Our article examines the market entry process of the first Islamic bank in Germany, particularly its interactions with regulatory agencies and other societal actors. When an organization enters a new market with a novel value proposition and business model, it often faces institutional complexity: a struggle over what it is, how it works – and even why it should exist. Being the first of its kind, the Islamic bank needed to develop innovative templates to effectively position itself within the German socio-regulatory framework.

Innovative templates for navigating novel institutional challenges

Entering from outside the established interinstitutional system, the idea and practice of Islamic Banking resulted in considerable conundrums at the interface of the religious and the state logic playing out in the German field of banking and finance. The Islamic religious logic was novel here, which led to jurisdictional tensions – and thus required the development of innovative business templates.

We argue that in any encounter of institutional logics in which the specific instantiation of a logic (in our case the religious logic) stems from a foreign interinstitutional system, the resulting novel institutional complexity necessitates the negotiation of the interfaces between the existing and the new logics. The development of innovative templates may imply reinterpretations and, more specifically, the ‘stretching’ of a specific institutional logic which, in consequence, impacts the compatibility of its jurisdictional claims. Additionally, as the bank was mainly committed to Islam but merely compliant to the state logic, we identify four distinct compromise mechanismsandsituate them along a perceived preference order. This results in a 4-step cascading strategy process (explaining, convincing, conceding, and suspending) to engage resulting institutional tensions.

Shariah compliance or Shariah commitment?

There are also further insights. For instance, our work addresses central concerns of the Islamic finance and management field. The so-called ‘form versus substance’ debate can be conceptualized as a debate about how demands from religion are approached and integrated into business practices. Effectively, the simple notion of Shariah compliance – despite its wide use in Islamic finance – can be deemed misleading. We suggest a continuum that spans from commitment to compliance with Islamic guidelines, within which Islamic banks with their diverse practices can position themselves.

Facilitating market entry – the role of regulators

We also offer thoughts on the regulatory setup. As regulatory actors (re)form institutional settings, they perform an important role in preventing conflict or improving the process of resolving tensions. They can ease, facilitate, or aggravate market entry. Regulatory actors hence need to consider the option of stretching existing institutional demands to form a field that is in accordance with the desired regulatory outcome while at the same time conducive for innovation and change. In contrast to the German case, for instance, the UK endorsed such change through changes in the regulatory system, that is, by removing the double tax issue for Islamic banking when a bank purchases a property and then sells it to the customer instead of lending interest.