euromoney - islamic private banking

1. Bener Law Office is a full service Turkish law
firm with a strong international practice. Our
results oriented team of lawyers provides
international quality counsel to both
businesses and individuals across a diverse
practice area.
We are committed to serving our clients’ needs
by providing not only advisory and
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We provide high caliber legal services with our
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support staff in; Turkish, English, German,
French, Italian and Spanish. Islamic Banking in Turkey: Istanbul Financial
Bener Law Office Centre plans further expansion
Yapi Kredi Plaza C Blok Kat 4
Paul WOUTERS
34330 Istanbul – Turkey
Bener Law Office – Istanbul Turkey
Tel + 90 212 270 70 50
Fax + 90 212 270 68 65
Email info@bener.av.tr – Istanbul Turkey Investment Banking - Emerging Trends,
Islamic
Website www.bener.av.tr Developments and Opportunities, 2010, Euromoney Books
Reprinted with permission www.euromoneybooks.com

2. Islamic Banking in Turkey:
The Istanbul Financial Centre plans further
expansion
Paul WOUTERS
Bener Law Office – Istanbul Turkey
The Author
From origin a Belgian lawyer
specialized in international financial
regulations and corporate consulting, Compared to other countries with a major Muslim population, Turkey has long been
Paul WOUTERS has been resident in keeping a low profile regarding Islamic banking. This is quite surprising if we
Istanbul-Turkey for years, where he is consider that all four Turkish participation banks are ranked amongst the top 65 of
counsel to Bener Law Office. the 500 biggest Islamic Financial Institutions in the world, according to a survey
conducted by The Banker FT (TOP 500 Islamic Financial Institutions – Supplement
Focussing on Islamic finance and November 2009). So we will use this chapter to find out how Islamic finance has
contract law, he has introductions prospered in Turkey and how it is likely to evolve in the near future.
from the GCC over Turkey to South
East Asia. Paul is amongst others Currently, 23 Turkish companies are amongst the Top 100 biggest companies in the
Member of the Advisory Board of Islamic world (Source: Dinar Standard 2009). Such a strong position in the Islamic
Islamic Finance News and consults, economic landscape should have a bearing on the country’s Islamic financial
lectures and writes on ethical and landscape too. However, activities in this area appear hardly visible. This is probably
legal aspects with respect to the due to the fact that Turkey wants to be perceived as a secular country and more
Islamic finance sector. specifically due to the enactment of the basic regulations - back in 1983 - since
when both the Islamic finance industry, and their products bear secular names.
Consequently, the growth of Islamic finance was stalled somewhat in the country.
He can be reached at Bener Law Office
or at pwouters.law@gmail.com
Indeed, at the very beginning, the Special Finance Houses (term given to modern-
day Participation Banks) were designed to attract investments from the Gulf
Cooperation Council (GCC). The fact that those countries had a different ethical
approach to finance was never really highlighted. The term “Islamic bank” was
never used and there was never any mention of their faith-based ethical
foundations. Today still, the Participation Banks are not allowed to have a Shariah
Board to review the products’ compliance. And their product names do not bear
any religious connotations. Instead of being called “Islamic” or “Shariah-compliant”,
products are called “special current accounts”, “participation accounts”,
“participation funds” etc.

