Turkey’s Islamic banks could continue their recent strong growth if they can cultivate stronger ties with their international owners and create a sustainable brand image, according to Standard & Poor’s Ratings Services’ view.
The country’s Islamic banking sector has grown strongly over the past five years, with total sector assets accounting for about 5% of total system assets as of year-end 2010 compared with 2.8% 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 Sharia-compliant funds; and the creation of a domestic index of Sharia-compliant banks and companies by the Istanbul Stock Exchange.
However, the report added, the sector remains small in a domestic context and in our opinion there is a lack of public awareness of its products. At present, it said, 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 Standard & Poor’s view, include a scarcity of Sharia-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 Sharia-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, in our view, 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% of Kuveyt Türk, Al Baraka Banking Group (BBB-/Negative/A-3) owns 56.6% of Albaraka Türk, and National Commercial Bank (A+/Stable/A-1) owns 64.7% 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.