Turkey Treads Fine Line As State-Run Trio Eye Islamic Banking

Three Turkish state-run banks plan to launch Islamic units, widening the reach of interest-free finance in the majority Muslim nation, but the government is treading a fine line between promoting the sector and hurting incumbents.

Turkey is pushing ahead with plans for Halkbank, Ziraat Bank and Vakıfbank to set up stand-alone Islamic banks, known locally as participation banks.

Last month, the government presented a legislative framework for publicly owned Islamic banks, proposing shareholding changes to Vakıfbank as a prelude to its launch of an Islamic unit. Ziraat, Turkey’s largest state-run bank, received approval last month for an Islamic unit with $300 million in capital. Halkbank, the second largest state-run bank, said last month it would apply for its own unit. Such moves are in line with government efforts to help industry assets more than double by 2023 to $100 billion.

The new entrants will have the financial muscle to expand the industry’s geographical reach in the country and improve consumer awareness, said Osman Nihat Yılmaz, deputy secretary general of the Participation Banks’ Association of Turkey. “Without a strong capital base, it is not possible to grow at a satisfactory rate.” But he added, “In the short term, the entry of a new bank is likely to force profits downward because of competition.” The newcomers would join Turkey’s four existing Islamic banks: Albaraka Türk, Bank Asya, Türkiye Finans and Kuveyt Türk, a unit of Kuwait Finance House.

The staffing requirements of the new banks could put a strain on the industry’s small talent pool, increasing operating costs for incumbents, said Duygun Kutucu, senior research analyst at İstanbul-based Burgan Securities. However, the impact on banks’ customer bases may be limited if the new lenders largely attract clients from their conventional parent, he added. “In the initial stage, we expect there will be a shift from state banks’ own client base to the new participation banks – which may be called cannibalization.”

Strategy

Much will depend on the strategies adopted by the new banks and the responses of existing players.

State-run lenders may focus on financing small businesses in regions where Islamic banks lack a strong presence, said Ateş Buldur, İstanbul-based banking analyst at Credit Suisse. “It depends on the bank regarding geography. Ziraat and Halk may focus more on rural areas. Vakıfbank is stronger in cities.” The existing Islamic bank are responding by diversifying their funding sources and exploring new business lines.

Last month, Kuveyt Türk raised 150 million lira ($66.9 million) via Islamic bank bonds, the largest domestic private placement of sukuk, as it shifts away from relying mainly on syndicated murabaha Islamic loans from other banks to finance its operations. Kuveyt Turk and Albaraka Türk have jointly set up a private pension firm, Katılım Emeklilik, to tap into the growing retirement sector. It started operations in September. Some Islamic banks also plan to branch out into wealth management to stave off some of the competitive pressure, according to a senior industry executive who declined to be named as the matter is not yet public.

As of March, Turkey’s four Islamic banks held a combined TL 95.4 billion worth of assets, up 27.8 percent year-on-year. The presence of big state-run banks in Turkey’s Islamic finance sector may strengthen the influence of the government, and indirectly the ruling AK Party, over its development. Because of political sensitivities surrounding Turkey’s secular constitution, the country until recently was slow in developing Islamic finance, but the pace has picked up in the last couple of years under the AK Party, which has Islamist roots.

Originally published on www.todayszaman.com