3. Despite the new Banking Law of 2005 – when Islamic banks got fully incorporated in The lack of sufficient tax-relief measures and the absence of good money market
the regular Turkish banking framework – the Islamic or alternative offering of the instruments hindered the Participation Banks substantially. This is not to mention
Participation Banks (former “special finance houses”) still cannot really be any proper Takaful regulation, which is non-existent and should allow the Islamic
distinguished from conventional finance’s products. Anyone could walk by a insurance sector to develop alongside other investment products. The recent
Participation Bank without noticing any real difference with the conventional bank. launch of Neova (KFH-group) only emphasizes the existing needs in the Turkish
markets.
It is just recently and with respect to the plans for “Istanbul Financial Center” that
the Turkish authorities sweetened the usually staunch secular position and finally However, Islamic institutions flourished, due to the products’ appeal with the
gave the sector its rightful place. For example, during a Seminar jointly organized by Turkish population, 99 % of which is Muslim. This is a substantial basis for “interest
the IFSB, The World Bank, The Islamic Development Bank and The Institute of free banking” which directly supports the real economy as opposed to synthetic
International Finance, Durmuş Yilmaz, Governor of the Turkish Central Bank said in lending practices of the Turkish deposit banks. Furthermore, in difficult times –
his “Islamic finance: during and after the global financial crisis” speech: such as the 2001 financial crisis in Turkey – the Participation Banks also stood by
their clients by extending special payment facilities. And the rate of loans over
“In the Turkish context, the Islamic finance practices are embodied in a uniquely collected deposits as maintained for several years now, shows the direct return of
defined compartment of the banking system. These banks are called as the funds invested by the public into the real economy. The average Turkish client sees
“participation banks” in Turkey and they constitute an integral part of the Turkish the positive impact on his or her daily life more from the Participation Banks’
banking system… actions than from the conventional banks’.
Participation banks are authorized … to collect funds … under the ‘profit and loss
participation accounts’ and the ‘special current accounts’. The profit and loss Turkish Islamic banking - though already financially healthy - consolidated after the
participation accounts are essentially a version of the Islamic financial instrument, 2001 financial crisis, resulting in four fully-fledged, Islamic banks, which are today
where the bank utilizes the funds deposited by account holders to fund specific operating on a large enough scale to be competitive and profitable.
business activities. Any profits earned are shared between the account holder and
the bank, in proportion to an agreed ratio. Since 2001, the banks have been expanding their branch networks, human
Participation banks in Turkey mainly offer two types of lending. The first type of resources and IT capabilities with astonishing strategic hindsight. They are fully
financing is Murabaha …The second type … is financial leasing or Ijara, with terms equipped to face international competition.
similar to those offered by other leasing companies.
Participation banks …have been expanding rapidly in recent years. The share of At present, three out of four Turkish Participation Banks have a GCC-based
participation banks’ assets in total banking sector rose from 1.9 percent in end-2002 reference controlling shareholder : Albaraka Turk (public listed – part of the Bahrain
to 3.7 percent in end-2008. They have provided finance to mainly small and medium based Albaraka Banking Group), Kuveyt Turk (part of Kuwait Finance House based in
size dynamic firms.” Kuwait) and Turkiye Finans (part of the KSA based National Commercial Bank). Only
Bank Asya is a fully Turkish-controlled Participation Bank and it is also publicly listed
However, there is still no specific regulation allowing the issuance of Sukuk, though on the Istanbul Stock Exchange.
there have been talks of the launch of a Sukuk Ijarah for some years now. Only in
2009, a first attempt to issue Revenue Indexed Bonds with a three-year maturity For years now, the Turkish Participation Banks have outperformed their
was made. The bonds were aimed towards investors from the GCC but were conventional counterparts (Deposit Banks) in terms of asset growth, deposits
relatively under-promoted and insufficiently packaged to attract the anticipated attracted and loans extended. Together with the measures just announced for the
attention there. However, they allowed the local Participation Banks to place some Istanbul Financial Center, Islamic banking comes to its own and the forecast that
of their excess liquidity in negotiable (Istanbul Stock Exchange ISE) instruments. predicts a doubling of the market presence in five to seven years should be realistic.
Investment accounts are usually managed on a Mudarabah basis. Murabaha and A further liberalization would allow conventional banks to enter the market
Ijarah are the two core lending products and Musharaka financing is still marginal. segment, which would enable the sector to come to its true potential. And right
now, the market braces itself for the introduction of an eventual fifth Islamic player.

4. Ratio loans on deposits Growth rate Participation Banks
Participation Banks / Deposit Banks and share in Turkish Banking Sector
120
103103
100 93 88 93 94
75 82 75 81 78
80 66 67
59
60 50 56 47
39 40 42
40
20
0
Source : Participation Banks Association Turkey (Aug 2009)
Source : Participation Banks Association Turkey (March 2009)
Whilst there is no specific regulation for Islamic Investment Banking, Takaful and
Sukuk, Islamic banking has mostly thrived on financing for all Small- and Medium-
sized Enterprises (usually through Murabaha and Ijarah-type of contracts) as well as
Personnel and Branches Network
imports and exports financing. The bigger “landmark” finance transactions usually Participation Banks
are structured using revolving Murabaha syndications with maturity periods of up Albaraka Bank Kuveyt Turk.
to three years, but rarely longer). Due to tax reasons, some transactions were Personnel Turk Asya Turk Finans Total
funded through off shore investments or used international structures. All Islamic
finance stakeholders are today eagerly awaiting new regulations to widen the 2009 / Q 4 1,935 4.074 2,447 3,346 11,802
industry’s scope.
Albaraka Bank Kuveyt Turk.
Over the last 10 years or so, a small group of mostly Gulf-based Islamic investors Branches Turk Asya Turk Finans Total
and finance houses has established itself and have started to play a small role on
the Turkish financial stage. Despite their introduction on the Turkish market, they 2009 / Q 4 101 158 121 178 558
usually prefer to work in the background and without too much publicity. Deals are
not reported upon and this is particularly the case when they are closed through
Source : Participation Banks Association Turkey (Jan 2010)
the foreign headquarter or its’ branches based overseas. However, South East Asian
financial institutions and investors are still absent from the Turkish financial land-

