(Mar 25): Germany, whose state of Saxony-Anhalt sold Europe’s first sukuk more than a decade ago, has beaten its euro area neighbours to the region’s first Islamic bank.

KT Bank AG, a subsidiary of Istanbul-based Shariah- compliant lender Kuveyt Turk Katilim Bankasi AS, has received a license to offer banking services in Germany and plans to start on July 1, it said in an e-mailed statement this week. Less than 5 percent of Germany’s 81 million people are Muslim.

“The target clients are the Turkish population living in Germany and Muslims of German nationality, and the focus will be on the main cities in Germany,” Hamad Abdulmohsen Al-Marzouq, the chairman of Kuwait Finance House, a majority stakeholder in Kuveyt Turk, said in a telephone interview from Kuwait City on Tuesday. The bank will start with a capital of 45 million euros ($49 million), half of which is paid up, he said.

KT Bank’s license comes as more non-Muslim nations seek to tap the $1.8 trillion Shariah-compliant industry. U.K. Export Finance is guaranteeing a sukuk that Dubai-based airline Emirates plans to sell this week, less than a year after the nation issued the world’s first sovereign Islamic bonds by a non-Muslim nation. Luxembourg, which sold its debut sukuk last year, is planning its second in 2016.

Huge Potential

KT Bank will offer Shariah-compliant deposit and credit finance facilities from its base in Frankfurt. The bank plans to expand to Mannheim, Al-Marzouq said. Kuveyt Turk applied for the license more than two years ago.

Boosting Islamic financing products in Germany offers a potential to strengthen ties with countries such as Turkey, the European Central Bank said in a paper two years ago. Germany was Turkey’s top trading partner in 2013, according to the latest annual data compiled by Bloomberg, totaling almost $39 billion.

“Germany was the focus, however, we will continue to evaluate other countries in Europe,” Al-Marzouq said.

Luxembourg may be the next euro area country to license an Islamic lender should Eurisbank, a bank backed by investors in the Gulf Cooperation Council, get its license, which is “currently being processed,” Finance Minister Pierre Gramegna said in an interview in Dubai on March 3.

Small Players

While setting up KT Bank helps develop Germany’s Islamic finance industry, “I don’t see potential for establishing an important market like in Malaysia or the GCC,” Apostolos Bantis, a Dubai-based credit analyst at Commerzbank AG, said by phone on March 23. “Perhaps we’ll see smaller players.”

Saudi Arabia and Malaysia are the world’s biggest markets for Islamic finance.

“Kuveyt Turk clearly sees potential in this developed market for its products,” Dermot O’Reilly, a Dubai-based consultant at Amanie Advisors, an Islamic finance advisory company, said by phone on March 24. “If Kuveyt Turk is profitable and continues to expand, their competitors at home and abroad will take notice.”