Original Article

Challenges and opportunities for Islamic retail banking in the European context: Lessons to be learnt from a BritishGerman comparison
Received (in revised form): 29th June 2010

Stefan Volk
is an Assistant Professor of International Business at Tbingen University. He received his PhD from the University of St.Gallen. His research interests include international business, cross-cultural management and behavioural game theory.

Markus Pudelko
is Professor of International Business at Tbingen University. He has earned Masters degrees in Business Studies (University of Cologne), Economics (Sorbonne University) and International Management (Community of European Management Schools CEMS) and a PhD (University of Cologne). His current research is on cross-cultural management, comparative management, headquarterssubsidiary relationships and multinational teams. He has published on these topics in books, book articles and journals such as Human Resource Management, Long Range Planning, Organizational Dynamics and International Journal of Human Resource Management.

ABSTRACT The purpose of this article is to identify major challenges and opportunities for Islamic retail banking (IRB) in the European context. We present insights gained from the comparison of two European markets for IRB: the mature British and the relatively undeveloped German market. Based on this information, we propose a framework of four major attributes of a nations socio-economic environment that determine to a large degree the evolution of a domestic market for IRB in Europe: demand conditions, supply conditions, regulatory conditions and societal conditions. We review each of these attributes, demonstrate how they can either be an opportunity or a challenge for IRB, and develop a number of suggestions for European countries and nancial institutions seeking to participate in the growing market of IRB. Journal of Financial Services Marketing (2010) 15, 191202. doi:10.1057/fsm.2010.16 Keywords: Islamic nance; retail banking; Europe; Germany; the United Kingdom

INTRODUCTION
This article explores the key determinants of Islamic retail banking (IRB) in the European context in order to identify major challenges

Correspondence: Stefan Volk Department of International Business, Tbingen University, Melanchthonstr. 30, Tbingen 72074, Germany E-mail: stefan.volk@uni-tuebingen.de

and opportunities for the European IRB market. This investigation is of relevance, as Islamic banking, that is the Shariah (Islamic law) compliant way of banking, is on the rise. During the past three decades the industry expanded with double-digit growth rates and there are now more than 300 Islamic nancial institutions operating in over 50 countries worldwide.1 As Islamic banking

2010 Macmillan Publishers Ltd. 1363-0539 Journal of Financial Services Marketing Vol. 15, 3, 191202 www.palgrave-journals.com/fsm/

Volk and Pudelko

was initially developed in recognition of the need of ordinary Muslims for borrowing and lending, the most prevailing activity of Islamic banking in the predominantly Muslim societies of the Gulf and the Far East is retail banking.2,3 Yet, in most of Europe IRB services offered to the general public are still rare.4 This appears to be a missed business opportunity as Europes Muslim community of about 50 million5 clearly outnumbers the total population of the Arab states in the Persian Gulf region of about 36.2 million.6 What is interesting about the European case is that countries such as the United Kingdom (UK), France, the Netherlands, Spain and Germany progressed at very different speeds towards developing Shariah-compliant nancial retail products and services. In fact, the UK has emerged as the spearhead of IRB in Europe and the entire Western World whereas, for example, the German IRB market must still be regarded as being in its infancy.7,8 This striking difference cannot be explained by the mere fact that London is by now the worlds most important nancial centre, as retail banking is driven by domestic demand and Germany has a signicantly larger Muslim population than the UK.5 This leads us to the following question: why is IRB prospering in some European countries while being relatively undeveloped in others? In this article we provide answers to this central question by investigating the determinants for the different degrees of progress that two large European countries with substantial Muslim populations are making: the UK and Germany. For the purpose of this study, we identify four major attributes of a nations socio-economic environment that individually and interactively determine the evolution of a domestic market for IRB in Europe: demand conditions, supply conditions, regulatory conditions and societal conditions. We review each of these attributes to demonstrate how they can either be an opportunity or a challenge for IRB and develop a number of

suggestions for European countries and nancial institutions seeking to participate in the growing market of IRB. Based on our analysis we conclude that there is a clear potential for IRB in Europe. However, we also point out that the expansion of IRB in Europe is not only a matter of technical implementation, but also an economic, legal, political and ultimately a fundamental societal issue. The remainder of the article is structured as follows: First, we will provide a short overview of the current status of Islamic retail and wholesale banking in large European countries with a focus on the UK and Germany. Next, we will propose a framework that identies the most important determinants and related opportunities and challenges of IRB in the European context. Finally, implications for European governments and nancial institutions are discussed along with directions for future research.

