial services. The attribute ‘Islamic’ refers to the religionrelated special features of this service sector.
Accordingly, banking transactions must be in accordance with the religious rules of Islam, the legal sources of the Fiqh and the Sunnah as well as the Shariah. The classical western banking transactions such as, in particular, credit business, deposit business, investment business or other interest-bearing transactions cannot be used in their usual form in Islamic banking.
International credit transactions, international payment transactions and interbank trade are characterized by freedom of capital movements, freedom of services and freedom of contract. These principles are contradicted by all financial contracts, which are subject to the Islamic rules of the general prohibition of interest (Arabic Riba), the prohibition of speculation (Gharar) and the prohibition of gambling (Maysir,
However, freedom of contract allows western banks to enter into a business relationship with business partners acting in an Islamic manner. The general prohibition of interest prohibits Islamic credit institutions from engaging in interest-bearing banking transactions, which, however, form the basis for the normal market lending or deposit business of non-Islamic banks.
In order to nevertheless be able to conduct such interest-bearing transactions with Islamic business partners, new financial contracts have been developed by market participants on the basis of non-cash loan agreements that are Shariah compliant on the basis of legal opinions (Fatwas). Shariah compliant means arranging financing, insurance, consumption and investment strictly according to the Islamic rules of faith.
For Islamic financial institutions, the Quran and the Sunnah lay down the religious and legal framework and also form the social and ethical foundation for the entire Islamic financial system. Islamic banking does not include the socalled Hawalah financial system.
Islamic cryptocurrency in Germany
In Germany, the Islamic finance market is still a niche — however, with high potential. Germany is the biggest and strongest market in Europe and has an increasing Muslim population. Therefore, it seems that it was not a coincidence that the first pure Islamic bank was not founded in the European centers for Islamic finance in the UK, France or Luxembourg, but in Germany.
And again, the first Islamic altcoin focusing on Islamic finance named ‘Caizcoin’ has been introduced to the cryptocurrency market and was founded in Germany. ‘Caizcoin’ is a portmanteau of ‘caiz’, which means ‘permissible according to Islam’ and coin, the nickname for cryptocurrencies.
Its fully-owned blockchain is called Caizchain. Caizchain was developed by Caizcoin to emphasize both Islamic values and the modern values of today’s world. Caizchain is the first liberal, decentralized and Islamic blockchain. This means that it has been recognized as compliant with Islamic financial principles and certified by Islamic scholars of Fatwas.
The Caizcoin team consists of Muslim and non-Muslim economists with a lot of experience in their fields. The Caizcoin roadmap also shows a commitment to the needs of its customers.
It plans to have a native blockchain, node sales and several other features by the end of 2021.
Regulation of cryptocurrency in Germany/EU
The EU and Germany have a quasipioneering role in the regulation of cryptocurrency. As a result of the EU Fifth Anti-Money Laundering Directive (Directive (EU) 2018/843), the member states of the EU are forced to treat providers of cryptocurrencies as obligated parties under antimoney laundering law. The new legal regulations thus pose new challenges for the entire industry.
In Germany, the legislator has taken the EU directive as an opportunity to subject companies that offer a custody service for cryptocurrencies to extensive regulation. According to § 32 KWG (Kreditwesensgesetz), a custody service is defined as: “The custody, management and safeguarding of crypto assets or private cryptographic keys used to hold, store or transfer crypto assets for others (crypto custody business).”
Effectively, this means that all cryptocurrency exchanges that offer a custody service for their customers, ie provide a wallet, are obliged to apply for a license from the German Federal Financial Supervisory Authority (BaFin). The custody service is thus defined as a new financial service.
Cryptocurrencies within the meaning of the German law are digital representations of a value that has not been issued or guaranteed by any central bank or public body and does not have the legal status of currency or money, but is accepted by natural or legal persons as a means of exchange or payment or serves investment purposes on the basis of an agreement or actual practice and can be transferred, stored and traded electronically.
Germany is ready for Islamic finance
So again, the newly founded Islamic cryptocurrencies must and will comply with Islamic finance rules and the German finance rules. It is the same interaction, which was also the case with the founding of the first European pure Islamic finance bank, KT Bank, from Frankfurt am Main. With both innovations, no changes to German law were necessary in order to be recognized as compliant with Islamic finance principles by scholars.
Therefore, the German market remains a huge market with a huge opportunity. The examples of the first Islamic bank and the first Islamic cryptocurrency show that Islamic principles and German law are compatible.
Especially now after the COVID-19 pandemic, there will be great opportunities for Islamic finance and Halal products as well as good investment opportunities in Germany.