October 30, 2013 / 7:06 AM / 4 years ago

Turkey's Islamic finance sector set for makeover -study

Oct 30 (Reuters) - Turkey's Islamic finance industry is being reshaped as banks widen their product range and new competitors prepare to enter the market, according to a Thomson Reuters study released on Wednesday.

Promoting Islamic finance in Turkey, the world's 17th largest economy with a predominantly Muslim population of 76 million, is part of government plans to boost commercial ties with the Gulf and diversify the country's investor base.

Turkey's Islamic banks, known locally as participation banks because of political sensitivies in the constitutionally secular country, have seen their assets grow six-fold over the last decade as their combined branch network has more than tripled.

Last year Islamic banks reached a combined $36 billion in assets, representing a 5 percent share of total banking assets. This was a 25 percent rise from a year earlier, compared to 13 percent growth for conventional banks.

The study estimates Islamic bank assets could reach between $80 billion and $120 billion by 2017; the lower estimate would give them a 9 percent share of total banking assets, on track to meet a government target of 15 percent by 2023.

For this to occur, however, the industry will need to do more to educate customers, the study said. A nationwide poll of 2,759 Turks conducted for the study found that 41 percent said better education about Islamic finance was needed. Among existing Islamic bank customers, 39 percent said they had little understanding of industry concepts.

Still, 38 percent of conventional bank customers would consider switching to Islamic banks, which follow religious principles such as a ban on interest payments, the study found. Of those interested in Islamic banking, a third would consider switching even if their capital was not guaranteed.

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For Islamic finance to develop, banks and companies would also need to take advantage of new rules that facilitate issuance of various types of Islamic bonds. So far, sukuk issuance has been limited to the government and Islamic banks; the country has yet to see its first corporate issuer.

Growth in issuance may depend partly on whether a sukuk structure known as istisna, commonly used in project financing, is added to rules set by Turkey's Capital Markets Board (CMB). The study quoted the CMB as saying it was considering whether to add istisna, but felt Islamic banks were unfamiliar with the structure and expected most would use ijara, a leasing contract.

"If the market really advances and we see project finance deals, then that will be really helpful," the study quoted Is Investments, the investment banking arm of Isbank, as saying.

In March, Deputy Prime Minister Ali Babacan said two state-owned banks might offer Islamic services, a move which could increase the sector's market share but also dent profitability because of the additional competition.

The country now has 50 banks, four of which are Islamic: Al Baraka Turk, Bank Asya, Turkiye Finans and Kuveyt Turk, 62 percent owned by Kuwait Finance House.

"We may see a surge in interest in the short term due to the entrance of the two state-owned banks, but then again, some existing participation banks may lose some of their customer base," the study quoted Al Baraka Turk as saying.

The state-backed lenders, which have not been officially identified, would have to establish Islamic operations that were separate from the parent banks since Islamic windows are not allowed in Turkey.

"There are two more banks that are planning to establish separate subsidiaries for Islamic banking," the study quoted the Banking Regulation and Supervision Agency as saying. The agency did not elaborate.

In recent years, Turkish regulators have been cautious about allowing new entrants into the banking industry. The sector expanded aggressively during the 1980s and 1990s, peaking at 79 banks by the end of 2000, but a banking crisis eventually led to the closure of 30 of them. (Editing by Andrew Torchia)

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