Islamic financing has been slow to get off the ground in Germany, although over the years REFIRE has reported on a number of initiatives designed to appeal to investors in a Sharia-compliant manner. As the number of products aimed at classical western investors proliferate across Europe, it's inevitable that real estate will follow trends being developed in other countries, particularly in the UK, in creating products designed for specialist investors.
Now Germany's first Islamic fintech INAIA has launched a real estate crowd-funding platform based on Sharia standards and certification, known as SUKUUK.
The sukuk structure is based on the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI)] Sharia standards and certified by the Dubai-based Minhaj Shariah Financial Advisory.
AAOIFI is a not-for-profit corporate body which prepares accounting, auditing, governance, ethics and Sharia standards for Islamic institutions and the industry.
INAIA founders Bilgehan Akbiyik and Emre Akyel said they had been working for five years on the concept of a "Sharia-compliant, tax-efficient and client-oriented" offer for people with special ethical needs. As they describe the process, the potential property buyer brings equity capital into a special purpose vehicle (SPV) – a subsidiary company formed between the buyer and investors to undertake a specific business purpose – for every project. It will be an independent security trustee registering the property rights and entering the land register. When the project is finalised, the SPV is dissolved.
For the investor’s share, the buyer pays a market-value rent, entirely defined digitally and individually for each property based on certain variables. The buyer obtains shares in the property every month until becoming the owner. It is basically a traditional diminishing 'musharaka' or joint partnership, fully digitalised for processing.
What differentiates SUKUUK from other property crowd-investing platforms, say the founders, is that their platform finances existing properties for private households where the owner is also the tenant, thus eliminating construction risks, including incompletion. This makes them unique in the German private sector, say the founders. Most other platforms which focus on commercial and construction project can't avoid this risk.
What's attractive about Germany, the founders say, is that the real estate market scores well in market, regulatory and political terms in making it a safe haven for international investors, INAIA's target investor group. Real estate crowd investing is already popular in Germany, especially among first-time investors and average earners. Considering Germany’s smallest urban area apartments start from €150,000 to €200,000, the ability to invest small amounts in several properties creates a diversified portfolio and generates rental income. The minimum investment is €250.
The SUKUUK business model works as follows. INAIA charges a platform fee to cover administrative and stakeholder expenses. Additionally, the company earns a management fee if it successfully implements funding, securing the buyer the necessary capital to buy the property. This fee is likely to be staggered, depending on the property value and financing amount.
Given the rules on charging interest in Sharia-compliant lending, the INAIA founders say the German legal framework has proved fortunate. On crowd-funding platforms, subordinated loans collecting investor funds for projects are often used. Subordination means the loan isn’t repaid until all credit obligations have been repaid and is often linked to interest payment. However, Germany has a mechanism that rules out an interest transaction and suggests profit-sharing, the definition of which can vary.
This proved beneficial for INAIA, as it offers investors rental income in line with their shares, but their solution eliminates any actual interest payments while emphasising the partnership nature of the transaction - a key component of Islamic financing.
The company is also working on a way to avoid the double taxation liable for investors as a result of Germany Grunderwerbsteuer, or real estate transfer tax, which amounts to between 3.5% and 6.5% depending on the federal state. It says that it plans to overcome this by optimising its SPV structure, and has found a way to avoid the tax payment. The product will then be ready to launch, for both buyers and investors, within a few months.
INAIA is Germany's only home-grown Islamic fintech, with a current product offering ranging from including gold saving plans to Shariah-compliant investment products like sukuk funds. Founder Akbiyik, himself the son of Turkish immigrants to Germany, is the co-author of the book “Islamic Banking Und Islamic Finance”, published in 2017.
Although Turks make up the largest immigrant group in Germany, Islamic banking has never taken hold in the country as it has done in other countries where Muslims make up a large minority. Many German Muslims emigrated when Turkey was still a secular state and Islamic finance didn't exist there. Muslims from the Gulf regions tend to be the main drivers of Islamic finance in other western countries, and this group is not well represented in Germany.
Akbiyik says that, following the early years of Turkish immigration into Germany in the early 1960's as Gastarbeiter, “The second, third generations of immigrants are now better integrated in Germany’s society, and are educated and more successful. They are now able to build wealth,” he says. One of their biggest aspirations is home ownership, and the INAIA founders say they are seeing a greater demand for Sharia-compliant real estate financing among young German Muslims.
