G20: Turkey shows progress in developing Islamic finance

ISTANBUL

Experts who attended at a G20 conference on Islamic finance in Istanbul have pointed to Turkey's progress in developing the sector.

Aysegul Eksit, executive vice chair at the Capital Markets Board of Turkey, said that the Turkish government is hard at work to create better enabling conditions for Islamic finance.

Islamic lenders now account for about 5.3 percent of Turkish banks' total assets, and this is more than twice the level a decade ago, Eksit said.

The value of Islamic finance assets in Turkey was $51.2 billion in 2014, making the country the eighth in the world. Only about 3.6 percent of global sukuk issuance comes from Turkey, according to World Bank statistics.

Sukuk are instruments similar to bonds, but in which asset growth provides income as opposed to the collection of interest which is forbidden under Sharia law.

“The Turkish legal framework for the issuance of sukuk is in the process of completion. Laws passed in 2012 and 2013 have established the use of these instruments,” Eksit said.

But there are still legal obstacles to the development of the sukuk market in Turkey, Eksit pointed out.

“There are still tax-related issues that limit the development of sukuk in Turkey. But there is work currently underway at the Ministry of Finance to overcome these obstacles,” Eksit said.

For now, almost all sukuk issuance in Turkey is made by participation banks and the Turkish Treasury.

In 2014, the Treasury has also created the basis for a wider range of Islamic finance instruments, such as “Mudarabah”, or investment based on profit sharing; “Murabahah”, in which a buyer purchases from a seller at a fixed profit margin; “Musharakah”, which allows each party involved in a business to share in the profits and risks; and “Wakalah”, which refers to a type of Takaful insurance contract.

“Corporates still do not issue sukuk, although there is no legal obstacle to their doing so,” Eksit said.

There are four private Islamic banks operating in Turkey for many years: Albaraka Turk, Bank Asya, Kuveyt Turk, and Turkiye Finans.

The sector employs about 16,000 people, and is growing at about 32 percent per year, relatively faster than the rest of banks in Turkey.

But on Oct. 15, the Banking Regulation and Supervision Agency (BDDK) allowed state-owned Ziraat Bank to establish an Islamic banking branch, and this opened on May 29.

State-owned VakifBank has also received a license for Islamic finance operations in Turkey.

“This is a game changer,” commented Khalid Howladar, global head of Islamic Finance at credit agency Moody’s.

“The market in Turkey has been small, but the entrance of these large state-owned banks, with thousands of points of distribution among them, should be a major step into growing the market. The large banks are also likely to involve corporates in the market for the first time,” Howladar said.

Turkey also boasts four Sharia-compliant pension funds, although assets under management remain low by global standards -- total value of investment in individual Turkish pension system is at about $14 billion, according to OECD statistics.

But the entire pension sector has invested in sukuk in the past, and is expected to show a considerable interest in sukuk as the instrument and the market becomes more mature in Turkey, Eksit said.