Islamic finance bounces back in Turkey

For the country’s Islamic finance sector has made a remarkable comeback in recent years, with many forecasting significant growth ahead.

Finance Minister Kemal Unakitan told visitors to the International Islamic Finance Forum in Istanbul early in October that ambitious plans to attract international finance houses to the city would also “be open to non-interest finance as well as all other types of financial institution”.

Islamic finance is peculiar in that it does not admit interest into dealings – in line with Quranic injunctions.

Unakitan’s statement was music to the ears of those in the non-interest banking sector, who have weathered some major storms in recent years – including a major countrywide financial crisis in 2001 and the consequent collapse of the sector’s flagship bank, Ihlas Finans.

“There has been an incredible recovery since then,” said Adnan Buyukdeniz, a director of one of the country’s largest Islamic banks, Albaraka Turk. “Back then, after Ilhas Finans collapsed, the sector lost 50% of its deposits.”

The crisis followed a collapse in confidence in many of Turkey’s banks, after revelations of mismanagement and a colossal hole in many balance sheets.

Rebound

The country’s five remaining non-interest banks – Albaraka, Asya Finans, Anadolu Finans, Kuweyt Turk and Family Finans – have seen their customers flooding back.

“After the crisis hit, many people pulled their money out and stashed it elsewhere – often under the mattress,” continues Buyukdeniz.

“But now they’ve been coming back – and we’ve seen faster growth in the non-interest sector than in the other banks.”

Ali Guney, fund management director for Anadolu Finans, agrees.

“2003 has been a year of major expansion – both in the sizes of balance sheets and physically in terms of the numbers of branches.”

Asya Finans General Assistant Manager Ayhan Keser told Aljazeera.net that his bank had seen the number of branches jump from 28 to 43 over the last 12 months.

Turkey’s pro-Islamist Justice and Development Party (AKP) has a more positive regard for Islamic finance and is also now working on issuing Ankara’s first ever Islamic bond.

“On a US dollar basis, we saw a 56% rise in funds over the first three quarters of 2003, compared to the same period in 2002,” he says. “We also surpassed the 2002 year end total profit just in the first nine months this year.”

However, the banking sector remains relatively small in Turkey in comparison to other countries, with the non-interest sector – known as the Special Finance Houses (OFKs) – still holding a tiny share of that.

“Despite the growth in 2003,” says Keser, “the OFKs still only have a 3% share of the Turkish banking system. With a total of about 180 branches, the OFKs account for about $2 billion of deposits.”

Distrust

Currently, the entire interest and non-interest sector combined has total assets worth less than those of a single major international bank.

The reasons for this have a lot to do with lack of trust – a far from irrational sentiment in an emerging economy, which has seen repeated banking collapses, usually due to major malpractice.

However, Turkey’s authorities have long recognised this problem and for years have run a 100% guarantee scheme on bank deposits in the interest-paying sector.

This meant that whenever a bank collapsed, depositors would eventually get all their money back from the state, boosting confidence among wary potential customers.

However, “This scheme did not apply to the non-interest sector,” said Buyukdeniz. This left the OFKs vulnerable to any crisis in confidence, such as the one that occurred in 2001 and sank Ihlas Finans.

Repeated banking collapses in Turkey left people uneasy

Since then, though, things have changed. “One of the consequences of the 2001 crisis was the introduction of a similar system for OFKs as for interest, commercial banks,” said Buyukdeniz.

“The OFKs established their own guarantee scheme, with each of the non-interest banks paying into a central fund, administered by the association of OFKs.”

Meanwhile, the current government has also announced plans to limit the 100% deposit guarantee scheme next year.

“After July 2004,” said Keser, “this unlimited guarantee will be removed. This will be very positive as it will also remove a major element of unfair competition between OFKs and the commercial banks.”

Growth

As a result, the OFKs are looking forward to this year’s surge continuing into next.

“We’ll see much faster growth in this sector than in others,” Buyukdeniz forecasted.  “It’s a relatively new sector in Turkey too, so there are many areas still to be exploited and expanded.”

There is also a much more favourable government in power in Ankara. The liberal, pro-Islamist Justice and Development Party (AKP) has a more positive regard for the OFKs and for Islamic finance in general. So much so that it is also now working on issuing Turkey’s first Islamic bond.

Justice and Development Party (AKP) supports Islamic finance

“Work is continuing on this bond at the government level,” said financial journalist Yasar Sumgu of the daily Yeni Safak. “Creating this will have an important role in increasing the quantity of foreign deposits coming into the country.”

Details remain to be worked out, but the government is widely thought to be thinking of a bond issue in the $400-500 million range.

“The model for the bond being talked about is one similar to that used in Malaysia and Bahrain,” said Buyukdeniz.

“It would be based on some sort of ownership – a kind of securitisation, with an annual profit payment. However, there are certain problems in Turkey’s case with the transfer of ownership of government assets that would be a part of the bond. Some work has to be done on this issue.”

Gulf money

The market expects that the bond will bring money from the Arab world into Turkey. “We know that financial institutions which have Gulf money are working with the Turkish treasury on this,” said Keser.

Bringing in more overseas capital is also a major part of the government’s plans to make Istanbul the “financial city of the future”. Yet, achieving this ambition requires a lot more from the state itself, said Sumgu.

“The government has to take steps to facilitate things – to ease the bureaucratic process that is currently an impediment to foreign investment,” he said. “If it can do this, then Istanbul can fully become a major financial centre.”

Turkey’s non-interest bankers seem ready to do their part in meeting that challenge.