Turkey a Rare Bright Spot in Islamic Finance's Forgettable Year

In a year to forget for the Islamic finance industry, this month’s Turkish election may prove the high point.

Two Turkish banks, Kuveyt Turk and Albaraka Turk, are marketing international sukuk issues this week in what may herald a revival of the Shariah-compliant industry in the country after the AK Party regained its parliamentary majority this month. The government’s Islamic drive had foundered following a previously inconclusive election in June as sukuk sales dwindled and the largest-listed state lender halted plans to set up a Shariah-compliant unit.

“A lot of the transactions that were on hold are being dusted off right now," Rizwan H. Kanji, a Dubai-based partner at law firm King & Spalding LLP who structures Islamic deals, said by phone from Riyadh. “We’re in the next phase of the growth of participation banking in Turkey."

The return to majority rule of the party co-founded by Turkish President Recep Tayyip Erdogan comes at a time when global sales of sukuk are heading for their slowest year since 2010. The AK Party has introduced Islamic units at state banks and expanded Shariah-compliant finance education at universities.

Unmet Demand

Kuveyt Turk meets investors this week before a potential $400 million sukuk sale, while Albaraka started meetings Nov. 13 before a Tier 2 subordinated offering.

Economic and political stability in Turkey will boost investor confidence and participation banking will be a direct beneficiary, according to Ashar Nazim, a partner at Ernst & Young LLP’s Global Islamic Banking Center. Untapped demand for banking that adheres to the religion’s ban on interest means the industry could expand as much as 10-fold in Turkey, he said.

"There’s no need to rush," said Melih Murat Borekci, the London-based co-head of equity research at Yapi Kredi Yatirim, a Turkish brokerage. "I don’t think that there will be a change to AK Party’s intention to establish state presence in participation banking, but there could be changes to the previous economy management. New appointees would need time set their own plans and timeline.”

Halkbank, the country’s biggest state-controlled publicly traded lender, withdrew its application for an Islamic banking unit before this month’s elections. Plans to start a new unit would be clear in two to three months, Chief Executive Officer Ali Fuat Taskesenlioglu said in October.

Despite Erdogan’s ambition to increase the proportion of Shariah-compliant banking assets to much as 20 percent of the market by 2023, for several years they haven’t gained market share. In September they were at 5.1 percent, their lowest as a percentage of the entire industry’s assets in almost three years.

New Units

Turkey’s cabinet appointed Mehmet Ali Akben, a career Islamic banker who has worked at two of the country’s five Shariah-compliant banks, to lead the Banking Regulation and Supervision Agency in May. The regulator approved state-run Ziraat Bank’s Islamic unit the same month.

Vakifbank’s main shareholder got the regulator’s nod for its own unit a month later, while Halkbank looks poised to revive its plans.

"Ziraat participation arm is already in action, we’re going to see another two state banks set up these units in the first half 2016 and we’ll have three participation banks,” said Aykut Ahlatcioglu, a banking analyst at Istanbul-based brokerage Oyak Menkul Degerler AS. "Participation banking will grow faster than their conventional peers.

(Bloomberg Business / 16 November 2015)

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