Islamic banking in need of money: S&P

ISTANBUL / PARIS

Turkey’s Islamic banks need fresh capital to be able to compete with conventional banks, said an S&P report. REUTERS photo

Turkish “Participation banks,” or what Islamic banks are termed in Turkey, are look set to keep increasing their market shares over the medium term, after posting exceptional growth between 2008 and 2012.

However, sluggish domestic savings and intensifying competition from conventional banks will likely limit the sector’s progress without fresh capital and funding, Standard & Poor’s Ratings Services said by the latest sector report released on Nov. 12.

Several factors contributed to the growth of the country’s four participation banks, not the least of which is the supportive stance of local authorities toward the sector, the report noted.

The Turkish Treasury’s debut of revenue-indexed bonds in 2009 and issue of “halal bonds” or sukuk in 2012 were indicated as major examples of the fiscal approach authorities took.

Gov’t to continue to support the system

These developments have not only attracted more funds to the sector from cash-rich member nations of the Gulf Cooperation Council (GCC), but also facilitated participation banks’ diversification of their balance sheets.

“Over the past four years, the banks have extended their branch networks, which contributed to market-share gains of about two percentage points in deposits and 1.5 percentage points in assets. The sector’s current market share, in terms of assets, stands at 5.4 percent.

Nevertheless, we believe that further gains would require additional capital,” S&P said.

The ratings agency believed the government would continue to take steps that help the segment capture a larger share of Turkey’s relatively under-banked market. This year, for example, the government has announced its intention to launch greenfield Islamic banking subsidiaries within state-owned banks.

“In our view, this would boost the aggregate market share of the still-tiny sector over the long term, although the new entrants, including any owned by foreign parties, will compete against existing players. We believe the growth momentum that participation banks have been experiencing can only continue if their capital bases widen and they achieve some competitive advantage,” read the report of the ratings agency.