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Turkish: Participation Banking : A Bumpy Road To Success


Bank Asya’s leading market share of the participation banking sector was slashed almost 13 percent over the first nine months of 2014. Former Bank Asya depositors, which include individual retail customers as well as government-related companies, looking to park their funds elsewhere only partially fed back into the participation banking sector from around June. As a whole the sector’s growth momentum was severely hampered; between January and October deposits whimpered to a 094 percent rise and total assets nudged up 447 percent, in contrast to the same period in 2013 and 2012 when deposits grew 1859 percent and 219 percent, respectively, and assets rose by 2109 percent and 2234 percent respectively. Before Bank Asya started suffering from the fallout of  the political row, Turkey’s participation banking sector was on a double-digit growth trajectory but total assets were knocked down to 53 percent at October 2014 from SS percent in 2013.

Three new banks to grow the sector threefold

Wading into these waters are three convention al state-owned banks seeking their own Islamic units: Halkbank, Vakifbank, and Ziraat Bank. Ziraat has already received regulatory approval to establish its Islamic unit and as of this writing Halkbankhad already applied to the regulator for its approval. Secretary-General of the Participation Banks Association of Turkey Mr. Osman A1q’üz explains that the government wants to increase the capital base of the sector in order to lift the industry ecosystem. At the heart of it, he says, is the desire to seethe sector grow to its potential in order to support Turkey’s goal of transforming Istanbul into a regional financial centre and an international financial hub by 2023, the centennial of the Turkish Republic. The goal for participation banking is to grow threefold to reach 15 percent market share of total banking  assets by 2023. Power feuds aside, one senses the government is impatient with the sector’s current rate of growth and has decided to give it a major leg up. One of the challenges holding back faster organic expansion of the sector (and that impacts on broader macro growth) is Turkey’s low savings rate; at the end of 2013 the International Monetary Fund said the Republic would need to increase its domestic savings from around 14 percent of GDP to 18 percent in order to sustain high growth. In this environment the participation banking sector needs an injection of capital. This is where the huge state-run banks will help push the sector forward At Q_3 2014 Ziraat held TL238 billion in assets, which is around 12 percent of total banking assets and almost two and a half times higher than the entire participation banking sector. Its Islamic unit will start off with US$300 million in capital. The downside to the entrance of the huge state banks into the sector is one that analysts have been warning about — the three could bury the sector’s incumbents. Reaching the underbanked The government is also hoping that a more extensive national network of participation banks will help capture a larger share of the underbanked in the country and channel deposits and savings into the banking system Turkey has a high percentage of unbanked — only 58 percent of adults in Turkey had an account at a formal financial institution in 2011, according to the World Bank. Providing alternative methods of savings and financing such as with participation banking is one strategy to increase the use of formal banking. Reaching more Turks is equally important; in its Q_3 2014 presentation Ziraat claims to have a presence in 401 locations in Turkey without a competitor and expects to open around 100 new branches in 2015 if it leverages on its extensive scale Ziraat could significantly expand the base of the participation banking sectors. The current four participation banks have about 850 branches between them.

National Action Plan to attract investors

Participation banking, then, says Mr. Osman, is a national priority — it is a component of both Turkey’s 10’ Development Plan and the Istanbul International Finance Center (IIFC — a US$5 billion 70 hectare 10-year project) Program Action Plan. Some 40 actions have been identified to build the sector. These include:
– Forming a Supreme Advisory Board for Islamic financial institutions
– Establishing a systematic communication channel between the PATB and the country’s High Board of Religious
– Preparing a document setting out ethical and corporate governance principles
– Studying funding sources that are as yet not available in Turkey
– Conducting a comprehensive promotion campaign to explain the philosophy and applications of the participation/Islamic system
– Enabling selective/mandatory courses in Islamic economics, finance and banking

