With its predominantly Muslim population showing increasing interest in Islamic finance products and the government keen to support their growth, Islamic finance is set to grow in Turkey. With the government having announced plans to launch three state-owned Islamic banks as subsidiaries of the state-run conventional banks, Ziraat Bank, Halkbank and VakıfBank, by the end of 2015, greater depth will be added to the Islamic financial sector. This in turn will encourage new entrants as well as a broadening of the Islamic finance products.
Review of 2014
Banking Regulation and Supervision Agency (BRSA) has reviewed Ziraat Bank’s application to obtain approval for carrying out participation bank activities. BRSA approved this application and BRSA’s decision was published on the Official Gazette dated the 15th October 2014 and numbered 29146.
According to the abovementioned approval decision, a participation bank will be established with T.C. Ziraat Bankası. being the controlling shareholder and its subsidiaries Ziraat Sigorta, Ziraat Hayat ve Emeklilik, Ziraat Yatırım Menkul Değerler. and Ziraat Teknoloji. being the other shareholders of the participation bank to be established.
BRSA’s decision states that the participation bank shall be established in Turkey with a founding capital of US$300 million.
Earlier this month, Ziraat Bank’s general manager Hüseyin Aydın stated that: “I hope a Ziraat participation bank will be established within or towards the end of the first quarter of 2015.”
Halkbank Islamic lender
State-run lender Halkbank would increase its paid-in capital by 80% to TRY2.25 billion (US$918.98 million) to set up an Islamic lender. The bank made the announcement in a filing with the stock exchange. Turkey has four non-state Islamic banks, and state Ziraat Bank has received regulatory approval to establish an Islamic finance unit as well.
Kiler Group Shariah compliant borrowing
In early February, Kiler Holding’s subsidiary Turkish food retailer Kiler Alisveris signed a US$120 million four-year loan deal, including Shariah compliant borrowing, with Bank of America, Merrill Lynch and banks from the Gulf region.
Preview of 2015
According to the authorities in the Islamic finance market in Turkey, the expectation is to a reach a growth of 10% in participating banks’ share in the Turkish financial market until 2023. The market also believes that the insurance sector also has huge potential although there is a lack of legislative regulations. It is believed that in 2015, there will be a lot of Takaful potential in Turkey, probably accompanied by several regulatory changes concerning/establishing opportunities for the Takaful market since there is also demand from customers in the market for Shariah compliant insurance instruments. There are many compulsory insurance obligations such as earthquake insurance which has become mandatory for homeowners and businesses in Turkey since 2012 following huge losses from a series of deadly quakes. As a result, the Turkish Catastrophe Insurance Pool has 6.6 million policies written, giving a penetration rate of 37%, according to data from the Turkish Insurance Association. While still short of blanket coverage, the pool represents one of the largest aggregations of issued policies, after compulsory third-party vehicle insurance. Therefore, it is believed that the participation banks in Turkey will concentrate on Islamic finance products newly presented to the Turkish market.
Despite the fast growth and good progress of Turkey in the Islamic finance participating banking field, it should be acknowledged that there is still a long way to go for the Sukuk, Islamic insurance (Takaful) and Islamic capital markets. Although participation banking is considerably settled in Turkey, there is no legal infrastructure for Islamic insurance companies. However, since foreign investors, such as Bahrain-based Albaraka, expressed their interest in Islamic insurance a new regulation may be expected in the near future.
In addition to the new Islamic finance instruments, an increase is forecasted for the participating banks’ share within the Turkish banking sector. Participation Banks Association of Turkey stated that the share of participating banks will be 15% in 2023 which is also in line with the government’s expectations.
It is hoped that 2015 will provide a boost for Islamic finance in Turkey with many new Islamic finance deals hopefully taking place especially in the real estate market. The government will also be expected to take steps to enhance Islamic insurance opportunities.