ISLAMIC RETAIL BANKING IN THE EUROPEAN CONTEXT

Islamic banking describes the sector of banking and insurance, which follows the rules of Shariah, the Islamic law. These rules are based on the Koran, manifesting to believers the words of Allah to the Prophet Muhammad and the Sunnah, a canon validated by the consensus of the Prophets companions, describing his sayings, deeds and his living habits. Essential for Islamic banking is that making money from money by charging interest is prohibited. This does not imply that prot making is prohibited. However, there must be trading or investment in assets involved, so that money is used in a productive way. Interest (riba), gambling (maysir) and uncertainty (gharar) are not permitted.9 Resulting from these principles are a number of rules to follow in Islamic banking. First, Shariah prohibits paying or receiving interest. Second, uncertainty in particular in contractual terms and conditions is not allowed. Third,

192

2010 Macmillan Publishers Ltd. 1363-0539 Journal of Financial Services Marketing Vol. 15, 3, 191202

Challenges and opportunities for Islamic retail banking in the European context

investments in certain economic activities are banned, including pork, alcohol, tobacco and weapons production, gambling and adult entertainment. Fourth, rewards and risks of economic activities have to be shared by all parties involved. Fifth, every nancial transaction must be backed by a tangible asset. IRB in particular is geared primarily towards local consumers and small businesses and includes, among other products, interestfree current accounts, Shariah-compliant savings products, Islamic mortgages and other interest-free nancial services. These nancial products and services have enjoyed most success in the Gulf region with the Al Rajhi Bank of Saudi Arabia and the Kuwait Finance House being among the worlds largest Islamic retail banks. In the following we will provide a brief overview of the current status of Islamic retail and wholesale banking in ve European countries with large Muslim minorities.

reported a customer base of more than 47 000 by the end of 2008. A number of further Islamic retail and wholesale banks opened business in the period from 2006 to 2008, including the European Islamic Investment Bank, the European Islamic Bank, the Bank of London and the Middle East and the Gatehouse Bank. Leading conventional banks such as HSBC and Lloyds TSB followed suit by offering Islamic nancial services through an Islamic window. In addition to banks, there are now a number of professional services and law rms, supplying services, including educational and training products in Islamic nance.10

France
France is with about six million people the country with the largest Muslim population in Western Europe. Large French nancial institutions like BNP Paribas and Socit Gnrale are active in Islamic nance, but focus mainly on the Middle East.11 Unlike other European countries such as Germany, the French government has already made some important legal modications to facilitate IRB.12 However, the supply of Shariah-compliant nancial services is still very limited and largely conned to real estate deals.13

The United Kingdom

With ve full-edged Islamic banks and 17 conventional banks offering Islamic nancial services through an Islamic window, the UK is currently the biggest market for IRB and wholesale banking in Europe.10 This is to some extend surprising as retail banking is by and large driven by domestic demand and the British Muslim community of about 2.5 million is signicantly smaller than the number of Muslims living in France or Germany as indicated by Table 1. The rst European wholly Shariahcompliant retail bank, the Islamic Bank of Britain, started operations in 2004 and
Table 1: Muslim population in large European countriesa Country France Germany United Kingdom Spain Netherlands
a

The Netherlands
A recent study by the Dutch central bank reported that although a few domestic banks already offer Islamic investment products in the Netherlands, the largest demand for Islamic banking actually exists for Islamic

Total population (million) 64.4 82.3 61.3 40.6 16.8

Percentage of Muslims 9.8 4.2 4.0 2.8 5.8

Absolute number of Muslims (million) 6.3 3.5 2.5 1.1 1.0

Numbers adopted from Kettani.5

2010 Macmillan Publishers Ltd. 1363-0539 Journal of Financial Services Marketing Vol. 15, 3, 191202

193

Volk and Pudelko

retail nance and mortgages.14 The authors of the study point out that important regulatory changes still have to be made to facilitate Shariah-compliant retail banking. Islamic mortgages, for example, are currently not competitive vis--vis conventional mortgages as tax advantages are not applicable and transfer taxes are charged twice.

Spain
A study by the Spanish national bank from 2008 identied a number of opportunities for Islamic retail and wholesale banking in Spain, including the large number of Muslim migrant workers in Spain and the increasing economic links to North African countries.15 Currently, three Spanish banks, Bancorreos, Santander and La Caixa, offer interest free current accounts and Islamic mortgages.16 However, IRB is still relatively unknown in Spain and there is very little Spanishlanguage information available.

an indirect offer of Islamic nance in Germany, as all collected money will be transferred to Shariah-compliant accounts in Turkey. It is noteworthy that the short supply of IRB in Germany cannot simply be explained by a lack of interest among the 3.5 million Muslims living in the country. A recent study among German Muslims conducted by the Institute for Islamic Banking and Finance and published in a major German newspaper reported that 66 per cent are interested in Shariah-compliant investments, 19 per cent are, maybe, interested and only 15 per cent are not interested.19 In a similar poll, twothirds of the Muslim respondents expressed interest in Islamic mortgages and about 40 per cent were interested in Islamic consumer credits, insurance products and mutual funds.20 The question, therefore, arises, why IRB is prospering in the UK while being largely stagnant in Germany? In the next section we will shed light on this question.