IMPLEMENTATION OF THE ACTION PLAN will kick  into high gear between 2ø15 and 2018 once the Ministry of Development sets out (in a few months, according to Mr. Osman)  the exact framework for coordination that will involve various 0.00  government agencies. The IIFC Action Plan is hoped to be the tide to raise all boats; it will directly develop participation banks and improve the capacity of the sector. Mr. Osman takes a guarded view for the sake of the development of the Turkish economy: “‘The IIFC will make infrastructure growth and this will promote participation banks to finance and to collect more [funds in deposit] .“ He continues: “‘The investment opportunities, the profitability, the  alternative funding and earning products will make investors consider the Turkish market. Participation banking and finance will have more choices.” He refers to the new Participation Index-30, Model Portfolio and Index 50 introduced by Borsa Istanbul in 2014 and plans in the works to develop a sukuk secondary market to support banks’liquidity management. While the PBAT is optimistic for the expansion of participation banking, Prof. Filiz Bakan Canya, Department Head of the Faculty of Business, Political Science and International Relations at  Izmir University of Economics, doesn’t see the demand adding up. Only a “tiny proportion of Turkish people”, she says, has been attracted to Islamic finance. As to whether Atatürk’s secular republic is experiencing a new wave of Islamic consciousness that could tilt the balance in favour of participation banking, she says: “Yes, Turkish society has become more and more conservative in social life since the rise of the AKP to power in 2002 but even conservative people still prefer conventional tools regarding their economic preferences.”The demand for participation banking has been low considering the first Sharia-compliant financial institution opened its doors in 1983, the same year as Malaysia’s first Islamic bank. It has only been recently that the Turkish government has put its weight behind Islamic finance. The best signal of government intent was in September 2012 when Turkey issued a US$13 billion sukuk. This new wave of government-led certainty and confidence in Islamic finance has been missing in Turkey and breathing   away from decades-long resistance to fully embrace and support Islamic finance will be key to faster and deeper growth of participation banking .

Opportunities In SME financing

If retail demand is still wanting, one area that could better position participation banks towards higher growth to meet national goals is SME financing. In proportion to the size of balance sheets Turkey’s participation banks lead in SME financing. On average participation banks’ percentage of SME financing to their total financing is 40 percent, which is about 15 percent higher than the proportion for conventional commercial banks.

This closeness  to the real sector”, says PBAT’s Secretary—General Mr. Osman, “makes participation banking a real sector banking model” And the sector is hugeln 2012 SMEs made up 998 percent of the total number of enterprises,758 percent of employment, 54.5 percent of wages and salaries, 633 percent of turnover 542 percent of value-added at factor cost and 532 percent of gross investment in tangible goods, according to the Turkish Statistical Institute About 40_4 percent of active SMEs in 2012 were in the Wholesale and Retail Trade and Repair of Motor Vehicles and Motorcycles. Increased SME financing is also hampered by Turkey’s low savings Mr Osman says: “What participation banks collect [in deposits by way of participation funds] they charge to financing, especially SME financing. Savings ratios are low in Turkey. In this regard, there is a need to collect more or bring in funds from abroad”One such source of funds recently arrived from the World Bank. In August 2014 the Bank approved a US$250 million loan to support SMEs in Turkey .The funds will be channelled through the privately-owned Industrial Development Bank of Turkey (TSKB). While US$160 million is earmarked for Islamic financing to SMEs and export-oriented enterprises, the remaining US$90 million will focus on factoring. The World Bank conservatively estimates that over 300 SMEs and more than 30 EOEs will benefit from the financing.

THE WORLD  BANK EXPLAINS THAT the Subsidiary Financing Agreement structure is a wakalah arrangement—the participation bank will act as an agent for TSKB, investing on its behalf and offering a guarantee (kafalah) to pay back TSKB in case the enterprise fails to repayits obligations. Sub-financing is, in turn, expected to be mostly asset-backed using murabahah or Ijarah. Banks have the flexibility to offer risk-sharing instruments such as musharakah and mudarabah. This ‘Innovative Access to Finance’ project is one of the first ever of two loans from the World Bank to support Islamic finance. The other is the ‘Promoting Innovation for Inclusive Financial Access’ in Egypt. A spokesperson for the World Bank says: “With this loan, the WB turned to Islamic finance and factoring as attractive alternatives to mainstream bank finance to enterprises, including by alleviating constraints related to the lack of collateral and credit history. At the same time, the WB recognised that Islamic finance is still a small contributor relative to mainstream banks in Turkey, and that the SMEs sector could benefit from access to longer-term financing through Islamic finance products that is in high demand across Turkey” The loan isn’t the Banks first contribution to Islamic finance inTurkeyThe World Bank Global Islamic Finance Development Center (GIDFC) — which was set up to contribute to the development of Islamic finance through research, training and advisory services to World Bank clients —was established in Istanbul in 2013. While such levels of Islamic financing are channeled to SMEs, still, says Mr. Osman, participation banks must do a lot more to support SMEs succeed in business. What SMEs also need, he says, is help managing their books, accounts, marketing and branding. He believes that as the participation banking sector expands its branch network and customer base that banks will be able to allocate resources to profit from the more valuable and productive areas of SME needs.





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