Pious finance

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Emerging Markets

When experts talk about the expansion of Islamic finance in Turkey, they often pinpoint Malaysia as the example Turkey should follow. Malaysia has a vibrant and active Islamic banking and financial sector, where both local and international players are active, and the efforts the government has taken through the years to create the right kind of infrastructure and regulatory environment have resulted in Islamic finance becoming the most popular funding vehicle for Malaysian corporates.

Turkey certainly has the potential to emulate Malaysia, the United Arab Emirates (UAE) and other members of the Gulf Cooperation Council (GCC) that have becomes hubs for Islamic finance, said Hulusi Horozoglu, Dubai-based head of global Islamic banking for Citigroup. Currently, Islamic finance represents only a mere two percent of Turkey’s overall financial sector, which means the potential for growth is enormous. But for this growth to be effective, Turkey needs to ensure that it has in place the right kind of infrastructure and regulatory support to generate both sellside interest and buyside participation in Islamic finance.

“In order for Turkey to become an effective Islamic financial centre, we need to attract large global players, and for this, Turkey needs a comprehensive and effective financial structure,” Horozoglu said. “The overall growth of Islamic finance in Turkey will depend on the ability to create the right infrastructure.”

If indeed Turkey wishes to expand its Islamic finance sector in a similar fashion to the UAE and Malaysia, the country needs to put in place measures that encourage global players to take part in local industry, Horozoglu said. Turkey, for instance, needs to institute a money market for Islamic institutions that is supported by the regulators, and the creation of windows for offering Islamic financial products is imperative. All these measures are still lacking in Turkey, but “I expect [they] will be coming over time,” Horozoglu said.

Over the past years, there has been a noticeable increase in Islamic finance in Turkey. The presence and penetration of participation banks has grown steadily and a number of international banks such as Citigroup, ABN Amro, HSBC and BNP Paribas, to name a few, have been arranging transactions in the Turkish market. While syndicated bank loans are still the dominant form of Islamic finance in Turkey, there have been some capital markets transactions, and experts expect that there will be more going forward.

But even if Islamic finance does have great potential for growth in Turkey, the question is whether it is needed enough to warrant a push by the authorities. Monzer Kahf, a former senior economist for the Jeddah, Saudi Arabia-based Islamic Development Bank who now works as an independent consultant for global Islamic banking and finance, argued Turkey’s economy is completely different from Malaysia’s and from other GCC countries’, and this will impede the rate of growth of Islamic finance in the country.

“The Turkish economy is more agricultural and industrial, not financial the way it is in the Gulf area,” Kahf said. “Islamic finance has largely funded a real estate boom in the Gulf; the Turkish economy cannot sustain such an expansion of the real estate sector, nor could it warrant a similar expansion of the financial sector.”

Conventional funding – or the lack thereof – is also not an issue in Turkey. The Turkish treasury has reportedly been considering introducing measures to enable a sukuk (Islamic bond) market, and several private issuers are apparently keen to get a sukuk market going. However, things haven’t evolved much because of the relatively easy access Turkish companies have to bank loans.

The bigger issue has to do with politics. Unlike Malaysia or countries of the GCC, there has not been – and cannot be in Turkey – a declared support for Islamic finance, Kahf said, because Turkey is a secular nation. “Malaysia has declared that it wants to serve the interests of the dominant Islamic community – that target cannot be imposed and cannot be tolerated in Turkey,” Kahf said.

Indeed, with Turkey’s potential European Union (EU) entry already an extremely sticky issue, the promotion of Islamic finance would only serve to go against the grain, agreed an unnamed analyst covering Turkey.

“Turkey was founded as a secular republic and it still is that,” the analyst said. “If there were a fundamental economic need for Islamic finance in Turkey, then perhaps we would see efforts to promote it. But there is not one, as far as I can tell, and the government doesn’t want to promote a contradictory image to the rest of the world.”

