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Islamic finance assets reach almost $50b in ’13

According to a newly released report “Participation Finance in Turkey 2014” by Kuwait Finance House Research Limited (KFHR), Turkey is the seventh largest domicile for Islamic finance assets with almost USD50bln in participation finance assets as at end-2013. Turkey is rapidly emerging as a major player in the global economic landscape and has introduced a number of initiatives to boost its financial markets. In recent years, Turkey has enhanced its economic and financial ties with the GCC, Asia and other emerging OIC member countries in order to diversify its trade and financial linkages. In this process, Turkey has also intensified efforts in developing the participation finance sector (Islamic finance is known as participation finance in Turkey) as it will serve to improve financial linkages with the oil-rich GCC and other emerging OIC countries which are domiciles of abundant Shari’a compliant liquidity.

Over the past few years, Turkish authorities have been proactive in introducing a number of amendments to the country’s legal structures in order to accommodate and develop the participation finance sector. Turkey’s economic development plan 2007-2013 has given reference to ‘asset-based’ and ‘interest-free’ financial instruments as part of efforts to develop the country into a regional financial centre.

Furthermore, these developments would also further support Turkey’s ambition to turn its cultural capital city of Istanbul into a major financial centre.  The government has included the project “Istanbul International Financial Centre” in its Ninth Development Plan covering 2007-2013, where more than USD350bln worth of infrastructure spending on projects over the coming decade.
The Turkish participation banking sector is rapidly emerging as a frontrunner in the global Islamic banking industry and is the seventh major domicile in terms of assets. The participation banking asset growth has consistently outperformed that of conventional asset growth. Participation banking assets grew by 392.8% (or at a compounded annual growth rate (CAGR) of 30.5% per annum) between 2007 and 2013, reaching TRY96.1bln as at end-2013.

In comparison, conventional banking assets expanded by 176.7% (or CAGR of 18.5%) between 2007 and 2013.  As at end-2013, there were a total of 961 participation banking branches in the country, an increase from 825 branches as at end-2012. The number of staff employed totalled 16,747, up from 15,324 in 2012. Key growth drivers for participation banks include huge retail base, low participation banking penetration rate as well as attractive product innovation that continues to attract new customers.
As at end 2013, participation banking assets formed 5.80% market share of the overall banking system total assets (end-2007: 3.34%). Furthermore, the participation banking assets expanded by 36.72% y-o-y as at end-2013, outperforming the growth in the conventional banking assets of 25.8% during the same year.

Sukuks (or participation certificates / lease certificates as they are known in Turkey) have also gained considerable interest in the Turkish capital markets following the issuance of country’s first sovereign sukuk in September 2012. As at end-2013, the volume of Turkish sukuks outstanding amounted over USD5bln, reflecting a CAGR of 276.3% between 2010 and 2013. The inaugural USD1.5bln sovereign sukuk gave a clear signal to investors of the country’s commitment in tapping into the Shari’a compliant funds market. In June 2013, Turkish authorities introduced new legislative changes concerning sukuk through a new communiqué published on the Official Gazette dated the 7th June 2013 and numbered 28670. This communiqué introduced new lease certificates to the Turkish Islamic finance market. These new regulations would enable sukuks to be structured based on most Shari’a principles including Istisna, Murabaha, Mudaraba, Musharaka and Wakala.

On the Islamic funds front, Turkish participation banks were one of the first to develop Shari’a compliant commodity funds that provided direct exposure to investors to commodities such as gold and silver. For instance, Kuveyt Turk Participation Bank offers two Shari’a compliant commodity funds:
 

Kuveyt Turk Participation Bank B Type Gold ETF (Gold Plus)
* The first Gold ETF issued by Kuveyt Turk Participation Bank
* Based on 100% physical gold spot market, no leverages, no futures and options
* Fund shares are traded in Istanbul Stock Exchange
* The physical standard bullion held by fund portfolio is in the custody of Istanbul Gold Exchange on the behalf of fund
 

Kuveyt Turk Participation Bank Silver Type B ETF (Silver Plus)
* Started to be traded since May 2012 in Istanbul Stock Exchange
* The index is based on the international silver price
Turkey offers huge potential for Islamic finance to grow. It offers strong growth prospects for Islamic financial markets in various sectors such as retail, SMEs, trade finance, wealth management and project finance. The Turkish participation banking sector is expected to almost triple in the next 10 years with assets estimated to exceed USD100bln by 2023. The sector has progressed tremendously since its commencement during the 1980s. The firm support by the government in the last six years to expand the sector provides ample opportunities for Turkish participation banks to expand their market share. Given the growing trade and financial relationships between Turkey and the oil-rich GCC and other emerging OIC countries, Turkish participation banks have strong growth prospects in various sectors including trade finance, syndicated finance, project and SME financing and also in providing Shari’a compliant wealth management solutions.
 

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