Turkey builds up new Islamic finance tools

ISTANBUL - Reuters

The head office of Kuveyt Turk, one of Turkey’s four participation banks operating in compliance with Islamic rules, is pictured in Istanbul. REUTERS photo

As Turkey seeks to boost political and commercial ties with the Gulf and diversify its borrowing, one of the Muslim world’s most dynamic economies is developing an Islamic finance industry which could rival current volumes in Malaysia - the world’s top sukuk issuer - within a decade.

The new rules, which were sent to Turkish Prime Minister Recep Tayyip Erdoğan’s office for approval this week, will allow Turkish corporates and banks, as well as the Treasury, to issue the world’s most widely used types of sukuk, giving them access to a wider pool of investors via a global market estimated at more than $100 billion.

“Islamic finance is just like halal food, there may be two reasons to choose it,” said Mustafa Cetin, head of financial institutions at the Turkish arm of Bahrain-based Islamic lender Al Baraka.

“Either you prefer interest-free products or you find the cost of borrowing, the taste, attractive.”

Turkey’s islamic banks are known locally as ‘participation banks’ in part reflecting public sensitivities. But nervousness about Islamic finance has eased in recent years, helped by growth of the sector in Western economies. Just over a year after its debut dollar-denominated sukuk issue, Turkey’s Capital Markets Authority (SPK) is finalising regulations on five new types of Islamic bond as the country aims to become a major issuer of Islamic debt.

Turkey aims to turn its economic and cultural capital Istanbul into a major financial centre. It foresees $350 billion of infrastructure spending on the project, with Islamic finance expected to be one of the major sources.

Turkey has begun to open the doors to giving new banking licenses after the 2001 banking crisis, with no exception for interest-free Islamic banks, called participation banks.

As of now four banks have operated in the participation banking industry: Bank Asya, Türkiye Finans, Albaraka Türk and Kuveyt Türk. They constitute 5.3 percent of the Turkish banking industry. The state-run banks, Ziraat Bank and Halkbank, will also establish new participation banks.