LONDON: The credit crunch and the global financial crisis are giving the participation banking sector, as Islamic finance is called officially, a major boost in secular Turkey, especially as capitalism becomes embroiled in a culture of greed, cronyism and corruption.
"The participation banking sector," stressed Meliksah Utku, chief economist of Albaraka Turk Participation Bank, "has grown twice as fast as the conventional banking sector in recent years. A large portion of Turkey is still unbanked. The deposit to GNP (gross national product) ratio is 50 percent, which is much lower than even the Eastern European countries. As such there is good potential for any system of banking especially participation banking because the SMEs (small and medium enterprises) and other clients especially from the Anatolian heartland are usually more conservative, and therefore more likely to use such banks." Albaraka Turk is part of the Bahrain-based Arab Banking Group, which in turn is the global banking division of the Jeddah-based Dallah Albaraka group headed by Saleh Kamel.
Turkey, said Utku, one of the new generation of Turkish bankers, has obviously been affected by the financial crisis as any other country. "We have, however, had a foretaste of this in 2001 when we had our banking crisis. Since then we have had our ups and downs and in 2006 the Turkish economy had already started to slowdown.
The impact on the economy has also been mitigated to a certain extent over the last few years the direction of Turkish trade has moved away from Europe and therefore the Euro Zone, to the Middle East and neighboring North African countries. In the recent past, Germany traditionally was Turkey's largest export market. Today it is the UAE, which is Ankara's largest market. The direction of Turkish trade has shifted hugely and the Middle East today accounts for some 45 percent of Turkish exports.
The total deposit base of the four participation banks is about 11 billion Turkish liras ($9 billion), which is about 4.5 percent to 5 percent of the total banking deposits in Turkey. There is a good possibility that this market share would increase to between 10 percent and 13 percent by 2010. Turkey has a majority Muslim population nearing 70 million - a large part of which would prefer such banking services. But the Participation Banks, said Utku, cannot take them for granted.
"When such banking first started in 1983, banks such as Faisal Finance Institution and others conducted a feasibility study which suggested that there was a 15 percent market share potential. I believe this potential is still there today, but its realization will depend on how the banks themselves develop in terms of number of players; the range of products and services offered; and of course their competitiveness and performance.
"Clients today demand more services especially in a global business environment comprising foreign trade, insurance and asset management.
"Up till now the participation banks have developed in a very predictable way. It is vital that they expand on this development to educate their potential clients, who are still largely uninformed about banking let alone participation banking, and to meet their diverse funding requirements. Increasing branch networks brings economies of scale. Most customers have business dealings with other regions and cities in Turkey. This brings in business volume."
The Turkish banking authorities prefer the term "participation banks" to Islamic banking because according to them it reflects better the nature of the banking business based on profit-and-loss-sharing. This instead of calling it Islamic banking because anything with the word Islamic in Turkey is hard to sell and has political sensitivities, especially with certain sections of the fundamentalist secular establishment.
The sector is now in its 25th year in Turkey. Initially it was called interest-free banking and the institutions licensed to carry out such banking were called special finance houses. In 2007, the Amended Banking Act forced the name change and brought the regulation of such banks under the same legal and regulatory framework as conventional banks. Both the regulators and practitioners, explained Utku, learnt Islamic finance by trial and error. "As practitioners we did not really know the market demand and actual potential. Nor were we familiar with the structures, contracts and accounting standards. Similarly, the regulators did not know the rubrics such as calculating the capital adequacy for such institutions. We all learnt through trial and error," he added.
Another sign of the rapid growth of Islamic finance over the last few years in Turkey is the growth in branch expansion of banks offering such products and services. At the end of 2002, for instance, the total branches of participation banks was 150 - between five banks. Today, the number of branches total 450 and the deposit base of participation banks has increased from 1 percent to about 5 percent.
The main reason for this, said Utku, is that the regulatory environment has been enhanced. Today, participation banks are licensed under the same 2007 (Amended) Banking Act as the conventional banks. This means that the same provisions apply to both types of banks -- capital and capital adequacy requirements, provisioning and reserves.
"Obviously there are differences in the way we collect funds the way we utilize them. The Turkish regulator accepts these differences and type of credits, and also acknowledges the different risk characteristics of Islamic finance compared to conventional banking. This includes market risk or interest rate risk because we do not have liabilities on the deposit side. We pass that risk to the stakeholders in the participation accounts and we act as the Mudarib (manager). All these factors are taken into account by the regulator (The Banking Regulation & Supervision Board) when calculating capital adequacy ratios for such banks. If a bank finances a credit from the participation accounts pool, it is weighted 70 percent rather than 100 percent in the calculation. Our regulator now understand the nature of participation banking and have developed a better set of rules to govern such banks," he explained.
Participation banks would support the issuance of a sovereign Sukuk by Turkey because currently they cannot invest in any Turkish Treasury bonds because they are interest-based. Ankara in fact is contemplating a debut international Sukuk as part of its external borrowing requirements.
Albaraka Turk says it concentrates on financing the real economy and one of its largest client bases are SMEs. It is also innovating new products such as charge cards for businesses and a special chip card for Turkish farmers.