The Islamic finance sector continues to rise in Turkey. The industry has both domestic and global interest, with the Turkish people increasingly supporting Islamic banking services. Instead of Islamic banking, the term ‘participation banking’ is preferred; participation banks follow Shariah rules and allow customers to make transactions within an Islamic outline. The Turkish government had also announced plans to introduce three state-owned Islamic banks as affiliates of the state-run conventional banks: Ziraat Bank, Halkbank and VakıfBank, which means greater abundance will be added to the Islamic financial sector. However, there have been some changes at the end of the year. Halkbank announced that it has freezed its decision to establish a participation bank, at least for now. However, the Turkish market is still hungry for Islamic instruments such as Sukuk and Takaful.
Review of 2015
The Turkish government launched three state-owned Islamic banks namely, Ziraat Bank, Halkbank and Vakifbank. Turkey currently has five participation banks: Ziraat Katılım (the recently established affiliate of state-run Ziraat Bankası), Bank Asya, Türkiye Finans, Albaraka Türk and Kuveyt Türk and they comprise approximately 5.3% of the Turkish banking industry, according to data from the banking regulator. They have nearly 1,000 branches and employ more than 16,000 people, both more than thrice their levels of 10 years ago. The sector goes on growing, with informed customers having conventional bank accounts looking likely to make the change and increase those numbers.
State-run Halkbank has revoked its application to set up an Islamic lender with the bank asking the Banking Regulation and Supervision Agency to cancel its previous application to establish a participation bank. They underlined that the bank may reconceive the plans in the future. The bank cited judicial reasons for the decision and also announced that they are working on material that does not require equity-raising.
Albaraka Turk has secured a US$450 million dual-tranche Murabahah loan, the proceeds of which will be used to expand its financing activities in the country. The Murabahah deal is a cost-plus-profit arrangement that is one of the most popular formats for structuring Islamic loans. Also, the bank has picked seven arrangers for a potential US dollar-denominated Sukuk. The lender is expected to raise around US$250 million, with the Sukuk issue planned before the end of the year.
Borsa Istanbul and Qatar Stock Exchange forge cooperation efforts
The Qatar Stock Exchange (QSE) and Borsa Istanbul signed an MoU at the QSE premises in Doha to establish and implement a procedure of mutual cooperation and agreement between the two exchanges, primarily for the purpose of facilitating the execution of functions assigned to them, the exchange of information, the proper dissemination of information and the promotion of the integrity of the markets.
The MoU provides a framework of cooperation which includes the existence of a channel of communication between the two exchanges, the increasing mutual recognition and the exchange of legal and technical information. It also aims to develop opportunities to exchange information and expertise pertaining to their activities, markets and operations in order to establish a long-term relationship and contribute to the improvement of their countries’ capital markets, as well as exploring the opportunities of the dual listing of securities to increase the competitiveness of both Borsa Istanbul and the QSE.
EBRD and Borsa Istanbul in exclusive talks over stake sale
The European Bank for Reconstruction and Development (EBRD) is entering exclusive negotiations to acquire a 10% stake in Borsa Istanbul, in a landmark deal which will support Turkey’s efforts to reshape its capital markets.
Borsa Istanbul, majority-owned by the Turkish government, is the sole exchange entity in Turkey, created in 2013 by combining the Istanbul Stock Exchange, the Istanbul Gold Exchange and the Turkish Derivatives Exchange.
Borsa Istanbul and London Stock Exchange cooperate
The London Stock Exchange Group (LSEG) announced the launch of trading in Turkish equity index derivatives on the London Stock Exchange Derivatives Market, following a partnership agreement signed between LSEG and Borsa Istanbul in early 2015.
The Islamic finance market also discovered that there is high potential in the Takaful insurance sector, and as a consequence, demands on Shariah compliant insurance instruments are rising. However, although Turkey has a high potential market for Islamic insurance in view of its large and young population, Takaful’s supply-side constraints, as well as a limited legal infrastructure in the Islamic finance sector, are obstructing Takaful’s market growth.
