Three of the four Turkish participation banks have got majority GCC ownership interests -- Turkiye Finans is largely owned by National Commercial Bank of Saudi Arabia; Kuveyt Turk Participation Bank (KTPB) is majority owned by Kuwait Finance House, one of the largest Islamic banks in the world; and Albaraka Turk Participation Bank (ATPB) is a subsidiary of Bahrain-based Albaraka Banking Group. The fourth, Asya Participation Bank (APB), also has closed ties with the GCC and has set up a joint venture with the Islamic Corporation for the Development of the Private Sector (ICD), the private sector funding arm of the Islamic Development Bank Group (IDB), called Tamweel Africa which invests in financial institutions, leasing entities and extends lines of credit to finance trade in sub-Saharan Africa. Analysis about the Turkish Islamic banking sector is fraught with complexities -- political, ideological, structural and market issues. The facts speak for themselves -- it was the military regime of General Kenan Evren through the Bulent Ulusu Government that issued the Special Decree in 1983 to facilitate the establishment of Special Finance Houses as Islamic banks were then termed under the law. The architect of Turkish Islamic banking policy was the late Turgut Ozal who at the time worked as a senior civilian bureaucrat at the Under-secretariat of the Treasury. This happened at a time when Turkey was forging a rapprochement with the Middle East and the Islamic world. The early promoters of Islamic banking in Turkey were two Saudis -- Prince Muhammed Al-Faisal through the Geneva-based Dar Al-Maal Al-Islamic (DMI) Trust, which invested with local Turkish businessmen such as Saleh Ozcan to establish Faisal Finance Institution in the early 1980s; and Saleh Kamel, chairman of the Dallah Albaraka Group of Saudi Arabia, through its banking arm which similarly launched the Albaraka Turkey Finance House. Another important feature of the Turkish Islamic banking sector is that during the Turkish financial crisis of 2001 the sector although affected by the crisis fared much better than the conventional banking sector. Some 20 conventional banks went bankrupt while only one special finance house collapsed namely Ihlas Finans. As such the resilience and the staying power of the Turkish Islamic banks has been a feature of its historical development, albeit painfully slowly due to the inherent conservatism and cautiousness of the banks, their shareholders and the senior management. Because of the so-called secular nature of the Turkish state in which anything Islamic was mistrusted by a fundamentalist secular media, Islamic bankers in Turkey psychologically preferred not to over-promote the development and progress of the sector. Indeed it was as if they were self-censoring the success of the Islamic banking sector, which as S&P points has grown strongly over the past five years, with total sector assets accounting for about 5 percent of total system assets as of year-end 2010 compared with 2.8 percent 5 years earlier. Even politicians on the conservative right with so-called Islamic leanings, save Turgut Ozal, were cautious about promoting Islamic banking too enthusiastically lest they be accused of pushing creeping fundamentalism. State officials at the Treasury, central bank, banking regulation and supervision board, over the years privately talked up the participation banking sector but officially appeared ambivalent about Islamic banking per se. Had it not been for this culture of fear, Islamic banking would have taken off much greater and Turkey could have been a market leader in this respect. How times have changed.
Islamic banking, now called participation banking under the Banking Act 2007, has now become part of the mainstream banking sector and even the secular media is now recognizing it as an alternative form of financial intermediation as opposed to 'religious financing' and are even making the case for Turkey to issue a debut sovereign sukuk on market and business grounds. The recent stunning general election victory of Prime Minister Recep Tayyip Erdogan, whose AK Party ought to be a natural ally of the participation banking sector, may become a watershed for the participation banking sector. But this will also depend on Erdogan's ability to get the constitution changed from the current "military" one to new "civilian" one and to forge through reforms in human rights, religious freedoms and the independence of the judiciary. Turkish participation bankers were perhaps the most keenest to see the outcome of the election. Post-election they expect things to develop much faster especially the issuance of the country's debut benchmark international sukuk. Nevertheless, over the past 18 months as S&P emphasizes, Turkey has passed a law conferring tax neutrality on Sukuk Al-Ijarah; Kuveyt Turk Participation Bank (KTPB) issued a debut $100 million sukuk; promoters issued several Shariah-compliant investment funds; and the Istanbul Stock Exchange launched a domestic index of participation banks and companies. While S&P is right in stressing that the Turkish Islamic banking sector remains small in a domestic context with only four players and in its opinion there is a lack of public awareness of its products, Arab News has learnt that there are a number of applications to set up new participation banks pending with the Banking Regulation and Supervision Board of Turkey. These applications include promoters and investors from the GCC countries. In fact, Turkish Islamic bankers such as Ufuk Uyan, CEO of KTPB, are more upbeat than the S&P assessment of the future progress of the Turkish Islamic banking sector, stressing that the current market share is about 6 percent and the target of 10 to 15 percent market share by 2015 is eminently achievable. Not surprisingly, major Islamic finance markets such as Malaysia is keen to forge closer links with Turkey. Indeed at the end of September, the Malaysia International Islamic Financial Center (MIFC) at Bank Negara Malaysia, the central bank, will undertake a high-level road show to Turkey incorporating programs in both the capital Ankara and the commercial center of Istanbul. According to Bank Negara, as the Islamic finance industry has moved to a higher dimension in the global financial landscape, the inter-linkages between Malaysia and Turkey would foster for greater business growth and opportunities in Islamic finance which include inter alia Islamic funding especially through sukuk origination, Islamic fund and asset management, Retakaful business and cross border liquidity management. Where S&P is right, is the scarcity of Islamic domestic investable asset classes, as well as no near-term likelihood of sovereign sukuk issuance. Moreover there are few options for Islamic banks to access liquidity at the central bank. Specifically, there is no Shariah-compliant mechanism replicating the repurchase agreements routinely available to conventional banks, as is increasingly the case in some Gulf countries. "In our opinion, the Turkish Islamic banking industry has reached a stage at which it will be increasingly difficult to rely on its own momentum to sustain growth. We believe that a global Islamic banking template would give Islamic banks in their respective domestic markets a chance of greater success. This would, for instance, require a basic set of commonly agreed standardized products to smooth out operational differences, central bank liquidity mechanisms, and reporting and regulatory requirements," said Standard & Poor's credit analyst Paul-Henri Pruvost. One route to such a global template could, according to S&P, lie in stronger ties between domestic players and their larger, foreign parents. "Such relationships, in our view, are beneficial, and may help to spread common practices through which the Turkish Islamic banking sector may reach a new level of maturity," said Pruvost. This recommendation is a double edged sword. During the 2001 financial crisis, there was a run on all Turkish banks including the Special Finance Houses.
