Turkey's growing trade and investment ties with the Gulf could provide a helpful boost to the country's currently small Sharia-compliant banking sector.
In Turkey, the banking practices that are Sharia-compliant, such as in the Gulf states and in Malaysia, are called participation banking. At the moment, participation finance in Turkey remains very much a niche sector, but the market is growing strongly, according to Yunus Nacar, general manager of Turkiye Finans. "With $21.5bn in assets, the participation banking market controls about 5% of the total banking market, but in the last eight years it has grown at a faster rate than conventional banking," he told OBG.
Participation banks have performed well in Turkey in spite of the recent slowdown in the global economy. For example, in the first half of 2008, Albaraka Turk saw a 48% growth in assets to $3.47bn and a 49% growth in deposits to $2.85bn, compared to the same period in 2007. Similarly, Kuveyt Turk reported growth rates for the first half of 2008 at 50%. Turkiye Finans earned $126m in profit in 2007, finishing the year with $4.8bn in assets, while in April it sold a 60% stake of its business to Saudi Arabia's National Commercial for $1.08bn.
Adnan Buyukdeniz, general manager of Albaraka Turk, told OBG, "At the beginning of the year, we thought that we might have to revise our targets given the global situation, but in the event we have had a very successful six months. To an extent, the less complex you are, the better equipped you are to deal with the credit crunch. Participation banks in Turkey have no dealings with derivatives or subprime mortgages; our risks are far more measurable."
Such strong growth is fuelling expansion plans. Kuveyt Turk has opened 25 Turkish branches in 2008 alone, while Albaraka has opened 20.
At the moment, the growth is focused in the country's major cities. "Due to the small size of deposits and loan volume, regional branches take far longer to become profitable than those in the cities. Having said that, we are always looking to open new branches in areas of strong small and medium enterprise [SME] growth, as this is the core of our business," said Buyukdeniz.
The banks are also working to introduce new projects and services. Kuveyt Turk has introduced a new credit card designed for SME clients, and Turkiye Finans signed a deal with Western Union in August to extend wireless money transfers to new sectors of the Turkish market. Given the rate of organic growth alone, participation banking is likely to double in size over the next ten years, according to Buyukdeniz.
There are reasons to suspect that growth could be even quicker than this, however. Increased trade and investment between Turkey and the Gulf Cooperation Council (GCC), where Islamic banking is already well developed, holds great potential for the sector. The signing of a Memorandum of Understanding (MoU) between Turkey and the GCC states in September has set in motion the final stage of a free trade agreement that has been in negotiation since 2005, while already the volumes of trade and investment between Turkey and the GCC are rising steadily. Bilateral trade with the UAE grew from $700m in 2002 to $3.7bn in 2007. Demand from GCC investors and trade partners for Sharia-compliant financial services is expected to act as a boost to Turkish participation banks.
The growing ties with the GCC have spurred Kuveyt Turk to open branches in the Gulf region. "We have established a branch in Bahrain, a key hub of Islamic finance, in order to serve institutional investors looking to invest in the Turkish market. We are looking to open a similar branch in Dubai," said Ufuk Uyan, general manager of Kuveyt Turk.
Another result of closer Turkish-GCC relations is the large number of Turkish construction companies operating in the Gulf. This opens up another area of opportunity, according to Uyan.
"With the boom in city creation and infrastructure, there is an anticipated $800bn worth of construction projects on offer over the next 5-10 years in the Gulf. Kuveyt Turk is looking to provide project financing to the ever increasing numbers of Turkish contractors active in the region," Uyan told OBG.
Contractors will have the chance to meet potential clients in Istanbul this autumn, as the Islamic Finance Summit will take place on October 13-17. Swati Taneja, the director of the conference, told local press "Internationally, Sukuk - referred to in Turkey as participation certificates - is one of the fastest growing asset classes in the financial industry. The Turkish market is in need of such instruments, and investor groups from the Arabian Gulf are ready to inject more into the Turkish economy, provided the right regulatory regime is put in place," she said.
The growth of participation banking faces some obstacles, however. "Due to regulations, developing new products is not easy for participation banks. In addition, there is a 100-year conventional banking culture in Turkey, meaning that it is not as easy to attract customers as it is in other markets," Uyan told OBG.
"In the long run, we have to bring about an increase in public awareness through our own products, services and performance," said Buyukdeniz. "The growth in GCC trade and investment could help us gain just this type of presence on the market."