All the same, Islamic finance in Turkey has had a steady (albeit slow) rate of growth through the years, and it will continue to go that route. Kahf believes that over the next decade, Islamic finance will grow to represent 10% of the country’s financial sector. There is a growing interest from the domestic investor base in Turkey for Islamic financial products, he said, and from Muslims in countries such as France, The Netherlands and Belgium, all of which will foster the growth of Islamic finance in different parts of Europe, Turkey included.

Indeed, there’s a large and well-diversified investor base for Islamic syndications, not just in Turkey but also in the Middle East, in Asia and in Europe, said Horozoglu. In Turkey, Citi has led several successful Islamic deals for industries that span the gamut from food and beverage to textile and information technology, and last November, the bank led a highly successful US$60m murabaha issue (the most actively used Islamic financing contract, used to finance acquisition of assets and meet the working capital needs of companies) for Turkish fleet leasing operator Derindere Turzim Otomobil. The deal – oversubscribed by 75% – elicited great interest from investors in the Middle East and Europe, but was more significant because it was the first five-year Islamic syndication for Deindere, thereby underscoring investor eagerness to finance Islamic deals with longer tenors. The transaction – which finally topped out at US$87.5m – was also Derindere’s first international issue and the largest Islamic facility to-date in the operational fleet leasing industry in Turkey.

Like the Deindere facility, many of the other deals Citi has done in Turkey were the issuers’ first international transactions Horozoglu said, and given their success, more such deals are likely to follow.

“A number of mid-sized Turkish corporates are using the Islamic finance market and there is great potential for more of them to avail of it going forward,” Horozoglu said.

David Testa, CEO of Gatehouse Bank in London, believes that there is potential for the development of Islamic finance in Turkey. Gatehouse has just received authorization from the Financial Services Authority (FSA), and Testa said that investors in the Middle East are showing increased interest in Turkey.

“There is a lot of inward investment into Turkey from the Middle East and if Turkish companies want that money, is has to be structured Islamically,” Testa said.

Given their structure, Islamic finance transactions can attract both Islamic and conventional banks, Horozoglu said – a factor that is all the more attractive at a time when the international credit markets are in a state of turmoil and many banks and investors are tightening the reins on credit.

Indeed, Islamic finance has not been affected too deeply by the problems in the financial market-at-large, he said, which will also further encourage its expansion and the creation of new kinds of financial instruments.

Globally, the Islamic finance market is still in the early stages of growth, so the overall potential for growth is enormous, bolstered by the fact that investors in Islamic finance transactions are increasingly keen to look for opportunities outside their region, Testa said. But even if the Islamic finance market has been relatively insulated from the general financial market instability, it is not totally immune to what’s been going on elsewhere, which means that placing large transactions is not so easy these days.

“Borrowers want us to sell a billion, but it isn’t easy,” Testa said. “Banks in the Middle East have gone through a re-evaluation process and are not offering hard currency liquidity in the same way they used to, as some limits are not there for the moment. Even if they have been turned into local currency bank deals, there are certainly a number of Sukuk deals that have been postponed.”

Banks and investors in the Middle East are also scrutinising deals with greater care, Testa said, because so many companies – many of which might not be a natural target for investors in the region – are now looking at the Islamic finance market as an alternative funding venue. “The last thing these investors want to do is to be taken advantage of,” Testa said.

All the same, Islamic finance worldwide is growing and Turkey is a part of that growth story, Testa said. There are a large number of strong corporates in Turkey that Middle Eastern investors are willing to finance, he said, “so we are excited about the opportunities.”

There are five participation banks currently operating in Turkey. Albaraka Turk Participation Bank (part of the Gulf-based Albaraka Banking Group); Kuveyt Turk Participation Bank (part of Kuwait Finance House) and Dubai Islamic Bank are from the Middle East, while Turkiye Finans Participation Bank and Bank Asya are Turkish in origin.