International links to boost Turkey’s Islamic banks?
Such relationships, are beneficial, and may help to spread common practices through which the Turkish Islamic banking sector may reach a new level of maturity
Turkey’s Islamic banking sector has grown strongly over the past five years, with total sector assets accounting for about five percent of total system assets as of year-end 2010 compared with 2.8 percent five years earlier. Other developments in this sector over the past 18 months have included; A law conferring tax neutrality on Sukuk products; A $100 million debut Sukuk by Kuveyt Türk (not rated); the launch of several Shari’ah-compliant funds; and The creation of a domestic index of Shari’ah-compliant banks and companies by the Istanbul Stock Exchange.
However, the sector remains small in a domestic context and, S&P believes, suffers a lack of public awareness of its products. At present, there are only four players, namely Bank Asya (not rated), Albaraka Turk (BB/Negative/B), Türkiye Finans (not rated), and Kuveyt Türk--in descending order of asset size as of year-end 2010.
Additional drawbacks, in S&P's view, include a scarcity of Shari’ah-compliant domestic investable asset classes, as well as no near-term likelihood of sovereign Sukuk issuance. Moreover there are few options for Islamic banks to access liquidity at the central bank. Specifically, there is no Shari’ah-compliant mechanism replicating the repurchase agreements routinely available to conventional banks, as is increasingly the case in some Gulf countries.
"In our opinion, the Turkish Islamic banking industry has reached a stage at which it will be increasingly difficult to rely on its own momentum to sustain growth," said Standard & Poor's credit analyst Paul-Henri Pruvost."We believe that a global Islamic banking template would give Islamic banks in their respective domestic markets a chance of greater success. This would, for instance, require a basic set of commonly agreed standardized products to smooth out operational differences, central bank liquidity mechanisms, and reporting and regulatory requirements."
One route to such a global template could lie in stronger ties between domestic players and their larger, foreign parents. Already three of Turkey's four Islamic banks have large and well-respected Islamic banks as majority shareholders. Kuwait Finance House (A-/Negative/A-2) owns 62.0 percent of Kuveyt Türk, Al Baraka Banking Group (BBB-/Negative/A-3) owns 56.6 percent of Albaraka Türk, and National Commercial Bank (A+/Stable/A-1) owns 64.7 percent of Türkiye Finans.
"Such relationships, in our view, are beneficial, and may help to spread common practices through which the Turkish Islamic banking sector may reach a new level of maturity," said Pruvost.
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