Turkey has demonstrated a sustained commitment to building up its Islamic finance capabilities and despite the recent political uncertainty; this support has not only remained firm but has been scaled up as the authorities seek to cement the country’s position in the global arena through sovereign issuance, corporate support and an improved regulatory framework. Group Managing Editor LAUREN MCAUGHTRY speaks exclusively to the chairman of Borsa Istanbul, HIMMET KARADAG, to learn what the exchange intends for the future of Islamic finance.
International opportunity
Turkey has been the coordinator of the OIC Member States’ Stock Exchanges Forum since 2005, and since 2013 it has also played host to the World Bank Global Islamic Finance Development Center, the World Bank’s only representation office on Islamic finance. In late 2013, Borsa Istanbul also signed an agreement with NASDAQ to deliver market-leading technologies including source codes and selling rights to 25 countries in the region. Through this agreement, NASDAQ acquired a 7% equity stake in exchange for the technological transfer and advisory services. In late 2015, the European Bank for Reconstruction and Development (EBRD) also acquired 10% of Borsa Istanbul shares, with a representation on the Board of Directors. “The long-term investments of these leading firms demonstrate their confidence in the potential of Borsa Istanbul and the Turkish economy as a whole,” commented Himmet.
As an investor on the other side, the exchange became a shareholder in LCH Clearnet (majority-owned by the London Stock Exchange (LSE)) in early 2015, and also received the right to disseminate the market data of London Metal Exchange (owned by the Hong Kong Exchange). In 2015 the bourse launched trading in futures and options on the BIST 30 index, consisting of leading Turkish stocks, on the LSE, to improve its global network. “As part of our vision to become a regional hub, we launched an initiative, Eurasia Data Dissemination Project (EDDN), which envisages disseminating data of all the regional exchanges,” Himment told IFN. “To this end, we are currently disseminating Sarajevo Stock Exchange, Montenegro Stock Exchange, Macedonia Stock Exchange market data and also have discussions with other exchanges to expand the coverage. We are planning on making further strategic partnerships in order extend our global presence.”
Islamic ambitions
So where does Islamic finance come in? There is no doubt of the focus and commitment from the authorities to growing Islamic finance – highlighted by the recent removal of double taxation from Islamic transaction and the latest sovereign Sukuk issued just last month. But the work goes beyond that, extending far into the future as the administration works to develop both its capabilities and its capacity. In order to encourage Islamic finance, Borsa Istanbul in particular has been both increasing its listing of Shariah compliant products and engaging in a wide range of activities: from research to secretariat.
The outstanding value of Sukuk listed on the exchange currently stands at US$3.8 billion, with a US$1.3 billion trading value for 2015. The exchange is working with the Turkish Capital Market Association to launch an international Shariah Board, as well as working on a wide range of innovative new products including Islamic real estate certificates to be used in urban transformation projects, developed in collaboration with leading Turkish real estate firms.
Sukuk ambitions
Perhaps most excitingly, Borsa Istanbul is also working on a revolutionary new type of asset-backed securities based on the revenues from large infrastructure projects. We asked Himmet to tell us more.
“The Sukuk that we are modeling, based on PPP projects, will cover bridges, toll roads, and other public revenue streams that generate stable and high-yield income. Revenues of the Bogaziçi, FSM, and Yavuz Sultan Selim bridges and Istanbul Airport are some examples of underlying assets for these products. The recent launch of the Turkish sovereign wealth fund is also supportive of these initiatives,” he explained. “There is a high infrastructure investment capacity in Turkey and it needs alternative financing methods. Issuances for the public sector projects will serve as a model for the potential private sector and other public sector projects. There is also a strong support of the public sector in all phases such as the Treasury Guaranty.”
Banking blues
Some of the valuable opportunities for these products include an expansion of investor base; increased awareness of the Turkish capital markets; boosting Borsa Istanbul revenues with the trade volumes of large scale public projects; increasing foreign demand, especially from the Gulf region; and attracting infrastructure investment, traditionally dominated by banking sector, to the capital markets. But the new Sukuk could also provide a compelling secondary benefit for the banking market. Turkey, like many other countries, has struggled to build up its Islamic banking sector for a number of reasons, one of which is the dearth of liquidity management tools.
“As opposed to conventional banks being able to invest their overnight balances in interbank money markets, participation banks in Turkey are struggling to find the right instruments for their surplus,” noted Himmet. However, he hopes that the new Sukuk products will change that. “Because the returns of these innovative products will be able to be calculated on a daily basis (i.e. the daily revenue of a bridge based on the data from the electronic tolling system), participation banks are going to be able to make short-term investments using these instruments in order to meet their goals,” he explained. ‘Bridge’ certificates will provide high and interest free return to participation banks, allow them to utilize their cash surplus within the country with efficient liquidity management in all terms.”
A new look
This will support a growth trend that is already well on the way. According to the Participation Banks 2015 Sector Report, in 2015, the total assets of the Turkish participation banking sector increased by 15% to TRY120 billion (US$39.3 billion). With the recent entry of two new state-owned participation banks in the sector, the number of participation banks in Turkey has reached six, while the number of employees has grown to 16,554 and the number of branches to 1,080.
However: “Although the growth rate of participation banking in Turkey is higher than conventional banks, there is still a lot of room for improvement due to the size of potential,” warned Himmet. One possible method of doing this could be to rebrand the sector, focusing both on its Islamic and ethical credentials and highlighting its wide range of possible applications.
“A rebranding of participation banking in Turkey will contribute to reach this potential and appeal to other regions in the world for foreign investment,” agreed Himmet. “In a financial system where banking and capital markets products are more integrated than ever, both conventional and participation banking sectors need to explore products and services that capital markets are offering. The new approach could also include the new and innovative products and platforms such as PPP-based Sukuk and crowdfunding platforms.”
A bright future
According to the Turkish Participation Banking Strategy Document for 2015-2025 put forward by the Participation Banks Association of Turkey, the industry vision is: “To raise the market share of participation banking sector to 15% by 2025 and to deliver world-class financial products and services”.
One of the actions listed in this strategy document is “ensuring the physical exchange in the commodity transactions in the BIST markets” – marking a key area of potential participation for Borsa Istanbul, and one which the exchange appears firmly committed to undertaking. “We are going to be working with the sector in order to achieve a collaborative Islamic finance market in Turkey,” Himmet assured IFN. With this level of commitment and support, the future looks bright for the industry in Turkey despite the current headwinds.