Turkey can profit from Islamic banking push

Turkey can profit from Islamic banking. As part of an initiative backed by the Islamist government, Ziraat Bank, the country’s largest state-run lender, is working to set up a Shariah-compliant entity. It comes less than a year after Ankara’s debut sovereign sukuk.

Turkey already has four Islamic banks, known locally as participation banks, of which three are foreign-owned. The first was established almost three decades ago. But Shariah-compliant assets account for just 5% of total banking assets, far below the average of 25% in the Gulf region, according to Ernst & Young.

Size is mostly the problem. Conventional deposit banks have 15 times more branches than Islamic institutions. Islamic banks in Turkey are also lagging in innovation compared to peers elsewhere in the Muslim world, bankers say.

The current push is motivated as much by pragmatic reasoning as by any spiritual desires. Stronger and larger Islamic banks could strengthen Turkey’s financial position.

Domestically, they could lure funds out from under the mattress in the country’s conservative and pious heartlands. That cash could help fund Turkey’s GDP growth. The Islamic money would be less likely to disappear than inherently fickle foreign funding, which has driven the banks’ average ratio of loans to deposits above 100%.

Internationally, stronger Islamic banks would enable Turkey to attract more cash from the Gulf and Asia, where the appetite for Shariah-compliant products far outstrips the existing supply.

For Turkey, which needs to fund a current account deficit of more than 6% of GDP, diversifying its sources of finance to include this pool of captive capital makes sense.

The aim of the Participation Banks Association of Turkey is to triple the share of Islamic banking assets in the country by 2023. If more large players enter the Shariah-compliant market, that target could start to look modest.

CONTEXT NEWS:

n Ziraat bank, Turkey’s largest state-run lender, is planning to set up a separate Islamic Bank, general manager Huseyin Aydin said on April 13.

nThe announcement follows a report a month earlier in the Hurriyet Daily News which said that Deputy Prime Minister Ali Babacan had hinted that two state banks may offer interest-free services without giving any names.

n Turkish lender Halkbank will be the second bank to start offering Shariah-compliant services under a new entity, according to two bankers familiar with the situation.

(Gulf Times / 13 May 2013)

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