As the direction of world trade once again shifts, Turkey, on the borders of Asia and Europe, stands to reap the rewards. SCOTT WEBER looks at a possible Ottoman economic resurgence. Participation banking in Turkey originates from a 600-year history of raising capital utilizing traditional Islamic contracts, networking and subcontracting. Islamic financing emerged as the result of Muslim entrepreneurship, SMEs and traditional business networks� desire to raise capital in a closed, centralized Turkish market.(source)
Turkey�s participation banks were first initiated in 1983 by government decree as �special finance houses� that were essentially an evolution of the traditional SME business networks, created to attract GCC investment.
However, the �special finance houses� soon courted controversy as they were not centrally controlled as part of the Turkish banking code.
Huge strides were made in 1999 as the participation banks were taken under the regulatory umbrella of the banking law; adding legitimacy to their existence both locally and internationally.
The 2001 economic crisis saw Turkey lose 60% of its market capitalization, with the participation banks losing 40% of their held deposits and forcing leading participation bank Ihlas Finans into liquidation. This forced the creation of an external warranty fund, as up to that point Islamic banking deposits were not guaranteed.
2005 marked the final change to the current system as these �special finance houses� were officially given the name �participation banks� with the idea that customers directly participated in the profit and loss of the bank. This change also clarified the legal status of participation banking, bringing the banks into line with their conventional counterparts as they became part of the larger, all-encompassing state savings and deposits insurance fund.
Islamic finance by any other name, but will the returns be as sweet?
Participation banking gives a unique dynamic to the assumed Islamic finance model without utilizing identity banking, reliance on Arabic terminology or emphasizing interest-free practices. Turkey�s participation banks are at a considerable disadvantage, yet they have managed to carve out a significant proportion of the Turkish market. With strong year-on-year growth, these banks are a growing force in the Turkish marketplace and externally.
Since 2001, Turkey�s Islamic banks have outperformed their conventional counterparts on every level, acquiring a market share of around 7%. While Turkey�s financial sector is still in the development stage it is ripe for expansion. The sector is driven by solid economic growth along with declining interest rates and inflation; although, a slight retraction is expected as 2010 provides its challenges in the wake of the global economic slump.
However, Turkey�s four participation banks are expecting asset growth of approximately 55% in 2010, according to Fahrettin Yahsi, chairman of the Participation Banks Association of Turkey (TKBB). 2009 saw Islamic assets grow by 30.5% with the conventional sector growing by only 13.8%, buoyed by increasing interest in the less speculative methods of interest-free banking.
Currently, banking assets of the participation banks stand at 4% of total bankable assets, with a potential target market of 10%.
Much of this success is due to the fact that �the Turkish participation banks were created to target the Turkish market as a whole; they did not need to target the already �convinced� majority Muslim population,� according to Fatih Bulac, vice president of international financial institutions at Turkiye Finans.
Insular economy
Relatively unaffected by the current economic downturn, Turkey�s financial institutions were not exposed to �toxic assets� caused by the financial crisis.
Due to the insular nature of the sector and regulatory measures put in place following the 2001 domestic crisis, Turkey�s participation banks are focused solely on organic growth. They are unwilling to raise their profile and come under fire from the secular government or military by actively marketing interest-free or Islamic products.
Having spent the last few years courting EU membership, it appears that Turkey is changing direction and turning to the Islamic world, looking to establish itself as a regional player resurrecting Levantine trading routes.
Mike Rees, CEO of wholesale banking at Standard Chartered, stated that: �The wealth of the world is shifting; Turkey should look east for foreign investment.�
Consequently, the participation banks stand in good stead to capitalize in this economic shift and will be central in attracting Middle Eastern investment into the country.
Unique market
Currently the participation banking sector receives no specific governmental support and is accountable to the same banking laws as the conventional market. However, the banks prefer this method, trying not to court controversy and a possible political backlash.
Nevertheless, due to the lack of tax incentives, limited technological infrastructure or encouraging regulatory framework, Istanbul has a long way to go to fulfill its ambitions as a regional finance centre. If this is the desire, it will take active investment on Turkey�s side, particularly on the participation banking side to complete its aspirations.
Without religious connotations dominating the marketplace, there remains no overseeing Shariah board regulating the banks� activities. Rather, the participation banks operate on the principle that investors and shareholders will only accept financing and investment from suitably compliant activities.
Limiting factors
The participation bank�s Shariah compliant products and instruments are not yet fully understood by a large proportion of the public due to their inability to utilize identity banking as a method of attracting investment.
More significantly, it is estimated that 60% of Turks are currently employed in unregistered �grey market� jobs to evade taxation. This is a large segment of society unable to be captured by the financial sector as a whole, thus impeding financial growth.
According to Fatih Bulac: �It is assumed that more than US$50 billion worth of savings lie idle outside the Turkish financial sector, a loss for both the economy and the individuals. It is hoped that participation banks can help encourage this group back into the banking realm.�
�It is a commonly shared idea that participation banks still have a long way to complete their brand recognition. The market sector needs to pool their resources to get rid of such handicaps and enhance the well-earned growth rates and market share,� Fatih added.
Sector strengths
Because of its secular roots, participation banking can widely appeal to all demographics and social segments without the drawback of limiting religious factors. It should be noted that this target market share also includes the growing well-educated and increasingly affluent sectors of society.
Turkey�s increasing integration with international markets, especially with the rising Islamic finance industry, has aided its recent growth and will stand as a marker for future development.
Cenk Karacaoglu, vice president of financial institutions at Bank Asya, attributes the rising strength of the participation banks to the dynamism and strength of the banks� management, pushing Turkish market opportunities while focusing on international markets. As such, the Turkish Islamic banks play an important role in increasing export-import operations in Turkey.
He also went on to add that the Islamic banks pride themselves on strong customer loyalty. �We are close to our customers, therefore this allows us to offer them better services,� he stated.
Moving forward
New developments within the Turkish market include the introduction of Murabahah sales contracts and the planned launch of the Istanbul Stock Exchange participation index. The initial listing is expected to attract 50�60 Shariah compliant firms with aims to court at least 100,000 investors. Kuveyt Turk, one of the leading participant banks in Turkey, has also announced plans to launch a US$100 million Sukuk within the next three months and although the offering is still to be finalized, Kuveyt Turk has ambitions to be the first Islamic bank in Turkey to tap into the lucrative Sukuk market.
Utilizing its operations in Bahrain and Dubai where fund pricing is much lower than Turkey, Kuveyt Turk plans to capitalize on the weakened European markets.
A Turkish Sovereign Sukuk has been on the table since 2003 to raise capital for large infrastructure projects, such as a new crossing over the Bosphorus, but the Sukuk has yet to be brought to market. Due to its isolation from the recent market downturn, Turkey stands on the crossroads of developing its financial sectors to new levels.
By capitalizing on new and existing trading routes, Turkey can establish itself as the Islamic gateway to Europe, of which the participation banks will be key.
Source : http://www.islamicfinanceasia.com/article.asp?nm_id=18702 - July-Aug 2010
