Turkey's government seeks to develop takaful insurance by launching state-owned Islamic banks

Sharia-compliant insurance, or takaful, is set to grow in Turkey, with its predominantly Muslim population showing increasing interest in Islamic finance products and the government keen to support their growth. Insurance of any kind can be a hard sell in Turkey, with the population generally averse to insurance cover and penetration levels as low as 1.4%, according to some estimates. Takaful also has a minimal profile in the Turkish market at present. The two firms that offer Islamic insurance products, Neova Sigorta and Asya Emeklilik, account for less than 0.5% of the insurance sector’s assets, which stood at an overall TL24.2bn (€8.5bn) in 2013, according to official data. However, the increasing success of Islamic banks could point to a market opening for takaful underwriters.

Turkey’s four functioning Islamic banks, known as “participation banks”, have posted strong asset growth since 2005, with their holdings now accounting for around 5% of the $811bn of sector assets in August 2014 and consultancy firm EY has identified Turkey as a new market for sharia-compliant insurance. In the “Global Takaful Insights 2014” report, released in September 2014 the market dynamics of Turkey’s takaful segment were noted as gaining traction thanks to the establishment of new participation banks.

Government Support

With the government announcing plans to launch three state-owned Islamic banks as subsidiaries of the state-run conventional banks, Ziraat Bank, Halkbank and VakıfBank, by the end of 2015, it is expected that greater depth will be added to Islamic finance. This, in turn, may encourage new entrants and broaden the product base to include takaful options. The EY report explained that the state is poised to offer long-term help. “The Turkish government’s aim to triple the share of Islamic banking assets in the country by 2023 with the help of state-owned participation banks and incoming players will help support the gradual growth of Turkey’s takaful industry.”

Slow Take-Off

Even though Turkey’s large and relatively young population offers a potentially lucrative market for takaful underwriters, EY suggests a number of hurdles have to be removed before such products could take off, with supply side constraints and a limited legal infrastructure for Islamic finance currently hindering growth. Challenges for Turkey’s takaful market also include a fragmented market which lacks the pricing power and tough competition among insurers at the lower end of the market,” EY noted.

Another study prepared by the General Council for Islamic Banks and Financial Institutions (CIBFI) and Thomson Reuters, agreed on Turkey’s developing potential as a takaful market. In its survey, up to 38% of respondents expressed some interest in participation banking, with 10% saying they would definitely be interested. The study, “Turkey Participation Finance Report 2014”, said while 10% was a low figure it nonetheless indicated market potential for takaful service providers.

“The government and industry are working to create more universal standards, but this is not easy to accomplish and will take time,” Re şat Karabıyık, the general manager of BMD Securities, told OBG. “That said, the recent establishment of the Global Center for Islamic Finance by the World Bank and IFC is a step in the right direction. Two state banks are also expected to enter the space sometime in 2015, which will help to focus the efforts on creating more standardised rules.”

Personnel Gap

Specialist training for staff is an area highlighted by the CIBFI report as necessary for the development of a strong Islamic financial market in Turkey, which requires the establishment of dedicated study programmes at universities. This personnel gap could be bridged through proposals such as the establishment of an Islamic university. The government announced plans in October 2014 to develop Istanbul’s May 29 University into an international Islamic university. Advanced courses in Islamic finance could help deepen knowledge and understanding on subjects such as takaful insurance. Another boost may come if the government includes takaful options in compulsory schemes like automotive or catastrophe insurance.