Interest rates are prohibited: Investing money in Sharia

The KT Bank is the first licensed bank in Germany, which operates according to Islamic principles – without interest. In Islam, these are in fact prohibited. Can this be a model for savers?

For the KT Bank operates according to Islamic principles and therefore may not require or pay interest. Although the bank itself is predominantly Muslim – so there is about the employees a prayer room – they emphasized basically available to all customers.

But what deserves a bank without interest money? For the checking account as it takes no fees. Although she does not pay interest, that does not fall in any case significantly. “The zero interest rate policy of the ECB is at the moment anyway almost no interest,” says CEO Ahmet Arslan.

The main product of the bank is the (interest-free) so-called investment account. Customers invest in this property and businesses – and not in financial products. “We fund a lot of German, regional projects: real estate, food, or the wholesale and retail. We particularly invest in medium-sized businesses, “says KT from the bank.

Net profit is split between banks and customers

Resulting gains bank and customer share. The customer’s profit sharing depends on the duration and the magnitude of the applied amount. The substance may have maturities of three to 36 months and deposits from 1,000 euros. If your deposits 20,000 euros over a period of three months, for example, 75 percent of the income earned to the customer and 25 percent can go to the KT bank.

All deposits paid into a pool from which the bank invested. The risk of the bank informs the customer. but according to Islamic law, she can not guarantee a certain risk. minimize it being understood that: the amount of profit sharing would be determined at the beginning. This is to protect against unpleasant surprises. The Bank calculates any expenses for risk provisions, which are based on the property and the company and the amount and term of the deposit. So risks are to be mitigated. Left then the net gain remains. “We are aiming to provide returns for our customers that are based on current market levels,” reads from the KT bank. She is a member of the Compensation Scheme of German Banks (EdB): The deposits of private clients up to an altitude of 100,000 Euros only (up to 200,000 euros for married couples).

Islamic bank as middlemen

Soon, the KT Bank also plans to offer a standard product of Muslim banks, so-called “Sukuk”. These are securities which are interest-free again and its owner again receive income from investments. It is thus a securitized and thus tradable form of investment.

The KT Bank also acts as the lender, however, again, not in a conventional way. Because in Islamic finance and loans are prohibited. When the Bank finances about a house, it must buy it along and pass on to the customer. In this case, the financial institution is currently proposing it a premium of 2.99 percent. In this way, the Bank financed the purchase of existing properties by acting as middlemen. Mortgages it does not offer it.

Actually double the middleman business maturity of the land transfer bypassing the KT Bank sent: It forms with the customer a civil law (GbR) with an equity ratio of customers of 35 percent who acquires the property. The term of the GbR is limited to 10 years, during which time the bank sold its shares in installments to the customer. Thus, the real estate transfer tax is payable only once.

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We do express our gratitude to R. Nelson Nash. Hopefully, this interview has sparked your consideration in reading his book Becoming Your Banker and ultimately the experience of living insurance.