Germany
Germany, the country with the second largest Muslim population in Western Europe, is among the least developed European markets for IRB. Many large German banks offer Islamic banking solutions to wealthy customers in the Middle East but no institution in Germany currently makes a similar offer to local German customers. In 2004, the federal state of Saxony-Anhalt issued a 5-year Sukuk (a Shariah-compliant equivalent of a bond) with a volume of S100 million. This was the rst Sukuk issued in Europe, but again with focus on investors from the Gulf States. Only a few Middle Eastern banks offer to German customers a small range of Islamic banking services through their branches in Frankfurt.17 The Kuwait Turkish Participation Bank KFHTurkey recently obtained a licence from the German Federal Financial Supervisory Authority (BaFin) allowing the bank to introduce Islamic banking services to the German banking system.18 The bank announced to open the rst Islamic bank in Germany in 2010. This will, however, only be

THE DETERMINANTS OF IRB IN THE EUROPEAN CONTEXT: THE CASE OF THE UK AND GERMANY
Although the focus of our study is on the UK and Germany, we argue that important conclusions can be drawn for the entire European Union. In this article, we therefore use the insights gained from this cross-country comparison to develop a framework that identies the most important determinants of IRB in the European context. Our approach is based on archival research, using multiple sources of information: rst, we reviewed the extant academic literature on IRB in Europe. Second, we conducted a thorough search of newspaper and web articles to cover the latest developments, current opinions and ongoing controversial discussions on the topic. Third, we reviewed a number of industry publications and company brochures. Owing to the novelty of the topic, so far few academic articles have been published in this area and none of them provide an overall picture of the IRB drivers in Europe.

194

2010 Macmillan Publishers Ltd. 1363-0539 Journal of Financial Services Marketing Vol. 15, 3, 191202

Challenges and opportunities for Islamic retail banking in the European context

Demand conditions

Societal conditions

Islamic retail banking

Regulatory conditions

Supply conditions

Figure 1: (IRB).

The determinants of Islamic retail banking

However, in this article, we attempt to ll this gap by proposing a systematic framework that illustrates the embeddedness of IRB in its socio-economic context, which shows how these environmental factors are interrelated and demonstrates how they determine IRB systems. Based on our research, we identied four major attributes of a nations socio-economic environment that individually and interactively determine the evolution of a domestic retail market for Islamic nance in the European context. These connections are depicted in Figure 1. Already from viewing Figure 1 it will become apparent that our framework is modelled on Porters diamond of national competitive advantage.21 The arrows indicate that the four determinants are interdependent and mutually reinforcing in their impact on the respective IRB system. For example, favourable supply conditions can only exist in a country if there are supportive government regulations, which, in turn, depend on societal support for IRB.

Demand conditions
Although the focus of Islamic wholesale banking is on international institutional investors, IRB is largely driven by domestic demand of local consumers and small businesses. The rst important determinant of the development of IRB is, therefore, the level of domestic demand, which depends, in turn, on the size of the relevant market segment.

Apart from a small segment of non-Muslim consumers who perceive IRB as an ethical investment opportunity, as it avoids engagements in areas such as alcohol, tobacco or weapons production, most consumers choose IRB for religious reasons.22,23 The most important target group for IRB in European countries is, therefore, the local Muslim community.24 The size of this community is, accordingly, a rst indicator of the potential of a nations IRB market. However, the UKs leading position in IRB cannot be explained by the size of its Muslim community alone, as it is signicantly smaller than the Muslim communities of other European countries such as Germany or France. A more exact indicator of the demand for IRB might therefore be the number of Muslims actually interested in Shariah-compliant banking services. This, in turn, could be a function of religiosity and of how strictly Muslims interpret the Shariah. The majority of Germanys 3.5 million Muslims are of Turkish origin and can, owing to Turkeys secular tradition, indeed be described as somewhat less strict in religious terms than the 2.5 million British Muslims of mainly Indo-Pakistani descent. Recent studies, however, show that the lower degree of religiosity does not translate automatically into a lower interest in IRB among German Muslims.19,20 We can, therefore, conclude that despite a higher degree of secularisation among German Muslims, there is an equal demand for IRB compared with British Muslims. Given the above mentioned larger Muslim population in Germany, the demand conditions appear to be not very decisive in explaining the more developed IRB market in the UK. This indicates that there is an unmet demand for IRB in Germany and that it is the supply side forming a bottleneck factor.

