As part of an initiative backed by the Islamist government, Ziraat Bank, the country's largest state-run lender, is working to set up a Shari’ah-compliant entity.
It comes less than a year after Ankara's debut sovereign Sukuk. In a country divided by the role of religion in public life, such an active promotion of Islamic finance would have been tough to imagine when Prime Minister Recep Tayyip Erdogan first came to power a decade ago. But times have changed.
Turkey already has four Islamic banks, known locally as participation banks, of which three are foreign-owned. The first was established almost three decades ago. But Shari’ah-compliant assets account for just 5 percent of total banking assets, far below the average of 25 per cent in the Gulf region, according to Ernst & Young.
Size is mostly the problem. Conventional deposit banks have 15 times more branches than Islamic institutions. Islamic banks in Turkey are also lagging in innovation compared to peers elsewhere in the Muslim world, bankers say.
The current push is motivated as much by pragmatic reasoning as by any spiritual desires. Stronger and larger Islamic banks could strengthen Turkey's financial position.
Domestically, they could lure funds out from under the mattress in the country's conservative and pious heartlands. That cash could help fund Turkey's GDP growth. The Islamic money would be less likely to disappear than inherently fickle foreign funding, which has driven the banks' average ratio of loans to deposits above 100 per cent.
Internationally, stronger Islamic banks would enable Turkey to attract more cash from the Gulf and Asia, where the appetite for Shari’ah-compliant products far outstrips the existing supply. For Turkey, which needs to fund a current account deficit of more than six per cent of GDP, diversifying its sources of finance to include this pool of captive capital makes sense.
The aim of the Participation Banks Association of Turkey is to triple the share of Islamic banking assets in the country by 2023. If more large players enter the Shari’ah-compliant market, that target could start to look modest.
CONTEXT NEWS
- Ziraat bank, Turkey's largest state-run lender, is planning to set up a separate Islamic Bank, General Manager Huseyin Aydin said on April 13.
- The announcement follows a report a month earlier in the Hurriyet Daily News which said that Deputy Prime Minister Ali Babacan had hinted that two state banks may offer interest-free services without giving any names.
- Turkish lender Halkbank will be the second bank to start offering sharia-compliant services under a new entity, according to two bankers familiar with the situation.
- Reuters: Turkey's Ziraat says working to set up Islamic bank
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