Turkey urged to seize Islamic banking opportunity

ISTANBUL - Hürriyet Daily News

Turkey’s non-interest, Islamic-compliant banks hold 5 percent of the total banking market at a size of $31 billion.

The Turkish Islamic banking sector will triple in 10 years reaching $100 billion by 2023, while the country would have even more potential if it would meet the foreign demand by offering more of a variety of Islamic financial instrument, an Ernst & Young report has said.

Islamic banking, which follows the requirements of Shaira and does not charge interest, has emerged as a prominent system at a time when European banks that have been the backbone of global sector are only slightly recovering from the aftermath of the financial crisis. The Islamic banking sector offers great opportunities for Turkey as well, as the country seeks its share in interest-free banking in light of the value and market presence of Islamic banks, also known as participation banks.

The report published by Ernst & Young on the sector says Turkish participation banks have expanded every year at an average of 19 percent and their commercial volume reached $1.3 billion in 2011.

Currently, all of the banks in Turkey that offer interest-free services to their customers hold 5 percent of the total banking market at a size of $31 billion, and the report expects Turkey will increase the size of its participation banks to over $100 billion.

While the general outlook of the sector looks promising, Turkey fails to reach its actual potential in the sector, the report warns.

Turkey has been trading only sukuk certificates indexed on rent certificates as an Islamic banking vehicle since last August, but there are three more non-interest financial instruments that are used in international markets.

New banks and new instruments coming

The Turkish Capital Market Board (SPK) has announced that it is preparing the necessary regulations for introducing three new Islamic-compliant financial instruments to supplement the existing sukuks at the beginning of this month.

According to the report, serving new, non-interest financial instruments to foreign investor from Asian and Gulf countries and using sukuks to finance Turkey’s planned domestic infrastructure investments, projected to reach $20 billion by the end of 2013, would accelerate the sector’s growth. Currently only one Turkish participation bank, Bank Asya, is completely Turkish-capitalized. The majority stakes of the other three, Albaraka Türk, Kuveyt Türk and Türkiye Finans, are held by Middle Eastern capital owners.

The Turkish state announced it will establish two new participation banks that offer interest-free services.