Challenges and opportunities for IRB from a demand perspective

It appears that in Germany, as in other European countries with a signicant Muslim population, a considerable demand for IRB

2010 Macmillan Publishers Ltd. 1363-0539 Journal of Financial Services Marketing Vol. 15, 3, 191202

195

Volk and Pudelko

exists. This demand will create a strong pull effect, which European banks cannot ignore for long. This effect will be further reinforced by the strong growth of Muslim communities in many European countries creating ample opportunities for IRB.25 However, conventional banks in Europe are still concerned about their image among non-Muslim customers. This is a major challenge for IRB as European banks often do not offer an Islamic banking window out of a fear of losing more conventional customers than gaining new ones.26

Supply conditions
The second determinant of the development of IRB is the nature of domestic supply. The colonial legacy of the UK has helped British banks to gain competence and experience in dealing with Muslim clients. This experience, paired with the knowledge and skills available in Europes nancial capital, London, has fostered the development of a wide range of Shariah-compliant retail banking products and services that appeal to local customers.27 Major British qualied accountancy bodies and British universities offer courses in Islamic nance, including a Scholar Professional Development Programme that trains Shariah scholars in conventional nance. These courses have helped to substantially improve Islamic nance qualications in the UK.10 Furthermore, the high level of competition in the British banking market is likely to stimulate product and process innovations as banks struggle to gain an edge over their rivals. The supply of IRB in Germany is in contrast still very limited. A recent survey among German Muslims revealed that only 4 per cent of the respondents used Islamic nancial products or services and 55 per cent of the respondents identied the lack of supply as the major reason for the low prevalence of Islamic nance in Germany.20 Lack of experience among local banks is certainly an important reason for this shortage. However, it should be noted that

many large German banks, including Deutsche Bank and Commerzbank, are already well-involved in the sector, albeit not in Germany but in foreign markets. Consequently, although British banks target the local Muslim communities in the UK, German banks largely ignore local Muslim customers and prefer to offer Islamic banking solutions to wealthy customers in the Middle East. It appears that German banks are concerned about rst-mover disadvantages, that is, the pioneering costs that an early entrant has to bear.28 They include, for example, the costs of business failure that a later entrant can avoid by learning from the mistakes of the rst mover or the costs of promoting a new product offering and educating customers. There are also substantial start-up costs associated with establishing a Shariah-compliant retail business, including the development of new products, employee training, implementation of a structure that allows separating the Shariah-compliant business from conventional business and the setup of a Shariah board. Our research showed that in particular the appointment of an internationally recognized Shariah board poses a major challenge to German banks. In Islamic nance, every nancial product needs Islamic legal expertise, thus conrming Shariah compliance. This is done by the Shariah board of a bank, consisting of Shariah and nance experts, who supervise the development of new products and services. The worldwide number of recognised Shariah scholars with the necessary grasp of nancial theory and sufcient English (not to speak about German) language skills is, however, very limited.29 The UK is again at the forefront of solving this problem and other European countries can only learn from the British model.

Challenges and opportunities for IRB from a supply perspective

With most European banks not yet providing IRB in their home markets, opportunities for

196

2010 Macmillan Publishers Ltd. 1363-0539 Journal of Financial Services Marketing Vol. 15, 3, 191202

Challenges and opportunities for Islamic retail banking in the European context

a better supply of Shariah-compliant nancial retail products arise from nonEuropean banks and investors. In particular nancial institutions from the Middle East are willing to bear the risks and costs involved in developing the European market. The rst Islamic retail bank in the UK, the Islamic Bank of Britain, was founded, for example, by investors from Qatar. Similarly, the rst Islamic retail bank in Germany will be opened by the Kuwait Turkish Bank KFH-Turkey and the rst Islamic retail bank in France will be founded by investors from Bahrain.30 It is likely that these institutions will pave the way for other nancial institutions seeking to participate in the European market of Islamic retail nance. However, the current reluctance among European banks, the start-up costs of a Shariah-compliant retail business and the shortage of Shariah scholars and qualied specialists are still among the challenges faced by institutions that wish to engage in IRB in Europe.

