IRAN DAILY - International credit rating agency Standard and Poor’s (S&P) asserted in a report published last week that Turkey’s participation (Islamic) banks could continue their recent strong growth if they can cultivate stronger ties with their international owners and create a sustainable brand image.
Turkey’s Islamic finance market is as old as the one in Malaysia and others in the Persian Gulf Cooperation Council (PGCC) countries, Arab News wrote. (source)
Three of the four Turkish participation banks have got majority PGCC 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.
Turk Participation Bank (ATPB) is a subsidiary of Bahrain-based Albaraka Banking Group.
The fourth, Asya Participation Bank (APB), also has close ties with the PGCC 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. The latter invests in financial
institutions, leasing entities and extending lines of credit to finance trade in sub-Saharan Africa.
institutions, leasing entities and extending lines of credit to finance trade in sub-Saharan Africa.
Complexities
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 Muslim world.
Less Affected in 2001
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.
The resilience and staying power of the Turkish Islamic banks have 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 overpromote 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. Total sector assets account for about 5 percent of total system assets as of 2010 compared with 2.8 percent five years earlier.
Islamic banking, now called participation banking under the Banking Act 2007, has now become part of the mainstream banking sector. 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 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.
Tax Neutrality
Nevertheless, over the past 18 months as S&P emphasizes, Turkey has passed a law conferring tax neutrality on Sukuk Al-Ijarah; Kuveyt TurkParticipation 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, there is a lack of public awareness of its products.
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 PGCC 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.
Links With Malaysia
Not surprisingly, major Islamic finance markets such as Malaysia is keen to forge closer links with Turkey.
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, links between Malaysia and Turkey would foster greater business growth.
Opportunities in Islamic finance, including Islamic funding, sukuk issuance, Islamic fund and asset management, Retakaful business and cross border liquidity management, will also increase.
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.
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 ten banks in Turkey and in 2010 our balance sheet growth was about 50 percent compared with 2009.” 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.
Source : http://www.iran-daily.com/1390/6/22/MainPaper/4051/Page/5/MainPaper_4051_5.pdf - Sept 13, 2011