While the likes of KTPB got a capital injection from its parent KFH, Albaraka Turk failed to get any help from its parent, the Dallah Albaraka Group. Instead it had to rely on one of its junior shareholders, the Islamic Development Bank , for a crucial capital injection which saved the day. In fact, the strength of Turkish participation banks has been achieved despite their foreign ownership because their balance sheet is comprised largely of domestic real economy activities -- trade finance, SME financing, consumer financing, project financing etc. "The growth of the participation banking sector was double that of the conventional sector," explained KTPB's Ufuk Uyan. "KTPB aspires to become one of the Top 10 banks in Turkey and in 2010 our balance sheet growth was about 50 percent compared with 2009. By the end of this year we plan to have 180 local branches. We also have a branch in Bahrain since 2002; in Germany; a representative office in Kazakhstan; and a full subsidiary in Dubai at the DIFC. We also have plans to go to Northern Iraq and open a branch in Erbil; and some other locations in the region which have not been finalized as yet," he explained. This confidence is further underlined by the performance of the four participation banks in 2010. According to Osman Akyuz, the secretary general of the Participation Banks Association of Turkey (TKKB) and the former general manager of Albaraka Turk, total assets of participation banks in FY2010 increased by 25 percent on 2009 reaching $28.1 billion; deposits increased by 22 percent to reach $21.9 billion, of which 66 percent were in Turkish lira and 34 percent in foreign currencies; financing allocated by the participation banks grew by 25 percent to reach $20.8 billion; total shareholders' equity increased by 19 percent to $3.5 billion; net income increased by 4 percent to reach $491.6 million; and the number of branches and number of staff of participation banks totaled 607 and 12,694 respectively growing at a year-on-year rate of 8 percent. Similarly, the market share of participation banks assets is 4.31 percent; of participation deposits is 5.4 percent; and of participation financing 6 percent. The financing to deposit ratio of participation banks in 2010 was 96 percent compared with 83 percent for the conventional banking sector in Turkey. In terms of non-performing loans, participation banks also fared better. The NPL for participation banks in 2010 was TL341 million or 0.34 percent compared with TL379 million or 0.47 percent in 2009. Another major constraint for the Turkish Islamic banking sector is the mismatch between short-term deposits and longer-term financing and liabilities. This has restricted the product profile of the Turkish participation banking sector. Not surprisingly, going forward, more recently, exciting new avenues are emerging for Turkish banks to raise participation funds from the international markets. This is in the sukuk market. Hitherto, the lack of sukuk legislation has meant that Turkish banks are forced to venture offshore to raise medium-to-long-term funds to finance some of their activities, instead of deposits which are largely short-term. There is a major problem for Participation Banks in terms of long-term borrowing requirements. The conventional banks can borrow through bond issues on a 3-years or 5-years basis and the taxation side was cleared a long time ago. The same is needed for the participation banks and there is only one way this can be done which is the sukuk route. Recently, the government covered the tax neutrality issues for Sukuk Al-Ijara, but according to Turkish Islamic bankers, there is a need for legislation development for other sukuk products as well. KTFP started with the first corporate sukuk, a $100 million issuance, and the bank plans to go on a road show in September after the World Bank Group annual meetings to launch its second sukuk. This issuance is likely to be a $20 million offering and with a longer tenor -- 5 years -- compared with 3 years for the previous one. Turkish bankers stress that an "emerging Islamic finance market, like Turkey, may just be what the global sukuk industry needs to sustain growth. Turkish sukuk originations could appeal to yield-hungry investors in the GCC, Asia and Europe because Turkish investments tend to pay relatively attractive spreads in comparison to Gulf and European spreads. There are many Turkish companies with a lot of good assets."
