BANKING - Market share of participation banks on the rise in Turkey

Bank Asya General Manager Abdullah Çelik - Al Baraka General Manager Fahrettin Yahşi - Kuveyt Türk General Manager Ufuk Uyan

Participation banks, which once were snubbed and had doubts cast over them when they first made an appearance in the Turkish financial system, have grown 10 times on average in the last eight years, according to data provided to the Aksiyon weekly by senior executives in the sector.

According to a report prepared by the late Dr. Adnan Büyükdeniz, who was the general manager of Albaraka Türk, one of the first participation banks to launch operations in Turkey, in 1985, the development of money and capital markets in developing countries is impeded by a number of factors including an underdevelopment of financial institutions and a lack of diversity of institutions and instruments. This problem is even more acute in countries where a segment of society prefers not to engage in the conventional interest-based banking system for various reasons. As a result, there is a leakage of savings from the financial system, and savings funds are often placed in unproductive areas. (full story) Büyükdeniz explained that the introduction of participation banks in Turkey just over two decades ago was a clear expression of ‘’equality of opportunity’’ in a pluralistically democratic society. These institutions have been able to mobilize savings which would otherwise have stayed outside the financial system and been channeled into unproductive areas. The history of participation banks in Turkey dates back to 1985, when two of the then “special finance institutions,” namely Albaraka Türk and Faysal Finans, opened their doors to clients who preferred to stay away from conventional banks mainly due to concerns about interest-bearing accounts. These Islamic finance institutions have grown considerably over the years as they meet Muslims’ preferences of not paying or being paid interest on loans and of not getting involved in any kind of investment in companies that sell goods or services considered haram (forbidden) in Islamic teachings. The sector welcomed a second player when Kuwait Turk walked in the door in 1989. However, Turkish capital owners stayed away from the sector until 1991, when the first domestically owned participation banks were launched. Anadolu Finans, İhlas Finans and Bank Asya, all owned by Turkish entrepreneurs, set up their operations in the 1990s. In 2005 Turkiye Finans was established when Anadolu Finans and Family Finans merged. The participation banks, like all other banks in Turkey, operate under the prevailing Turkish Banking Law, regulated and supervised by the Banking Regulation and Supervision Agency (BDDK). Furthermore, they hold a full foreign exchange license and they are part of the payments system in the country.   Participation banks in Turkey were initially suspected by some of not really operating on completely interest-free terms. However, their share of operations is now on the rise. According to Aksiyon, the market share of participation banks in Turkey has reached 4.3 percent in total assets in the 25 years they have been operating in Turkey. In money terms, in the last eight years their assets have risen from TL 3.9 billion to TL 43.3 billion. This corresponds to a tenfold growth in the said period. Akyüz says that this is so despite the fact that participation banks have gone through tough times in Turkey, with the worst being during what is called the post-modern coup of Feb. 28, 1997 and the 2001 banking crisis, which led to the closure of one participation bank.  Participation banks have encountered serious difficulties a number of times in the past but have managed to post strong growth and achieve a close to 10 percent share in the overall loan volume of the Turkish banking system, Türkiye Finans Chairman Mustafa Boydak said in an earlier meeting with businessmen. “It is a really great success story,” said Boydak, who is also the president of the Kayseri Chamber of Industry. “Participation banks went through tremendous hardships on a number of occasions, including when some almost went bankrupt. But when we look at the current situation, we see that these institutions extended nearly 10 percent of total loans provided by the banking system in Turkey. This is very important. Türkiye Finans is proud to be part of this sector,” he said.  During a recent briefing with a group of businessmen in İzmir, TKBB and Albaraka Turk President Fahrettin Yahşi said the objective of the sector is to grow a further 25 percent by extending operations overseas and opening new branches in the Middle East, the Balkans and Europe. Despite being in business for 25 years, participation banks are still not fully known in Turkey by all parts of society, says Abdullah Çelik, president of Bank Asya. According to Çelik, such reality was brought up at a recent board of directors meeting of the TKBB where a decision was reached in order to intensify the promotion of participation banks’ activities and soon implement a budget for this purpose. Çelik says that his bank’s aim has been to increase the quality and speed of service for their clients, from individuals to institutions, as well as to reach out to conventional banking clients in addition to their loyal pious Muslim clients without conceding interest-free operations. Çelik says that such a strategy has been rewarding as Bank Asya has now taken the lead in the participation banks’ league in Turkey and placed itself in the top-10 list of overall banks. In addition to its domestic success, the bank also found itself recognized on the global stage, ranking number 404 in the BrandFinance Banking-500 index in 2011.  Albaraka Turk’s Yahşi says that they are meticulous and very careful in abiding by the principle of interest-free banking, which is the basis of the participation banking system, when it comes to dealing with financial transactions. He says despite the fact that his bank is mostly known for its dealings with small and medium-sized enterprises (SMEs) they are planning to extend their operations to individual clients. He says at Albaraka Turk they provide quality and friendly service to their clients and that from 2011 they have set a vision of becoming the top participation bank globally. Kuwait Turk General Manager Ufuk Uyan says that in 2010 they introduced the system of “sukuk” which could mean interest-free bonds with terms until 2013. He says the system was awarded the most innovative category in the banking sector by Euromoney magazine as well as by several others. Another example of their innovative products is an ATM where their clients can transact in gold instead of currency.  Uyan explains: “We offer credit cards to our clients for which they dictate their own terms of repayment. As Kuwait Turk we also introduced interest-free retirement plans and insurance packages. We also know that there is a lack of information about the services provided by participation banks for the Turkish public, and we have addressed to this issue at TKBB meetings.”  Promoting their services and extending their reach to all parts of society seems to be the main task for participation banks in the immediate future. Yet on top of traditional banking services, participation banks have two important functions to play in the financial system: First, due to their interest-free operations they channel a substantial amount of savings which otherwise would be lost to the unproductive investments; and second, as Çelik puts forward, there is a direct contribution to the real sector from participation banks since the latter do not get involved in interactions with the Treasury such as bonds and securities that yield interest. Rather, he says, participation banks directly finance investments aimed at boosting production of goods and services, also increasing employment opportunities across the country. Source :  http://www.sundayszaman.com/sunday/newsDetail_getNewsById.action?newsId=243159- May 8, 2011