ISTANBUL: When Turkish Prime Minister Tayyip Erdogan came to power a decade ago it would have been almost unthinkable for his government to issue an Islamic bond, given accusations it was seeking to erode Turkey’s secular status.
Now, as it seeks to boost political and commercial ties with the Gulf and diversify its borrowing, one of the Muslim world’s most dynamic economies is developing an Islamic finance industry which could rival current volumes in Malaysia — the world’s top sukuk issuer — within 10 years.
Turkey has a strong secular identity. Its Islamic banks are known locally as participation banks, in part reflecting public sensitivities. But nervousness about Islamic finance has eased in recent years, helped by growth of the sector in Western economies.
Just over a year after its debut dollar-denominated sukuk issue, Turkey’s Capital Markets Board is finalising regulations on five new types of Islamic bonds as the country aims to become a major issuer of Islamic debt.
The new rules, which were sent to Erdogan’s office for approval this week, will allow Turkish corporates and banks, as well as the Treasury, to issue the world’s most widely used types of sukuk, giving them access to a wider pool of investors via a global market estimated at more than $100bn.
“Islamic finance is just like halal food, there may be two reasons to choose it,” said Mustafa Cetin, head of financial institutions at the Turkish arm of Bahrain-based Islamic lender Al Baraka.
“Either you prefer interest-free products or you find the cost of borrowing, the taste, attractive.”
Unlike the oil-fuelled economies of the Gulf, whose Islamic debt issuance is primarily sovereign, Turkey has a powerful private sector which is increasingly eager to finance international projects using sharia-compliant products.
As part of plans to celebrate the 100th anniversary of the founding of the modern republic in 2023, Turkey aims to turn its economic and cultural capital Istanbul into a major financial centre. It foresees $350bn of infrastructure spending on the project, with Islamic finance expected to be one of the major sources.
Construction company Agaoglu, which will build the Istanbul Finance Center, has said it plans to borrow $2bn through sharia-compliant instruments, topping the total value of Turkey’s existing sovereign dollar sukuk issuance.
Turkey’s Islamic lenders have enjoyed rapid growth in recent years but remain a small part of the banking system.
The share of participation banks has risen to six percent of total banking assets from two percent a decade ago, when Erdogan’s Justice and Development (AK) Party first came to power.
As part of efforts to develop the sector, the government wants to see that share increase to 15 percent over the next decade and is determined to support this through regulation, as well as by encouraging unbanked rural residents to open accounts with Islamic lenders.
“Turkey’s 2023 financial services vision could see the Islamic banking industry tripling in size to more than $100bn, approximately where Malaysia is today,” accounting firm Ernst & Young said in its latest World Islamic Bank report.
Turkey’s two largest state-run banks, Ziraat and Halkbank , look set to help achieve that target, with both about to establish their own participation banks.
Turkey’s Islamic banking sector may be small given the country’s population of 76 million is 99 percent Muslim, but its conventional capital markets are much more developed than many other Muslim nations.
Reuters
