TURKEY: AGAINST THE ODDS
Turkey’s GDP grew 0.9% in 2019, according to the World Bank, with an economic recovery in the past few years aided by regulatory measures that continued to 2020. NESSREEN TAMANO highlights how the country’s Islamic finance and banking industry has fared in the last 12 months in turn, given that 99.8% of its population is Muslim and it has a thriving participation banking sector.
Regulatory landscape The country’s Islamic banking sector — widely known as participation banking — falls under the purview of the Banking Regulation and Supervision Agency (BRSA), which employs the Banking Law. Although there is no dedicated legislation for Islamic banking, the law takes Shariah compliance into account when it comes to Islamic transactions. In 2018, the BRSA published revised regulations for the financing, selling, leasing and partnership methods of Islamic banks. The Capital Markets Board (CMB) first introduced regulations on Sukuk in 2010, and in 2012, sovereign Sukuk issuances were facilitated and the Capital Markets Law No 6362, which focuses on private lease certificates and asset-leasing companies, was implemented. In 2013, the government allowed for lease certificates to be structured under various Islamic concepts and in 2015, a dedicated Islamic finance coordination committee was set up to focus on the development of the industry. The Ministry of Treasury and Finance discussed the establishment of a central Shariah advisory board in 2018, but there have been no updates on this since. Banking and finance There are 53 banks in Turkey, out of which six are fully-fledged Islamic banks, listed with the BRSA.
National bank Halkbank announced plans a few years back to open a participation window, and the country is in talks with the IsDB and Indonesia about establishing an Islamic bank, which was supposed to have been launched in 2018 but has yet to materialize. Also in 2018, AlBaraka Turk launched Insha, a digital Islamic bank, in Germany. In mergers and acquisitions, the Turkish Treasury has expressed interest in taking over a controlling stake in Vakifbank, and in 2019, the UAE’s Emirates NBD acquired 99.85% of Russia’s Sberbank stake in DenizBank.
The first Sukuk facility issued was in 2010 by Kuveyt Turk Katilim Bankasi, which raised US$100 million in lease certificates. The Turkish government made its sovereign Sukuk debut in 2012, raising US$1.5 billion. It regularly auctions gold-based Sukuk and issues Islamic lease certificates as well. In May 2020, in response to demand, the Turkish Treasury announced that local currency-denominated fixed rent rate lease certificates will be issued to Islamic banks through direct sales. Turkey is one of the top jurisdictions leading global Sukuk issuances (the others being powerhouses Malaysia, the UAE and Saudi Arabia), which saw a 55% increase in 2018 amounting to a total of US$24.4 billion, according to the IFSB’s latest data. Regular issuers include Turkiye Finans, Vakif Katilim and AlBaraka Turk. In 2019, Turkish Airlines and ferro-chrome producer Eti Krom both announced plans to issue Sukuk.
There are three fully-fledged Islamic asset managers in Turkey, but conventional asset managers are permitted to offer Islamic products on a window basis with no need to apply for separate Shariah approvals, making it difficult to ascertain the total number of Islamic funds in the country. Popular in the country are Sukuk participation funds and participation pension funds, which are established and managed by portfolio management companies licensed by the CMB, and which together constitute 5.5% of the total fund sector. According to data from the CMB, the total value of participation funds increased in 2017 to US$222.4 million compared to US$59.14 million in 2016, while participation pension funds also saw an increase, amounting to a total value of US$1.34 billion in 217 compared to US$707.98 million in 2016.
Turkey is a key Islamic banking market, and enjoys regulatory support, lending its Shariah compliant products resilience and allowing the industry to stay competitive despite economic challenges, in addition to President Recep Tayyip Erdogan being vocal about the need to further develop Islamic finance in the country. Moody’s Investors Service said in a report published in January 2020 that Turkey’s Islamic banking assets, which represented just over 5.8% of total banking assets as at the end of September 2019, are set to double within 10 years due in large part to this government support