in the European context, in particular because there is no such thing as Christian or Jewish banking.32 Societal conditions seem also to be a major part of the explanation as to why the UK is ahead and Germany behind in the implementation of IRB. The IRB sector in the UK appears to have greatly beneted from the British societys tradition of tolerance towards religious and ethnic minorities. For example, 39 per cent of the British respondents in the above mentioned survey agreed that Muslim culture ts well into their country, whereas only 17 per cent of the German respondents were of the same opinion. An additional major concern is that a Shariah-compliant parallel banking system will overly promote Muslim identity beyond the sphere of religion and, therefore, foster societal segregation and a parallel Muslim society. In a speech on Islamic nance in Europe, Rudolf Bhmler, member of the executive board of Germanys central bank, made the following comment: Although a large part of the Muslims living in Germany have integrated well, unfortunately, there is also often a tendency for Muslims to segregate themselves from their Western surroundings. Often families and young people whose parents or grandparents came to Germany from the Arab states and Turkey shut themselves off from German society. To be quite honest, it was for this reason that I was initially rather sceptical towards the issue of Islamic nance in Germany. My concern was that the creation or support of additional Islamic nancial services would support the creation of parallel societies in Germany.4 In the same speech Mr Bhmler added that he is now convinced that in particular IRB can foster the integration of Muslims in Germany. A position long held by British authorities as a speech by Clive

Societal conditions
The third determinant of the development of IRB is a societys attitude towards Islamic culture in general and Islamic banking in particular. In fact, a considerable part of public opinion in Europe has some concerns with the open expression of the Muslim faith in their countries, as indicated by the dispute over wearing the headscarf in schools in France and Germany a couple of years ago or, more recently, the referendum about building minarets in Switzerland. A large-scale study of attitudes towards Islam in European countries found considerable prejudice against Muslims.31 According to this study, 69 per cent of Europeans do not believe that Muslim culture ts well into their country. Furthermore, 54 per cent believe that Islam is a religion of intolerance and 55 per cent think that Muslims in their country are too demanding. Such a strong public disapproval of Islam creates a major challenge for IRB

2010 Macmillan Publishers Ltd. 1363-0539 Journal of Financial Services Marketing Vol. 15, 3, 191202

197

Volk and Pudelko

Briault, Managing Director of the British Financial Services Authority (FSA), demonstrates: [T]he government has placed considerable emphasis on the need to combat social and nancial exclusion in the population as a whole. More specically, the government has wanted to give the 1.8 million Muslims (approximately 3 per cent of the population) in the UK access to nancial services consistent with their religious beliefs. This has been demonstrated by tax and other changes to encourage the development of a retail market.33 The above comments illustrate the important role political debates have played in the past for the divergent development of IRB in the UK and Germany. Favourable political attitudes towards IRB, for example, were at the core of the implementation of the necessary legal and regulatory framework in the UK.

Regulatory conditions
The fourth determinant of the development of a retail market for Islamic nance in Europe is the respective national regulatory framework. The UKs leading position in IRB, for example, is to a large extent based on supportive government regulations. In the following we will raise only a few specic points as a detailed review of the scal and regulatory initiatives, particularly taken by the British government, is beyond the scope of this paper. First, the successful development of Islamic retail nance is predicated on equal treatment regarding regulatory conditions for conventional and Islam-compliant nancial institutions. Initiatives by the British FSA to ensure such equal regulatory treatment of both types of institutions provide a suitable environment for the formation and registration of new Islamic retail banks.34 In Germany, however, regulations still create considerable market entry barriers for Shariah-compliant nancial institutions. For example, Germanys BaFin recently issued the rst licence to open an Islamic retail bank in Germany. Closer examination reveals, however, that this is just a very limited licence, as it only permits to collect funds in Germany which subsequently have to be transferred to Shariah-compliant accounts in Turkey. Second, a favourable tax regime can provide important incentives for establishing IRB. In the UK, tax policies implemented in 2003, including the abolition of double stamp duties on Islam-compliant real estate nancing arrangements and the extension of tax relief on Islamic mortgages to companies as well as individuals, encouraged the development of IRB. By contrast, in Germany and other European countries many Shariah-compliant nancial products are currently not competitive because of an adverse tax regime. Islamic mortgages, for example, are not attractive as tax advantages are not applicable and the property acquisition tax is charged twice, once when the bank

Challenges and opportunities for IRB from a societal perspective

Shariah conform savings plans, endowment insurances and above all schemes leading to homeownership can potentially greatly assist European Muslims to live their lives in accordance to their religious beliefs and at the same time manage their lives in accordance to the demands of a modern life in a Western country, thus strengthening simultaneously their religious identity and their inclusion and participation in the society they live in. In this sense, IRB could be understood as an opportunity to facilitate the integration of Muslims in European societies. However, there is still substantial public disapproval of and resistance against the inclusion of Shariah-based law into the legal system of European countries. This antagonism paired with virulent Islamophobia creates a major challenge for IRB in the European context.

