Secular Turkey sees boom in Islamic finance

By bne IntelliNews January 25, 2007

Nicholas Birch in Istanbul -

The market for sharia-compliant murabaha loans is booming in Turkey, as Gulf banks whose relations with the West have soured since 9/11 look closer to home to make profits.

On January 10, Turkiye Finans Bankasi secured €50m off a consortium of 10 international banks active in the interest-free financing sector, which typically operates by a syndicate of lenders buying an item for the client and then selling on that item at an agreed profit. Turkiye Finans Bankas will pay back the sum - plus a profit margin of euribor plus 0.75% - this time next year, terms that analysts say are probably the best ever for a Turkish murabaha.

On December 19, management at the Islamic bank Kuveyt Turk hired rooms at Istanbul’s swankiest hotel, the Ciragan Palace, to announce the clinching of the bank’s $200m two-year murabaha.

Murabaha made up a third of HSBC's $1.2bn total syndicated loans in Turkey last year (excluding regular syndicated loans). The Turkish market leader in such syndicated loans, HSBC has seven more murabaha mandates from borrowers in the offing.

"Our pipeline is full too," says a Deutsche Bank financier who was involved in the Kuveyt Turk deal. "The Turkish market is no longer the preserve of a select few financing institutions."

Adnan Yousef, CEO of Albaraka, a Bahrain-based bank, agrees. "Turkey has always been an important market for Gulf investors," he says. "But in the past only the big players invested. Now everybody is interested."

It’s an increasingly close relationship that worries some in Turkey, with its mainly Muslim population and staunchly secular state.

Unsurprisingly for a country that set its heart on the West over 150 years ago, trade here has always been heavily weighted westwards, with around 70% of exports going to EU countries. And just as Turkey’s founders saw the Middle East as a morass of religious ignorance, so some Turks today believe that investments from their Muslim neighbours carry a potential Islamic threat to their secular system.

"Green capital," as Turks call investment from the Middle East, has been a particular issue since the 2002 elections brought a party with its roots in political Islam to power.

Sure enough, the most recent beneficiaries of murabaha are the kind of institutions that set the more hidebound Turkish secularists’ teeth on edge. Both Turkiye Finans and Kuveyt Turk are sharia-compliant banks, half of a four-strong market (less than 3% of the total banking market in asset terms) that makes no bones about targeting more religious-minded clients.

But the interesting thing about murabaha in Turkey is that it’s not just conservative-minded institutions that are showing an interest.

Take Boyner Holding, the country’s biggest non-food retailing group, which has secured $80m in murabaha over the past two years, and is currently looking to get more from an ABN Amro-led consortium. When its CEO, Cem Boyner, stood in elections in the early 1990s, his new party had by far the most liberal political programme in Turkey’s history. Beloved of Istanbul’s westernised intelligentsia, he got less than 1% of the vote.

"We chose murabaha because the terms were good compared to bank rates here," says Umit Boyner, Cem’s US-educated banker wife and company CFO. "There’s nothing Islamic about it – it’s just a fixed-rate loan."

You can see her point. Borrowing off the Turkish lira market would cost 21% in interest plus an extra 2 or 3 percentage points in risk premiums, analysts say. Boyner’s murabaha, meanwhile, came at libor plus 3%, which is a 10-percentage-point-plus saving, although at the expense of an unhedged foreign currency position.

Some analysts point to mobile firm Turkcell and the airport operator TAV as evidence that some companies use murabaha as more a gesture toward their more religiously-inclined neighbours. If so, the ploy didn’t succeed in Iran, where both companies’ ventures fell through. But TAV’s ventures in Egypt, Qatar and UAE have been more successful, and Turkcell’s appetite for regional expansion remains undimmed, with a third GSM licence tender in Saudi Arabia in the works.

A structured finance manager at HSBC, Sinan Artar, agrees with Umit Boyner that murabaha loans serve an important financial need. "Capital is short in Turkey," he says. "Companies borrow from conventional local banks, and they borrow from international banks. Now they have the added option of borrowing from Gulf banks too."

Taking a cut from the cash flow

Yet Turkish sensitivities over secularism have played a part in blocking a potentially much more lucrative part of the Islamic banking market – sukuk alijara. A series of recent mega-deals, like the $3.5bn Dubai World and Nakheel PSJC deal last year, have made this relatively recent instrument – in which investors buy a share of an asset and take a cut of its cash flow - the rising star of an Islamic finance market worth more than $300bn globally.

Analysts say that theoretically, and under a less Islamic-sounding name, sukuk would probably be just about feasible under present Turkish law.

The problem is that sukuk deals involve an essentially symbolic transfer of property, with finance providers "buying" the asset whose cash returns they will receive a part of. Under Turkish law, you either buy or you don’t – there is no symbolic half-way point. And if you buy, your tax bill is astronomical.

Conventional and interest-free banks in Turkey began lobbying to change the law over this back in 2002, and received a positive response from the government. And by 2005, the draft bill was ready.

"We timed it perfectly", says Osman Akyuz, head of the Turkish Participation Banks Association, referring to the three-fold rise in petrol prices that had enriched Gulf investors to an estimated tune of $200bn in the previous 18 months.

Since then, however, the government has sat on the bill, and officials and bankers complain there is no change of it being passed soon.

Omer Bolat, chairman of MUSIAD, a business association strong in the rising industrial centres of socially conservative Anatolia, blames the delay on a secular-minded business community keen to guard the status quo. "The big [Istanbul-based] conglomerates don’t want the newcomers to get their slice of the cake," he believes.

Less ideologically minded bankers argue that the issue is highly sensitive, particularly in an election year. "Pass this law, and you’re bound to get some newspapers saying you’re selling Turkey’s motorways to the Arabs," one banker says.

These bankers generally believe the delay has a lot more to do with Turkey’s changing economic fortunes. Tapping only conventional markets, Turkey has improved its debt profile infinitely over the past five years, HSBC’s Artar explains. ‘Why risk negative publicity when you don’t even need funding through sukuk?"

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