Turkey treads fine line as state-run trio eye Islamic banking
REUTERS PhotoThree 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 Vakifbank 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 Yilmaz, 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 Turk, Bank Asya, Türkiye Finans and Kuveyt Turk, 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 Istanbul-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.”
Much will depend on the strategies adopted by the new banks and the responses of existing players.
This growth was achieved despite political turmoil surrounding Bank Asya, which is caught in a power struggle between the government and Fethullah Gulen, an Islamic cleric whose sympathisers founded the bank.
Seeking to show loyalty to the government, depositors including state-owned firms and institutions this year withdrew 4 billion lira or some 20 percent of Bank Asya’s deposits, local media reports said. The bank declined to comment on those figures.
New sukuk trade made
Meanwhile, Turkey opened books on a US dollar benchmark 10-year sukuk trade yesterday, in what is becoming an annual excursion into the Islamic bond market.
“Two years ago, Islamic investors were not comfortable with going far beyond the five-year mark, but this market has been maturing rapidly as you saw with Indonesia,” said a banker familiar with the transaction.
Initial profit thoughts on Turkey’s sukuk appear to offer only a small premium to the sovereign’s curve.
“This is a perfect time for Turkey to come to market when oil prices are so low and Turkey being a net importer of oil,” said one bond trader who covers Middle East and Turkey.
“Everyone wants to get a bit of Turkey at the moment,” he added, pointing to recent trading in the sovereign’s conventional curve.
For example, Turkey’s long-dated 6.625% 2045 has risen 10 points to 121.1 since the start of September, according to Tradeweb data.
Citigroup, CIMB Islamic and HSBC are arranging the transaction.