198

2010 Macmillan Publishers Ltd. 1363-0539 Journal of Financial Services Marketing Vol. 15, 3, 191202

Challenges and opportunities for Islamic retail banking in the European context

purchases the property and a second time when the eventual owner buys the property from the bank. Third, the overall legal environment is an important determinant of IRB. The British common law system allows judges more freedom in interpreting tradition, precedent and custom, when dealing with specic characteristics of a particular case. The German civil law system is, by contrast, based on a detailed set of legal codes, which leave little opportunity for interpretation. The power to interpret common law provides a decisive degree of exibility with respect to the unique legal features of Islamic nance that civil law lacks. In the tradition of this adaptive legal system British banks have developed exible solutions to a number of legal problems related to IRB. For example, the conict between the deposit insurance system, set by British law, protecting depositors against the possible bankruptcy of the bank, and the risk-sharing principal set by Shariah law, requiring customers to participate in the banks risk, has been solved by allowing Muslim customers to waive the insurance in an individual agreement.

the key principles underlying the legislation is that the Government cannot sensibly legislate for different religions: one cannot have one set of tax laws that apply to Muslims, a different tax law for Christians and a different tax law for Jews.36 Furthermore, as we have seen, in many continental European countries the regulatory framework is characterised by detailed civil law codes and regulations, leaving little space for adjustments.

DISCUSSION AND CONCLUDING REMARKS

The purpose of this article has been to identify major challenges and opportunities for Islamic retail banking in the European context. To this end we developed a framework identifying four main determinants of IRB in the European context: demand conditions, supply conditions, regulatory conditions and societal conditions. Subsequently, we demonstrated how each of these attributes can either be an opportunity or a challenge for IRB in Europe. In the following we will summarise the insights gained from this analysis, develop a number of suggestions for European countries and nancial institutions seeking to participate in the growing market of Islamic retail nance and suggest directions for future research. Although our ndings are based on a comparison between the UK and Germany, we hold that important conclusions can be drawn from our analysis for the entire European Union, not least due to the political, economical, scal and to some extent social harmonisation and integration processes in this area. Consequently, the following suggestions are meant for the entire EU area. The key message of this article is that there is a denite potential of the European IRB market, waiting to be fully exploited. If this has occurred so far only to a limited extent and only in a few countries (mainly the UK), the reasons clearly lie more on the supply than the demand side. The supply side is, in turn, as we have demonstrated, strongly affected by regulatory and societal conditions.

Challenges and opportunities for IRB from a regulatory perspective

Many European regulatory authorities, including Germanys BaFin, are apparently increasingly inspired by the success of the British model and are now willing to lay the regulatory and supervisory groundwork for Islamic nance.4 An important driver here is the increasing number of Muslim voters in many European countries.35 This development is expected to greatly strengthen the position of IRB in Europe. However, the implementation of necessary regulatory adaptations is confronted with one fundamental challenge. Mohammed Amin, a partner at PricewaterhouseCoopers limited liability partnership (LLP) and its UK head of Islamic nance, brings this problem in his Islamic nance blog to the point: One of

2010 Macmillan Publishers Ltd. 1363-0539 Journal of Financial Services Marketing Vol. 15, 3, 191202

199

Volk and Pudelko

Owing to the socio-economic complexity of this issue and the multidimensionality and interrelatedness of various contextual factors, for IRB to expand in Europe an equally complex, multidimensional and interrelated approach would be required. We would argue that the rst important step in this direction would be to reach a consensus in society that IRB should be regarded as a sign of religious tolerance, a means to facilitate the day to day life for Muslims in Europe and, in addition, as a facilitator of integration. If, however, societies came to the conclusion that IRB disrupted societal integration and opened the doors to parallel legal systems, IRB would survive in such countries only in small niches. We therefore encourage more research on the potential consequences of IRB for societal integration of Muslims in European societies. If we assume the general willingness of the European populations and their political representatives to support the further expansion of IRB, a change of the regulatory systems would be required: rst, to allow the implementation of various IRB schemes and second, to assure equal treatment of IRB in comparison to conventional banking, for example with regard to taxation. Although our article provided only a broad overview of regulatory challenges, future research may pay closer attention to the consequences of country specic differences in regulatory conditions, tax regimes and legal environments for the evolution of IRB in the European context. Assuming the societal and regulatory environment would be in place for IRB to expand, European banks would have to offer the various Islamic banking products that meet the demand of their Muslim customers. As the European market for IRB is largely undeveloped, it provides substantial opportunities for rst movers. Those could capture the market by establishing strong brand names and tie customers to their products by creating switching costs. However, nancial institutions entering the

