The future of Islamic banking in Turkey

By bne IntelliNews December 6, 2011

Justin Vela in Istanbul -

Islamic banking in Turkey is on the rise, but the industry's belief it can grab a sizable market share over the coming years is undermined by concerns that slowing economic growth will crimp lenders' ability to generate the necessary income from these Sharia-compliant loans.

Islamic banking had a slow start in a country that claims secularism as its defining doctrine. But these "participation banks," as they're known in Turkey, are today regarded as equivalent to conventional deposit banks and an alternative to conventional banking in these uncertain financial times. "We are not religious or political," Osman Akyuz, general-secretary of the Participation Banks Association of Turkey and former general manager of Albaraka Turk Participation Bank, tells bne. "We are trying to provide banking services to all, though we mainly have Muslim customers."

Currently, Turkey has four Islamic banks: Turkiye Finans, Asya Bank, Kuveyt Turk Participation Bank and Albaraka Turk Participation Bank. These operate alongside 32 conventional banks.

In 2010, the Islamic banks held 5.5% of the country's total deposits (TRY33.8bn), 4.3% of the assets (TRY43.3bn) and 6% of the total loans ( This data excludes deposits from banks, murabaha (a non-interest-bearing loan) and non-performing loans. These figures are significantly up on previous years. The TRY43.3bn in total assets has risen from TRY33.6bn in 2009, while the number of branches have increased to 607 branches from 530 in 2008.

Akyuz expects this growth to continue. He argues that with Islamic banks working on a principle of profit/loss sharing, they are working more closely with their individual customers and are less affected by recessions. In Turkey, Islamic banks are working almost exclusively with the real sector, providing services and financing to customers mainly working in the construction and trade industries looking for capital and loans for equipment. "We are financing production directly," he says. "At the same time, we are providing all banking services to our customers. Credit and ATM cards, letters of guarantee."

As interest is prohibited in Islam, there has traditionally been a large amount of "under the mattress" saving in conservative areas of Anatolia, the region that is Turkey's centre of small business. Since their establishment, Islamic banks have helped draw deposits from more religious Turks, says Akyuz. They have also played an important role in drawing capital from the Gulf region to Turkey, mostly in the form of murabaha syndicated funds, where banks initially purchasing goods or property that are then repurchased with an agreed upon profit for the bank added on. "The performance of the Turkish economy is attractive to Gulf funds," Akyuz says.

While still a small part of the sector, Islamic banks in Turkey are receiving so much attention that Akyuz thinks more are necessary. "Presently, four Islamic banks is not enough for Turkey," he says. "It should be six to seven at the first stage."

The potential of Islamic banking in Turkey makes that certain to happen. In August, Turkey's Adabank was bought by the Dubai unit of Gulf Finance House and Gurmen Group for $75m and is expected to become Turkey's next Islamic bank.

However, Akyuz warns that establishing more Islamic banks won't be plain sailing. "Our banking authority doesn't want newcomers in our banking sector, they are very tough," he says, explaining that the current financial outlook has made Turkey's banking authorities unwilling to license new banks.

"Officially, you need TRY30m as capital, this is what they say on paper," he says. "However, the reality is that the banking authority and government demand [more] capital. This is because of the regulation of the banking sector. The banking authority wants to be strong."


With Islamic banks present in Turkey for nearly 30 years, many wonder why they do not have a larger share of the market. Islamic banking has 38% of the sector in Saudi Arabia, 40% in Brunei, and 21% in Malaysia, according to ArabNews.

The answer lies partly in how institutions in Turkey have long avoided association with anything that had religious overtones for fear of a crackdown by the secular establishment. Critics also say that Islamic banking does not offer adequate services. Mehmet Asutay, an expert in Islamic banking at Durham University, points out that Islamic banking does not very easily allow for short-term loans, such as a five-year mortgage.

With the slowing of the global economy, investors are also concerned that Islamic banks won't be able to generate sufficient income from loans. Turkey's economy is expected to grow only 2.2% in 2012 after the strong 6.6% showing in 2011, according to the International Monetary Fund.

Some have also suggested weaker Turkish banks might need to be recapitalized, though Atilla Yesilada of Global Source Partners, disputes this. "[Banks] are facing challenges. [But] I am not aware of any Turkish bank that is short of capital. I doubt very much if they have any capital problems. Of course, you would never see it on their balance sheets. Banks are solvent until the moment they go bankrupt."

In October, Renaissance Capital predicts that the value of non-performing loans in Turkey will surge 73% in 2012 to 4.1% of total loans. "The surge in percentage terms sounds bad, I agree," says Yesilada. "[However,] they are coming from a low base so they don't endanger bank solvency."

Still, the weaker loan/asset ratios of the Islamic banks - Albaraka Turk has a loan/asset ratio of 77% and Bank Asya's is 76%, compared with 54% for Garanti Bank, the country's largest - and the rise in non-performing loans is reflected in the recent share price performance of Islamic banks. Turkey's two listed Islamic banks, Bank Asya and Albaraka Turk, have lagged the wider sector, gaining 12% and 4.9% respectively since August 10 compared with the 19% gained by the overall banking index.

There is certainly scope for Islamic banking to grow in Turkey. The worry, though, is how profitable it will be.

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