Leaders of Islamic banks in Turkey forecast this week that their sector would more than quadruple in size in the next decade, mirroring demand and asset growth for their specialised services throughout the Muslim world.
Islamic banking, or financial services provided according to Islamic principles, are growing in popularity. A surge in oil prices since 2003 has created extra wealth in oil-rich Muslim countries, while developing Muslim nations such as Turkey and Malaysia have growing economies that are creating wealth and driving demand for services such as bank accounts, securities and loans. Markets in such countries are maturing and increasingly able to support the sales of Islamic bonds and mutual funds.
Islamic banking, provided in Turkey by lenders called Special Finance Institutions (SFCs), purports to serve customers in accordance with Islamic principles, which rules out the use of interest. Growing numbers of banks in Muslim countries are claiming the ability to meet this standard, but are doing so in a wide variety of ways. An investor looking for Islamic finance opportunities will be unable to find set standards or universally accepted procedures across countries or companies.
Some critics say that Islamic financial services are merely financial tricks and loopholes that still result in lent money creating income, and as such are not really the sharia-compliant products they claim to be. The collapse of Ihlas Finance in Turkey in 2001, after a national economic crisis, also sapped confidence in the idea. Ihlas was the largest Islamic finance house in the country at the time.
Despite the lack of clarity, demand from Muslims continues to fuel an expansion and attract Western companies to the sector. A Citigroup unit now operates what is effectively the world’s largest Islamic bank by transactions, according to the Wall Street Journal, with some $6bn structured and marketed in conformance with Islamic laws since 1996. The US-based lender underwrote a $129m Islamic bond offering last September for the German state of Saxony-Anhalt. Ernst & Young won recognition for the “best Islamic assurance and advisory services” at the recent Islamic Finance Awards, and BNP Paribas was named “Best Islamic Project Finance House”. HSBC, Deutsche Bank, ABN Amro, Societe Generale SA and Standard Chartered have also started Islamic banking units in recent years.
Norton Rose, an international law firm and winner of the “Best Legal Adviser in Islamic Finance” award, helped establish the Islamic Bank of Britain, the UK’s first Islamic bank. It is helping to set up the first private pan-European Islamic equity real-estate portfolio, and is also advising Bank Islam in connection with a $600m Islamic private debt-securities issue to finance a public-housing project in Turkey. That would be the first cross-border issuing of sukuk, or Islamic bonds, done in the region. The sukuks usually offer a saleable asset as collateral.
Turkey’s SFIs had collected YTL6bn ($4.35bn) in assets by the end of 2004, and that total is expected to surge to YTL35.87bn ($26bn) by 2014, according to Ufuk Uyan, chairman of the Special Finance Institutions Union, who spoke to the press on May 18.
Uyan said he expects legislation now under consideration in Turkey’s parliament to boost the Islamic banks by extending a deposit guarantee up to YTL50,000 ($36.245.02) to funds they hold. He said the banks earned YTL115m ($83.36m) in 2004, a 36% increase from 2003. There were 264 branches in Turkey at the end of 2004 that employ 5250 people, and Uyan expects those numbers to grow to 750 locations and more than 10,000 workers.
The market for Islamic financial services is lucrative in Turkey in part because it is the Muslim world’s largest economy, yet similar growth is also expected in other Islamic countries. At Saudi Arabia’s government-controlled National Commercial Bank, the largest bank in the Arab world, 80% of loans were compliant with Islamic laws last year, compared with 16% the previous year, the bank’s senior economist, Nahed Taher, told the Wall Street Journal. In Malaysia, Islamic financial instruments comprise 10% of country’s public and private financial dealings, up from 6% in 2000, the WSJ reported, citing the country’s central bank.
Dow Jones has responded to the growing interest in Islamic financial services with indexes tracking Islamic stocks. Those are defined as shares of companies that are not involved in producing or offering alcohol, pork products, conventional financial services or entertainment such as pornography, music, film or gambling. There are 45 Islamic indexes, according to a Dow Jones web site. Dow has six sheikhs on an advisory board helping to evaluate companies according to sharia principles.
One of the newest Islamic indexes is the Dow Jones Islamic Market Turkey Index, which tracks stocks trading on the Istanbul Stock Exchange. The index was introduced in September 2004 and has a float-adjusted market capitalisation of $4bn, according to Dow Jones.
Read More from OBG