market early would also have to bear the risks and costs involved in developing the market. Conventional banks concerned about their image among non-Muslim customers might refrain from advertising the religious component and focus on the nancial performance of Islamic banking, the high ethical standards, the risk sharing principle and the avoidance of highly speculative investments. Future studies should therefore continue to investigate ways to improve the marketing effectiveness of Islamic banks and conventional banks with an Islamic banking window in non-Muslim countries (cf. Naser and Moutinho,37 Dixon38). This type of research is also important as previous studies in a number of countries have shown that potential IRB customers are often not properly informed about the functioning and the basic principles of Islamic nance.39,40 Ultimately, also potential customers of IRB in Europe would need to voice their interests. This would concern, in their role as citizens, the political lobbying for IRB and, in their role as customers, their preparedness to choose IRB products. Future research might also help to establish the true potential of IRB in Europe by investigating the demand for Islamic nancial services among European Muslims. In conclusion, in this article we have identied and described the key determinants of IRB in Europe and highlighted opportunities and challenges for IRB. In doing so, we provided strong evidence for the fact that the establishment of IRB in Europe is not a mere technical implementation problem, but also an economic, legal, political and ultimately a fundamental societal issue that touches upon the question in which kind of society Europeans want to live in.

ACKNOWLEDGEMENTS
We would like to thank Ms Maike Bader, Tbingen University, for her diligent research assistance.

200

2010 Macmillan Publishers Ltd. 1363-0539 Journal of Financial Services Marketing Vol. 15, 3, 191202

Challenges and opportunities for Islamic retail banking in the European context

REFERENCES AND NOTES

1 El Qorchi, M. (2005) Islamic nance gears up. Finance and Development: A Quarterly Magazine of the IMF 42, December 2005, http://www.imf.org/external/pubs/ft/ fandd/2005/12/qorchi.htm, accessed 21 March 2010. Pudelko, M. and Bhargava, N. (2005) The inuence of Islam on the economic development of Muslim countries. Economy, Business and Finance 20: 1628. Wilson, R. (2005) The growth of Islamic banking and product development among Islamic retail banks. In: S. Jaffer (ed.) Islamic Retail Banking and Finance: Global Challenges and Opportunities. London: Euromoney Books, pp. 1828. Bhmler, R. (2007) Speech to 2nd Islamic Financial Services Forum: The European challenge. Frankfurt am Main, 5 December, http://www.bundesbank.de/ download/presse/ reden/2007/20071205_boehmler.pdf, accessed 25 March 2010. Kettani, H. (2009) Muslim Population in Europe, Proceedings of the International Conference on Social Sciences and Humanities; 1012 October 2009, Singapore. Cooperation Council for the Arab States of the Gulf. Baba, R. (2007) Islamic nancial centres. In: M.K. Hassan and M.K. Lewis (eds.) Handbook of Islamic Banking. Cheltenham, UK: Edward Elgar Publishing Limited, pp. 384400. Karbhari, Y., Naser, K. and Shahin, Z. (2004) Problems and challenges facing the Islamic banking system in the West: The case of the UK. Thunderbird International Business Review 46: 521543. Gerrard, P. and Cunningham, J.B. (1997) Islamic banking: A study in Singapore. International Journal of Bank Marketing 15(6): 204216. McKenzie, D. (2010) Islamic Finance 2010. London, UK: International Financial Services London, Islamic Finance Working Group. Schoon, N. (2009) Islamic nance in continental Europe. Islamic Finance News, 6 March: 1415. Bi, F. and Atta, A. (2009) Overview of the current state of Islamic nance in Europe. Islamic Finance News Guide 4: 7779. Valente, C. (2010) France risks Shariah credentials over sukuk delay. Reuters, 17 February, http://www.reuters .com/article/idUSTRE61G2Q920100217, accessed 25 February 2010. Verhoef, B., Azahaf, S. and Bijkerk, W. (2008) Islamic Finance and Supervision: An Exploratory Analysis. Amsterdam: De Nederlandsche Bank. Garca-Herrero, A., Moreno, C. and Sol, J. (2008) Finanzas islmicas: Desarollo reciente y opportunidades. Revista de Estabilidad Financiera Banco de Espaa 15: 120130. Garca, E. (2009) La banca islmica crece en Espaa al calor de la crisis. WebIslam, 17 November, http://www .webislam.com/?idt=14475, accessed 10 February 2010. Rivlin, P. (2008) The development of Islamic banking. Orient 3: 411. Drries, B. (2009) Erste islamische Bank: Mit dem Segen Allahs im Lndle. Sddeutsche Zeitung, 19 December, http://www.sueddeutsche.de/politik/793/498092/text, accessed 20 March 2010.

