Turkey: Sukuks set to diversify bank funding

A strong performance from Turkey’s banks last year produced a significant rise in total assets and an increase in equity capital, generating impressive growth across the industry. Turkish banks also continued to strengthen their position on the international stage by further diversifying their services, with a number of financial institutions extending their reach into the growing Islamic financial services segment.

The Banking Regulation and Supervision Agency (Bankacılık Düzenleme ve Denetleme Kurumu, BDDK) announced on February 13 that the sector grew 12.6% in 2012. Total assets reached TL1.3bn ($0.72bn), driven largely by growth in the second half of the year, according to Mükim Öztekin, president of the BDDK.

Öztekin told the Economic Journalists’ Association in Ankara in February that sector growth rose from 4.6% in the first six months of 2012 to 7.6% by year-end. Expansion was due to a change in the perceived level of risk in the country, he added, together with an acceleration of capital inflow, decreasing interest rates and the overall economic growth trend.

According to BDDK, sector profits hit TL23.6bn ($13.10bn) in 2012, up 19.2% on the TL3.8bn ($2.11bn) posted the previous year. Equity capital, meanwhile, increased by 26% to reach TL182bn ($101.13bn).

Turkey’s financial institutions are also accessing funding from a wider range of lenders, in line with a move to diversify their interests and offerings. The amount of money Turkish banks borrowed from European institutions dropped from 50% in 2010 to 35% in 2012, while lending from financial institutions in the Gulf states, Japan and Switzerland increased.

While conventional banking assets and profits are growing at a steady pace, the Islamic finance segment has been earmarked as the industry’s next big growth story.

The launch of Turkey’s first sovereign sukuk, or Islamic bond, in September signalled a milestone for the banking sector, marking the first time the government had shown major support for the sharia-compliant financial services industry. The $1.5bn bond also laid the groundwork for Turkey to move into mainstream Islamic finance and attract investment from around the globe.

Turkey has four Islamic banks, which are referred to as “participation banks” due to political sensitivities arising from strong secular sentiment within the country. Before 2010, no legal framework existed for the issue of sukuks, known locally as “leasing certificates”. The issue of sharia-compliant bonds was legalised in April 2010, supported by the amendment of tax laws in 2011, which allowed sukuks to be exempt from some taxes. The regulatory changes are widely viewed as a positive development that will pave the way for Turkey to significantly expand its Islamic financial services industry.

Turkey launched a second, lira-dominated sovereign sukuk in early October, which raised TL1.6bn ($0.89bn) and was oversubscribed two-fold, according to the Undersecretariat of the Treasury.

Before the sovereign sukuks were launched in 2012, only two sharia-compliant bonds had been issued in the country. The bonds, which were launched in August 2010 and October 2011 by Kuveyt Türk, the Turkish arm of Kuwait Finance House, raised a total of $450m.

The sukuk market looks set for further growth, following the news that two of Turkey’s other participation banks intend to issue Islamic bonds. Bank Asya said in December that it planned a TL100m-150m ($55.52m $83.28m) lira sukuk issue, along with a $200m-300m dollar-denominated sukuk issue, in the coming months. Bank Albaraka’s sukuk issue, worth $200m, is in the pipeline.

Turkish financial institutions may also decide to explore the potential of subordinated sukuks, which could help to meet growing investor demand and improve capital adequacy ratios. Ibrahim Öğüdücü, the head of financial institutions at Bank Asya, told Reuters in February that longer-tenure subordinated sukuks would serve to diversify banks’ funding sources, while also balancing mismatches between liabilities and assets.

There would also be benefits outside the banking sector. “One benefit from an increase in private sector sukuk issuances would be that more liquidity would flow to project financing, and to infrastructure and superstructure privatisations,” Resat Karabiyik, managing director of Bizim Securities, told OBG. “This is important given the country’s ambitious infrastructure and business development goals.”

Changes to finance and tax laws, together with the subsequent launch of sukuks by both the Turkish Treasury and independent financial institutions, have opened the door for increased investment from the $1.5trn global Islamic financial services sector. In particular, the industry will be hoping to generate added interest from Gulf investors who have already begun eyeing the country’s market.

“Over the past few years, Turkey’s soft power has increased in the Middle East, and more and more visitors from the region have come here as tourists,” Nezih Akalan, the chief representative at the Turkish representative office of Qatar-based Doha Bank, told OBG. “This has made Arab investors more interested in Turkey as a place to invest and do business – a trend that local policy makers should capitalise on by offering more tailor-made investment products in growth industries such as agriculture, real estate, energy, health, and tourism.”