Turkey’s Takaful market dynamics are, however, gaining attraction with the establishment of more participation banks since customers of participation banks are also considered as potential customers of Takaful and similar instruments which are not yet introduced to the market. Since no regulatory changes are needed to provide the market with Takaful products, the Takaful market may provide a totally new market to Turkish participation banks and their affiliates operating as insurance companies (if there are any) if accurate products are provided to customers.
The Doga Group had planned to join the Islamic insurance market (Takaful) in 2015 with what would be the country’s first such product. The Doga Sigorta insurance unit announced that it is close to signing a cooperation deal with reassurance companies. The company wants to take advantage of the growing interest for Islamic finance products in the largely Muslim nation. It is expected that at least three to four other firms are planning to enter the Takaful insurance market by 2018.
The Turkish real estate sector had a boost after the reciprocity rule was adopted which allowed foreigners to more easily invest in the Turkish market. The increase of the market has slowed down a little bit starting from the beginning of 2015; however, the market is still expanding and a significant increase in real estate market prices has been seen in 2015.
Government-backed projects are also continuing to be developed in 2015. The Istanbul Grand Airport consortium, which won a tender in 2013 to build Istanbul’s new airport, signed a loan agreement in October 2015 with six banks, namely state-run Halkbank, Ziraat Bankasi and Vakifbank as well as foreign-financed Turkish banks DenizBank, Garanti Bankasi and Finansbank, to provide a sum of EUR4.5 billion (US$4.83 billion) for the first phase of the project which is projected to be completed in 2018. According to the agreement, the loan maturity date has been set at 16 years. The consortium includes Turkish companies Cengiz, Mapa, Limak, Kolin and Kalyon.
The third Bosphorus Bridge – controversially named after 16th century Ottoman Sultan Selim I – and its connecting highways are expected to cost Turkey around US$3 billion. The construction began in 2013 and both towers have already been completed. As of May, the Asian tower had reached 318 meters high from the ground, while the European one had risen to 322 meters. The bridge was projected to be completed in October 2015 but is now expected to be finished in early 2016.
Preview of 2016
Although a decrease is expected in the Islamic finance market globally, the number of participation banks, the insurance sector especially Takaful, and Sukuk will be increasing in significance in Turkey. Turkey’s Treasury Department plans to issue Sukuk worth TRY1.5 billion (US$517.74 million). The government also aims to present Istanbul first as a regional financial center and then as a global financial center by 2023. It is also expected to open 20 branches with a total of 400 employees at the end of this year. In the upcoming years, the bank aims to have 170 branches with 2,200 personnel. The number should reach 500 branches in 2023.
A large amount of funding for the government could come via Sukuk. Turkey’s government is also planning debt issuances this year denominated in the euro and, possibly, the Japanese yen. Investors are unlikely to see in the near term the country’s first corporate Sukuk. Laws, particularly regarding taxation issues that prepare and define corporate Sukuk, remain less clear than those on Sukuk from banks. In general, the legislative regulations need to be completed and be clearer for the activity in this market to pick up.
According to the Participation Banks Association of Turkey (TKBB), the legal outline of Islamic finance in Turkey is almost complete with awareness of Islamic finance in Turkey growing and the share of participation banks expected to reach 20% by 2023. The future of participation banks in Turkey will be brighter in the coming years. TKBB expects demand for Islamic finance products to come more from the corporate sector. Due to Shariah, legal and political issues, Turkey spent many years working on the Sukuk and Takaful sectors in the country. There is a big demand for Takaful in Turkey; however, there are no options for potential customers who are interested in Takaful. It is hoped that there will be companies/banks who will at least take steps to introduce Takaful products to the market. The banking sector is generally stable and powerful in Turkey. It would not be a surprise if new participation banks enter the market as it is already projected that some foreign banks will enter the Turkish conventional banking system via share purchases. The real estate market is one of the leading sectors of the Turkish economy. Despite being a little sluggish in 2015, the market is still growing and we expect the slight growth in the market will continue.