In September 2016 in conjunction with the IFN Turkey Forum 2016 and supported by Borsa Istanbul, REDmoney Group held the second Turkish edition of its groundbreaking series of high-level, closed-door industry dialogues. Designed to establish a working roadmap for the progression and evolution of Islamic finance in Turkey, the invite-only event comprised a distinguished array of senior regulators and market leaders, along with a select group of international representatives.
The closed-door discussion centered around Turkey’s ambitions to become a global capital for the Islamic economy, and the challenges faced by the industry on its path toward progress – both economic, fiscal and political.
Covering a wide range of topics from regulation and legislation to participation and expansion, the role of state-owned banks and the encouragement of the retail sector to the development of the Islamic capital market and the importance of tax barriers and legal framework, the detailed discussion was characterized by a keen urgency to enact change and improve the current climate. Industry practitioners engaged in fruitful debate with market regulators and international observers to achieve a thorough understanding and analysis of where Turkey is now, where it wants to go and how it can get there.
Rewarding for both organizers and participants alike, the discussion followed Chatham House rules to encourage free and open debate. As such, no comments are attributed.
Participants | ||||
Ahmet Bicer Executive Director, Head of Banking and Financial Institutions Department, Central Bank of the Republic of Turkey |
Avsar R Sungurlu General Manager ,BPY Asset Management |
Ayse Akkin Managing Director, Debt Finance and Advisory, UNLU & Co |
Eda Tanyel Group Manager of Structured Finance, HSBC Turkey |
Eser Sagar Deputy Head of Corporate Finance Department, Capital Markets Board of Turkey |
Hakan Audogan EVP-Financial Cooordination and HR, Ziraat Participation Bank |
Hakan Uzun Executive Vice-President, Treasury, Turkiye Finans |
Mahmut Kayacik CEO, Takasbank |
Rizwan Kanji Partner, King & Spalding, the UAE |
Saleh Jelassi Resident Representative, IDB Group, Country Gateway Office, Turkey |
Selim Elhadef Partner and Country Advisory Leader, EY Turkey |
Sera Somay Partner, Paksoy |
Tevfik Kinik EVP – Capital Markets, Aktif Bank |
Tayfun Ozkan CEO, KT Asset Management |
Lauren McAughtry Group Managing Editor, REDmoney Group (Moderator) |
Executive Summary
Participation Banking
- We have seen a weak performance from the participation banking sector compared to the conventional banking sector over the past year.
- Development in Turkey since inception 30 years ago has been relatively slow – but things have speeded up over the past five years.
- There is a large underbanked community in Turkey, especially in rural areas, and participation banks should be focusing on this segment.
- The current market share is just 5% and a target of 15% is unfeasible in the short term. A 15% share equals around US$300 billion in assets – and currently the total assets of all participation banks amount to around US$40 billion. The industry needs more attainable goals.
- Product diversity and distribution channels are key to developing the industry further. Channels such as ATMs and payment points should be used as well as banks.
- State-owned banks are working together with standalone banks to build the pie – they are not competing as most customers are new rather than captured from other institutions.
- Participation banking is not a substitute for conventional banking. They should exist side-by-side rather than competing.
- Participation banking should focus on the ethical principles and benefits rather than promote its religious Islamic foundations.
- Participation banking is the right brand – as an industry, calling it Islamic is just backing ourselves into a corner.
- The participation banking sector needs a separate law and separate regulation to differentiate itself.
- BRSA expects to release new rules next year.
Capital markets
- The new tax change should have a big impact on the market.
- Corporates will need to start looking at other means of fundraising, and they will consider Sukuk because banks are not able to provide the same levels of funding going forward.
- However, tax issues still exist – a big one is that there is still no tax exemption for real estate companies that want to issue Sukuk, and that is a major problem.
- Barriers to the creation and function of ALCs are preventing corporates from issuing Sukuk.
- The capital market in Turkey will not grow just from participation bank issuances. The corporates have to get involved.
- There is an issue between asset-based and asset-backed Sukuk. With 98% asset-based, the ALC rules of recourse do not apply and that is a problem for investors.
- There is a disconnect between BRSA and CMB legislation in terms of subordinated issuances, especially Tier 2 issuances, that needs to be resolved as it is driving issuers abroad.
- To have a more sustainable Sukuk market, new structures must be considered.
- The foreign currency restriction on issuance is problematic and should be addressed. However, the Treasury is already working on it so a solution may be forthcoming next year.
Infrastructure
- PPPs are a big opportunity, and Turkey has huge infrastructure requirements that the participation banking industry could benefit from financing.
- The IDB has invested billions in supporting Turkish PPP projects, with at least three deals due to close before the end of 2016.
Asset management
- Liquid products and Islamic instruments are urgently needed by portfolio managers. Most Sukuk do not meet this criteria.
- Pension funds are growing very rapidly, and they need things to invest in.
- The Islamic market share of the Turkish asset management industry is tiny.
- Conventional managers hold over half of Islamic pension fund assets under management. There need to be compliance rules that ensure Islamic/participation asset managers manage these assets instead.
- There is a huge necessity for a central Shariah board to ensure compliance.
- Turkey has a growing secondary market, which is unusual. It should leverage this to become a global hub for buying and selling Sukuk and other Islamic instruments.
- Turkey needs a separate licensing system for Islamic non-banking financial institutions.
- Turkey also needs to be more involved with the international market and create product teams that are able to develop and apply that knowledge.