Islamic Banking in Turkey: A Safe Haven for the Investors?
General Banking Climate in Recent Years
The last decade in Turkey has seen an immense macro-economic growth that spilled over to various different branches of the national economy. The banking sector has been one of the leading industries to benefit from this growth. What accounted for such growth was in part domestic and in part international. Macro-economic stability that has been provided by the government coalesced with the ubiquitous presence of global liquidity operating on low interest rates. Such a coalition had led the Turkish banking industry to register significant rates of profits and to inoculate a virtuous cycle in to the Turkish economy where the banking growth was re-invested in to the national economy in the form of low interest rate credits.
However, the global financial crisis erupted in 2008 changed the entire landscape that the banking industry has to operate in. Since then not only the cheap credits that had enabled the banking industry to grow by utilizing the ever-growing consumer demand had ceased to exist but also a recent policy has been adopted by the authorities based on spending cuts to deal with the problem of growing current account deficit. Hence, possibly a year of stiff competition and increasing risks await the banking industry in 2014
Islamic Banking in Turkey
Islamic banking has increasingly emerged both in Turkey and in the world as a safe haven for the investors especially during such turbulent times. Such an image stems from its stress on the traditional methods of banking operations. It does not only ban interest payments on loans but also imposes stringent rules on some of the banking operations that had recently led the global banking industry in to an abyss. Re-bundling of several different financial assets which had resulted in toxic mortgages and the recent slump in global financial markets are not employed by the Islamic banking industry which relies on more conventional methods of banking. More recently, the Islamic financial instruments are being exploited for the purposes of project finance in Turkey. One recent example is the issuance of Sukuk that worth for USD$ 200 million by one of the leading Turkish construction companies to finance their projects.
The numbers reflect the positive image of the Islamic banking in Turkey as well. Participatory banks, a term employed in Turkey to describe the Islamic banks, has taken a course of protracted but stable growth in Turkey since the year 2000. In 2000 such banks had only accounted for the 2.13% of the Turkish banking industry but as of 2011 they had managed to increase their share to 5.55%. The total amount funds available in the Islamic banks' portfolios has recently exceeded USD$ 60 billion. As of 2014 the Islamic banking industry has 966 branches all over Turkey which is more than 40% increase compared to 2011.
The growth of the industry encapsulates the recent legislative developments that had went hand in hand with the growth of the Islamic banking industry. Between 2010 and 2013 three major directives were adopted by the relevant bodies that paved the way for the Islamic banking industry to introduce the Islamic financing instruments to the Turkish market. The earliest of the three was the Capital Markets Board's decision to lay the legal foundations of the Special Purpose Vehicles which serve as intermediaries to sell the Islamic compliant financial instruments. Then came the regulation that gave the Turkish Treasury the authority to issue a specific instrument of Islamic finance; Sukuk al Ijarah. Finally, the last one of these three legislations expanded the scope of Islamic compliant financial instruments to introduce istisna, murabaha, mudaraba, musharaka and wakala bonds to the Turkish market.
Islamic banking industry has recently been enjoying an image of a safe haven for the investors given its reliance on the conventional methods of banking operations and its rejection of high risk re-bundled financial assets. The current numbers of growth in Turkey attest to the development, growth and the positive image of the Islamic banking in Turkey. However, it should be noted down that the mere existence of an image of safe investment and the presence of a lucrative market are not enough for the Islamic banking industry to take off. A legislative framework which will promote the growth of the industry by solid legal guarantees and tax related or other kinds of incentives are necessary for the growth of such an industry. Turkey, by assuring the presence of all these three factors has managed to create a growing Islamic banking industry operating in a course of stable growth.