In the last five months, the economic and financial life in Turkey was dominated by the fallout from the subprime mortgage crisis, just like in the rest of the world. More dominant till mid-July however was the closure case against the AK Party. Together with the blind obstructive behavior of the opposition parties, this more or less paralyzed political life at a time when the country really could not afford to stand still. The cost of that litigation to the development of the country will be a considerable weight for a long time and the recovery will experience hindrance from the global financial turmoil.
The development of the Islamic finance-style participation banks — being demand driven — nevertheless continued on its well known organic pattern. A persistent growth effort in the overall number of branches in the last year has been accompanied by serious IT investments that prepared them aptly for the times to come. The participation banks strive to be at the forefront of the Turkish financial markets. In attending the talks for the Istanbul Financial Center master plan that aims to make Istanbul a regional financial center, their presence in and value to the market is clear.
Closure case
The closure case against the governing AK Party basically resulted in a stand off. The party was not closed down and also none of its members was expelled from politics. A fine amounting to half its allocation for 2007 was forfeited however. In other words, it boils down to an official warning not to make any gesture that could be understood as undermining the principles of secularism as they are interpreted by the Constitutional Court. The different camps are therefore watching each other with even greater eagerness.
The AK Party immediately embarked on renewed efforts for democratization and the EU bid, and also restarted the talks on the change of the “military” inspired constitution to a “civil” constitution. Most political parties appear to be willing to enter the negotiations.
The politics of non-confrontation — both in the political arena and on the streets — and of voluntary submission to justice and democracy as practised by the AK Party throughout the legal proceedings did keep social peace in the country and appears to have been paid off by hightened popularity in the polls. For the moment, the country is waiting for the reasoning behind the decision of the Constitutional Court to be published.
It is impossible for any economy to escape the consequences of the present turmoil on the financial markets:
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Global economic slowdown, in some places turning to recession.
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Decreasing prices in the real estate markets and the effects of capital adequacy standards.
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Tightening financial markets and rising cost of financing.
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Exposure to other financial institutions with problems or in default.
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Massive sell-off of assets of financial institutions in distress.
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Rerouting of financial means by the big market players, out of the emerging markets and back to the home markets.
With the mortgage and securitization markets in Turkey not being overdeveloped, the first wave of the subprime crisis did not hit as hard and direct as it did in some other markets. Sound financial politics and foreign direct investment initiatives should keep the economy on track. Hopes are that the crunch will not target Turkey as much as other, more exposed markets.
Market organization
The Capital Markets Board of Turkey (SPK) introduced regulations to allow the use of interest-free financial instruments in private pension funds. The Banking Regulation and Supervision Agency (BDDK) and the Turkish Central Bank (TCMB) have expressed support for the new SPK regulations. Participation Banks Association of Turkey (TKBB) secretary general Osman Akyüz said however that the Turkish Treasury still needs to create the interest-free instruments that are to be used to that end.
In July 2008 some friction surfaced as it became clear that the accounts at TCMB where Turkish banks are obliged to deposit 11% of their foreign currency deposits and 6% of their domestic currency deposits, only accrue interest revenues on those deposits, which the TCMB gains from lending the banks’ money back to the banks. It is obvious that the participation banks strongly oppose receiving the interest revenue. The participation banks suggested that instead of receiving the interest, their fixed deposit rate should be cut from 11% to 5.5% or 6% in foreign currency and from 6% to 3% in domestic currency. The suggestion was rejected by the Central Bank, since the deposit is an instrument of monetary policy.
The participation banks have decided to receive interest revenues, according to the TKBB. AlBaraka Türk is reported to spend the interest income on corporate social responsibility projects, sponsorship deals and advertisement expenditure. Türkiye Finans would transfer the money to the Savings Deposit Insurance Fund TMSF. It is clear that the present vacuum weighs unnecessarily on the participation banks’ profitability and should be addressed as soon as possible.
And as a reminder: the leasing certificate regulation (Sukuk Ijarah) has not been approved yet. Valuable time and investment possibilities are being lost due to this.
