From an older answer

Part 1

There wasn't such a thing as an official policy on Muslims in Nazi Germany. Rather, it is possible to observe various policies that ranged from courting Muslim representatives where the Reich government felt it politically expedient to do so to a distinct lack of concern for the persecution of Muslims on the hands of various satellite and associated governments to the the persecution and imprisonment of Muslims in Nazi Germany because of certain groups they belonged to.

Especially since 2001 and the resurgence of extreme Islamic terrorism in the Western world, there has been a whole slew of literature alleging a sort of "romance" or alliance between Nazi Germany and Islam or Nazi Germany and the Arab world but it is imperative to keep in mind that these allegations hinge mostly on one figure, Amin al-Husseini the former Mufti of Jerusalem, or on a generally very selective and decontextualized reading of historical evidence, while evidence for the persecution of Muslims under Nazi and associated rule often is left out or forgotten.

What also gets overlooked in all the writing on the relationship between Nazi Germany and Muslims is that the presence of Muslims is far from confined to the Arab world that is most frequently mentioned in these texts. Rather with both Albania and Bosnia, you have Muslim majority populations that were directly affected by Nazi rule and within the Red Army's forces, there were people from Soviet Republics that had had a majority Muslim population.

And rather than observing the alliance that is often alleged, in case of the latter policy was pretty much the opposite direction when it came to Soviet Muslims: So far not that much research has been done into this topic but from what we know, the Einsatzgruppen were not just handed over Jewish Soviet POWs by the various Wehrmacht POW administrators to be shot on the spot but also so-called "asiatic" POWs, meaning Soviet soldiers from the Central Asian Republics with strong Muslim populations. In line with the ideological illusion by the Nazis of the Soviets representing "asiatic hordes" intent on destroying Europe, these POWs, from Kazakhs to Mongolians, were shot on the spot as well and fell victim to a program of systematic murder against them.

In occupied Bosnia and Albania, the situation was a bit more complex. I have written about Bosnian Muslims in WWII before here and the situation was indeed multi-faceted. Bosnia was given to Croatia under the rule of Ante Pavelić's Ustaša (or Ustasha if you prefer English transliteration).

The Ustasha has been described by historian Alexander Korb as the radical product of the disintegration of the Habsburg empire. Racialist nationalists, they were a conspiratorial terrorist organization that had fought the Yugoslav state and the Serbs in particular. When they took over in Croatia and subsequently founded the Independent State of Croatia (Nezavisna Država Hrvatska, NDH) they were in essence the second choice of the invading Nazi regime because the conservative Agrarian party had refused to collaborate. The Ustasha, at the time of their takeover a group of about 3000 people, quickly set to put their policies against Jews, Roma, and Serbs into bloody practice. They for example dislocated about a third of the Serb population of Croatia, while another third was to be killed, and the final third to be converted to Catholicism.

Now, where do the Bosnian Muslims figure into this. This is where it gets a bit complicated. The Ustasha wanted to use the Muslims as pawns in their policy of forced expulsion, murder and forced conversion against the Serbs. They declared that the Bosnian Muslims, which they initially regarded as »Muslim Serbs« to be Croats and started spreading hatred between the Serbs and the Muslims in Croatia, in part by drafting Muslims into their security forces, in part by adopting Muslim symbolism such as the Fez. This tactic worked to a certain extent, and the Serbian nationalist resistance in Croatia and Serbia, the Chetniks, started not only attacking the Germans and Ustasha but also Muslim communities.

At the same time, a considerable number of Bosnian Muslims were also targeted for imprisonment and to be killed by the Ustasha because they were so-called »gypsies«. Roma in Croatia had often adopted the Muslim faith and either settled down or continued their Roma lifestyle. Since the Ustasha targeted so-called gypsies as part of their policies of racialist cleansing, the did indeed imprison and often kill in a very brutal and gruel way, considerable amounts of Muslims.

Basically, a lot of Bosnian Muslims were caught between being victimized by the Chetniks because they believed them to be Ustasha and the Ustasha for they believed them to be so-called gypsies. This motivated quite a few of them to join the Partisans, who had a policy of being open to all nationalities (in 1941 e.g. people from Bosnia and Herzegovina were the third largest group in the Partisan movement after Serbia proper and Montenegro, by 1945 about a 100.000 of them fought with the Partisans). But this open was also not necessarily open to all since the Partisans, being communists, were not exactly regarded highly withing faithful communities.

Others, especially those who saw themselves as not being able to work with communists, turned to the Germans for help. And suffering a very apparent shortage of manpower, the Germans were happy to oblige by creating the Waffen-SS Division Handjar comprised of Bosnian Muslims. And while Handjar was eventually used in Bosnia and was responsible for a whole variety of war crimes in occupied Yugoslavia, the division was far from the success the Germans had hoped it would be. The division mutinied twice upon being sent to France for training and upon learning they were slated to be sent to the Eastern Front to fight the Soviets. Also, recruitment was sluggish and didn't produce the numbers the SS-Hauptamt had hoped for, especially compared with the ethnic German Waffen-SS division in former Yugoslavia, Prinz Eugen. All in all, for the overwhelming role Handjar plays in "proving" a sort of alliance between Islam and Nazi Germany, it was an abject failure on almost every level and did not produce the desired results for the Germans.

Which brings us to Amin al-Husseini and his lesser known colleague in terms of collaboration with the Nazi regime, Rashid al-Gailani, former prime minister of Iraq. I have written about al-Husseini beofre here while /u/kieslowskifan has written about the subject here and here.

Al-Husseini had been the mufti of Jerusalem during the British mandate in Palestine and had spend the 1920s with various political maneuvering vis a vis the British and the Jewish communities there with the ultimate goal of preventing the mandate becoming a Jewish state as had been laid out in the Balfour Declaration in 1917. He was semi-successful in these endeavors but was ultimately forced to flee in the late 30s after an attempted insurrection against the British failed. Husseini made his way to Iraq where a prime minister with pro-Axis leanings, Rashid Al-Gailani, was in power.

Al-Husseini and Gailani both arrived in Germany after Gailani's pro-Axis government had been overthrown by the British in 1941. Al-Husseini had been in Iraq since 1939 and had had a hand in creating Gailani's government but not too much influence. Anyways, before his arrival in October 1941 and even as early as January of 1941, al-Husseini had asked Hitler to publish a declaration that Nazi Germany would create an Arab Palestine once they beat the British in North Africa. This was also the subject of their meeting in November 1941. Al-Husseini demanded that the Nazis recognize an Arab-lead Palestine. Hitler and the German foreign office were not thrilled by the idea and also didn't believe al-Husseini's story of him being the leader of a secret organization that once the Germans would recognize an Arab-Palestine would incite a revolt against the British in Palestine (this never materialized and there is no evidence for what al-Husseini claimed here).

In that meeting they also talked about the Jews and it has been used often to say that al-Husseini had some kind of role on the formulation of policy in the Holocaust. Husseini stressed that part of the German policy should be the "destruction of the Jewish homestead in Palestine" to which Hitler replied that "the German aim was the destruction of the Jews living under British protection in Palestine".