19

20

21 22

23

24

25

6 7

26

27

28

10

11 12

29

30

13

31

14

32

15

33

16

34

17 18

35

Stocker, F. and Zacher, S. (2009) Regulierungsbehrde will islamkonformen Banken den Weg nach Deutschland ebnen. Die Welt, 25 August: 13. Wackerbeck, P. (2006) Islamische Bankprodukte in Europa: Zwischen Ethno-Marketing und ethischem Investment. Die bank 6: 4245. Porter, M.E. (1990) The Competitive Advantage of Nations. New York, NY: Free Press. Metawa, S. and Almossavi, M. (1998) Banking behaviour of Islamic bank customers: Perspectives and implications. International Journal of Bank Marketing 16(7): 299313. Naser, K., Jamal, A. and Al-Khatib, K. (1999) Islamic banking: A study of customer satisfaction and preference in Jordan. International Journal of Bank Marketing 17(3): 135150. Oakley, D. (2008) Islamic banking: Shariah-compliant institutions buck trend. Financial Times, 24 November, http://us.ft.com/ftgateway/superpage.ft?news_id=fto1123 20082024063877, accessed 23 March 2010. Michaels, A. (2009) Muslim Europe: The demographic time bomb transforming our continent. Telegraph, 8 August, http://www.telegraph.co.uk/news/worldnews/ europe/5994047/Muslim-Europe-the-demographic-timebomb-transforming-our-continent.html, accessed 10 February 2010. Pauly, C. (2009) Shariah banking comes to Germany. Der Spiegel, 22 October, http://www.spiegel.de/ international/germany/0,1518,656448,00.html, accessed 24 March 2010. Wilson, R. (1999) Challenges and opportunities for Islamic banking and nancing in the West: The United Kingdom experience. Thunderbird International Business Review 41: 421444. Demgensky, S. and Knoer, L. (2010) Ready to grow: Potential of the German market for Islamic nance. Business Islamica Magazine, 15 February, http://islamicame .com/article.asp?cntnt=430, accessed 25 March 2010. Alexander, P. (2010) Scholars and scale. The Banker, 3 March, http://www.thebanker.com/news/fullstory.php/ aid/7123/Scholars_and_scale.html?current_page=1, accessed 21 March 2010. Valente, C. (2009) French nancial plans 1 billion euro sukuk. Reuters, 16 April, http://www.reuters.com/article/ idUSTRE53F2XA20090416, accessed 25 February 2010. Zick, A. and Kpper, B. (2009) Attitudes Towards the Islam and Muslims in Europe: Selected Results of the Study Group-Focused Enmity in Europe. GFE-Europe Research Report. Wilson, R. (2007) Islamic Finance in Europe. Florence, Italy: European University Institute. RSCAS Policy Papers 07/02. Briault, C. (2007) London: Centre of Islamic nance? Speech to Industry Forum, London, 17 October, http://www .fsa.gov.uk/pages/Library/Communication/ Speeches/2007/1018_cb.shtml, accessed 25 March 2010. Ainley, M., Mashayekhi, A., Hicks, R., Rahman, A. and Ravalia, A. (2007) Islamic nance in the UK: Regulation and challenges. Financial Services Authority, November 2007, http://www.fsa.gov.uk/pubs/other/islamic_nance .pdf, accessed 25 March 2010. Savage, T.M. (2004) Europe and Islam: Crescent waxing, cultures clashing. The Washington Quarterly 27: 2550.

2010 Macmillan Publishers Ltd. 1363-0539 Journal of Financial Services Marketing Vol. 15, 3, 191202

201

Volk and Pudelko

36

37

Amin, M. (2006) UK taxation of Islamic nance Where are they now? PricewaterhouseCoopers Islamic nance blog, 20 November, http://pwc.blogs.com/ islamicnance/2006/11/uk-taxation-o-1.html, accessed 21 March 2010. Naser, K. and Moutinho, L. (1997) Strategic marketing management: The case of Islamic banks. International Journal of Bank Marketing 15(6): 187203.

38 39

40

Dixon, R. (1992) Islamic banking. International Journal of Bank Marketing 10(6): 3237. Haron, S., Ahmad, N. and Planisek, S. (1994) Bank patronage factors of Muslim and non-Muslim customers. International Journal of Bank Marketing 12(1): 3240. Rammal, H. and Zurbruegg, R. (2007) Awareness of Islamic banking products among Muslims: The case of Australia. Journal of Financial Services Marketing 12(1): 6574.

202

2010 Macmillan Publishers Ltd. 1363-0539 Journal of Financial Services Marketing Vol. 15, 3, 191202

Copyright of Journal of Financial Services Marketing is the property of Palgrave Macmillan Ltd. and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use.