The Turkish participation banks
Albaraka Türk is a member of the Albaraka Banking Group (ABG). In June 2008, ABG announced opening its doors for business in the Indonesian market. The president and chief executive of the bank, Adnan Yousif, announced plans to expand investments and operations in the Islamic markets of Southeast Asia and especially in the Indonesian market, which is considered as the biggest market in the region. Since the trade volume between Turkey and Indonesia has been picking up, the presence of ABG in that market could be an important development for Albaraka Türk.
Bank Asya: Following the strong growth (in terms of USD) of 78% in total assets, of 80% in total loans and of 43% in profits in 2007, Bank Asya decided in July 2008 to increase its capital base by injecting YTL300 million (US$214.33 million) from their shareholders and another YTL300 million from retained earnings.
Bank Asya crossed the one million outstanding credit cards benchmark and is by and large the market leader amongst the Turkish participation banks in this segment. In July 2008 MasterCard and Bank Asya launched the Asyacard DIT, a multi-application chip and PIN card with an integrated municipal toll and transit application. Bank Asya customers now can use a single card for both contact and contactless payments, perform secure remote transactions and, amongst others, to pay to use the Bosphorus bridges.
In September Bank Asya opened 18 new branches in two days to bring the total to 142 and this expansion continues as Bank Asya is basing its growth strategy on opening branches all over the country, with the aim of being the 12th largest bank in Turkey in terms of assets, with 200 branches, by 2010.
Kuveyt Türk: The initial public offering that has been on the drawing board for some time appears to have been shelved for the moment. In April 2008 an increase in the bank’s equity capital, which was YTL 260 million (US$185.76 million) in 2007, by 92% to YTL500 million (US$357.47 million) was announced. In May 2008, Standard Chartered Bank presented its Straight Through Processing (STP) Excellence Award to Kuveyt Türk for the 97.7% error-free transactions it realized in dollar transfers made over the SWIFT system through the New York branch of Standard Chartered Bank throughout 2007.
Kuveyt Türk launched its new credit card “Palmiye Card” in June 2008. The card aims to provide Turkey’s small- and medium-sized enterprises with an opportunity to purchase merchandise and pay the cost in 12 monthly installments and do away with the need to use checks and deposit slips.
In September 2008, Kuveyt Türk announced that it plans to invest in the Balkans and the Russian Federation with the support of its partner, Kuwait Finance House (KFH). Kuveyt Türk general manager Ufuk Uyan confirmed that it wants to be the regional base for KFH. Kuveyt Türk aims to grow in the countries surrounding Turkey as part of this strategy. Uyan said Kuveyt Türk has opened a branch in Kazakhstan and plans to transform the branch in Germany into a financial services bureau. Next will be a branch in Bahrain to serve institutional investors looking to invest in the Turkish market, as well as an office in Dubai.
Türkiye Finans: In August 2008, Türkiye Finans signed an agreement with Western Union, the international money transfer company to tap into Western Union’s worldwide network infrastructure. The synergy with the new shareholder Saudi Arabia’s National Commercial Bank — which paid US$1.08 billion to acquire a controlling 60% stake in Turkiye Finans — will prove its value.
Qatar Islamic Bank has been rumored to have applied for a license as a participation bank. This would be the fifth license in Turkey.
The most visible transaction was the 2-year Murabahah facility of US$450 million by Elaf Bank — a Bahrain-based Islamic bank — and Shamil Bank to the Shamil Bosphorus Mudarabah in July. The financing facility will be used mainly for the Beylikduzu real estate development project.
Conclusion
The Turkish financial markets continue to develop as usual with their regular ups and downs. At the same time, the participation banks eagerly expand their operations in volume and in physical market presence. Their growth is becoming more obvious but there is not yet a level playing field with the conventional banks in terms of both the institutional level and the available financial instruments.
Turkey is missing out here, both in the internal expansion of the economy and in external economic relations. The boundaries need to be pushed further.