The Islamic Development Bank (IDB) latest $75 million line of financing to Turkiye Finans Participation Bank, one of the four participation (Islamic) banks in Turkey and in which Saudi Arabia's National Commercial Bank has a controlling stake, underlines the proactive involvement of the multilateral development bank of the Muslim world in Turkey over the last three decades. (source)
The facility signed in mid-October 2011, on the sidelines of the 27th meeting of the Standing Committee for Economic and Commercial Cooperation of the Organization of Islamic Cooperation, (COMCEC), in Istanbul, by IDB Group President Ahmad Mohamed Ali and Turkiye Finans Chief Executive Officer Deya Gurerk, provides long-term financing opportunities to small and medium sized enterprises (SMEs) in Turkey through installment sale, Ijara (leasing) and Istisna (construction financing), and aims further develop key targeted sectors such as agriculture and food security, transport, energy and manufacturing.
The financing facility is part of the IDB Group's Member Country Partnership Strategy (MCPS) program for Turkey which was launched in 2010 and which covers the period 2010-2013 and envisages a total financing envelope of $2 billion from IDB Group to Turkey.
The IDB Group has long been supporting the development of the Turkish private sector through project and trade finance as well as insuring export and import operations. Turkey is one of the major beneficiaries of IDB financing to date, and has received financing totaling $4.6 billion, of which trade financing accounts for $3.5 billion. This figure represents a staggering 10 percent of total gross trade financing approved by the IDB. Following the establishment of the International Islamic Trade Finance Corporation (ITFC), the IDB Group's standalone trade finance fund, two years ago, the annual approval level for trade financing in favor of Turkish companies and banks rose from $50 million to $200 million.
IDB/ITFC trade financing disbursement in Turkey until a few years ago was limited to Letters of Credit, but more recently the two entities started to implement "documentary collection" as an alternative method of disbursement. The limitation on the source of supply by allowing only imported goods is also being overcome albeit most of the trade finance clients of ITFC in Turkey procure their goods from domestic sources instead of imports. As such, ITFC has started to provide financing for purchasing from free trade zones within Turkey, and lines of financing which can be used for pre-export purposes.
The Member Country Partnership Strategy (MCPS) aims to identify, target, allocate, implement and evaluate its financing more efficiently in member countries. The IDB published a pilot MCPS report on Turkey for 2010-2013 in early 2011. The report stressed that lines of trade financing extended by ITFC through local banks in Turkey has proved to be an efficient way to do business with Turkish SMEs, and that ITFC is looking to expand this business to include Turkish conventional banks.
"The disbursement level and the developmental impact under the Line of Financing operations," explained the report, "are higher compared to the direct operations. Other multilateral financial institutions active in Turkey follow a similar approach where they reach the SMEs through the local banks via line of trade financing operations or through confirming Letters of Credit. ITFC has been collaborating with public and private conventional banks for establishing new lines beside the well established cooperation with Turk Eximbank and the four Participation Banks which have already utilized several facilities and
are interested to renew the lines."
However, one potential impediment is the Line of Trade Financing documentation of the ITFC, which is not acceptable to some of the conventional and participation banks because some of the articles are not in line with local laws and regulations. The IDB is already working with the Turkish government to streamline the legal documentation and to develop a simpler legal framework for 2-step Murabaha agreement which would be acceptable to the Turkish banks.
On the other hand, Turkish banks are probably the most active in the international Murabaha syndication market. Earlier this year Asya Bank raised $300 million through a Murabaha syndicated loan. This was the largest single such facility extended to a Turkish bank, and Asya Bank's third foray into this market in the last two years. Albaraka Turk Participation Bank similarly has accessed the Murabaha syndication market recently.
According to the MCPS report on Turkey, the ITFC is keen to scale up its trade finance operation to $250 million over the next two years. In this respect, ITFC's cooperation with the Turk Exim Bank and the four Participation Banks is set to increase. If the legal issues related to trade financing documentation are resolved, ITFC envisages to pursue and develop business opportunities with intermediary banks, including Ziraat Bankasi, Vakifbank and Halkbank, where an SME financing scheme would be developed in cooperation with undersecretary of Treasury and KOSGEB, the Turkish trade promotion agency.
Another IDB entity targeting business in Turkey is the Islamic Corporation for the Insurance of Export Credit and Investment (ICIEC). The total amount of business insured by ICIEC for Turkish exports, according to the report, has reached $674 million, while business insured for Turkish imports amounted to $201 million.
The main services that ICIEC provides are medium term export credit insurance, investment insurance and insurance of Letters of Credit in favor of banks, reinsurance of Turk Exim Bank in addition to short-term credit insurance for non-clients of Turk Exim Bank. These services are channeled through ICIEC's local agents in Turkey, Aktif Bank and PGlobal Advisory Services; through Turk Exim Bank, Turkish banks and major international and local brokers in Turkey.
ICIEC sees good potential for the insurance of Letters of Credit to be confirmed by Turkish banks, a product that enables Turkish banks to enhance their confirmation capacities on banks from importing countries and to extend their confirmation business to more countries.
In fact, in October, Turkish state-owned national export credit agency (ECA), Turk Eximbank, one of the long-established ECA's in the Muslim world, signed a Memorandum of Understanding (MoU) with the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC), the standalone ECA of the Jeddah based Islamic Development Bank Group (IDB).
Under the agreement, the two entities aim to help Turkish investors and contractors doing business in the member countries of the Organization of Islamic Cooperation's (OIC). ICIEC, specifically aims to provide political risk insurance (PRI) to Turkish companies doing business in ICIEC member countries.
There is strong demand for PRI from Turkish companies especially after the recent political turbulence in the Middle East. Turkish companies, stressed the two signatories, will benefit from the cooperation between ICIEC and Turk Eximbank by insuring their investments against the risk of war, civil disturbances, expropriation, transfer restrictions, and non-honoring of sovereign financial obligations of the host country. Both institutions strongly believe that by joining hands they will meet the needs of Turkish companies for political risk insurance and thereby encourage them to invest in OIC member countries.
