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.