5. scape, but there is high hope they soon will have their place. Indeed, the Key figures Turkish Participation Banks on Sector
internationalisation of the Malaysian Islamic finance industry for example is
interpreted as a very positive sign for an imminent involvement.
in ASSET in DEPOSITS in LOANS
VOLUME VOLUME VOLUME
Relative Market Share BANKS #
Participation Banks / Sector Mio TL RATIO Mio TL RATIO Mio TL RATIO
Funds collected Loans Extended
Assets
Particip.Banks 4 31,825 4.0 24,925 5.0 23,190 5.8
2001 % 1.13 % 1.28 % 2.08
2002 % 1.91 % 2.20 % 4.01 Deposit.Banks 32 740,962 93.4 472,796 95.0 364,075 90.7
2003 % 2.01 % 2.71 % 5.88
2004 % 2.34 % 3.04 % 5.16
2005 % 2.54 % 3.33 % 4.89 Dev.&Inv.Banks 13 25,760 2.6 0 0 14,208 3.5
2006 % 2.84 % 3.47 % 4.80
2007 % 3.46 % 4.02 % 5.39
2008 Total 49 798,047 100 497,721 100 401,473 100
% 3.69 % 4.15 % 5.18
2009 / Q 3 % 4.11 % 5.01 % 5.99
Source : Participation Banks Association Turkey (Volume of the Turkish Banking Sector 2009 Q 3)
Source : Participation Banks Association Turkey ( 2009 / Q 3)
The brand new “Strategy and Action Plan for Istanbul International Financial Center
Preparing for a new phase (IFC-Istanbul)”is the long awaited outcome, resulting from the “Istanbul
International Financial Centre - Feasibility Study” of October 2007. The Strategy and
As we have seen, the Turkish Participation Banks’ assets have tripled in volume Action Plan (SAP) focuses on the education of local human resources (both in
(from 1.13% to 3.87% of the total financial assets of the country in the past eight language skills and financial know-how) as well as on the opening of the borders to
years) compared to the relatively slow growth of the conventional sector. Some the much-needed foreign expertise. Also on the agenda of this ambitious plan are:
conventional banks have cast a very interested eye on the growing market potential the introduction of new financial instruments and of the necessary market
and have carried transactions for overseas contacts where they were not hindered structures as well as the expertise which will be brought by international financial
by regulatory constraints. institutions.
After the representative office in Kazakhstan, Kuveyt Turk just recently obtained The Turkish Participation Banks Association is fully recognized as a participant in the
Dubai and German Islamic Banking licenses, apparently working on the North-South process, especially as a consultant on the following Action Items (quoted from the
axis as a complement to the global KFH-strategy. Bank Asya got active in North SAP):
Africa and reaches towards India and Malaysia, following the East-West axis. The
internationalization of Turkish Participation Banking inaugurates a new phase for Action No 29 - Developing infrastructure for interest-free financing instruments
the sector. It seems that the “silent” days of Turkish Islamic banking are over. (2010 – 2012)
Indeed, speaking at a press conference organized as a part of the International
Monetary Fund-World Bank annual meetings October 2009 in Istanbul, Deputy “A joint road map shall be made by the international entities of the sector, private
Prime Minister Ali Babacan said that “Istanbul aimed to become a significant and and public organizations that have the potential to be issuers, regulatory
prominent financial center”. And Islamic banking certainly got its rightful place in authorities, entities that may assume tasks in product design and intermediation.
the developments to come.

6. Works shall be completed for regulating and creating infrastructure to attract the represents another avenue for development. Given the neutrality of Turkey, its
capital that prefers interest-free financing which reached to a certain size both in position at the crossroads of the Islamic finance world and the abundance of
the Gulf region and in our country, and the project related to the capital market available know-how inherited from the Ottoman culture, Islamic finance should
instruments and clearing connection for the Gulf capital shall be implemented. ” know a rich and fruitful development in the country.
Action No 38 - Reducing transaction costs to competitive levels (after 2010) Paul WOUTERS
Counsel Bener Law Office
“Public financial burdens, including mainly BITT (Banking and Insurance Transaction pwouters.law@gmail.com
Tax), which increase the intermediation costs, shall be progressively reduced at the
proper time considering the public balances and economic developments in order to
reduce transaction costs to competitive levels.”
It is not clear at this stage whether the overall taxation regime (withholding taxes,
income taxes, capital gains etc) will be addressed in a pragmatic way to bring
Turkey as a financial center on par with its international peers. Moreover: being a
financial center means that money is readily available on the local market and that
willingness exists to use that money from the lending side. Large amounts of
liquidity still need to move towards the Istanbul financial markets.
However, the fact that the sector will not have a consultative voice in the further
development of the leasing and insurance industry is generally perceived as a
disappointment, as those activities are an important line of business for the
Participation Banks. On the other hand, read together with the overall Strategy and
Action Plan SAP, the following paragraph could cast a very positive light on the long-
awaited introduction of Takaful (quotes from the Strategy and Action Plan SAP):
Action No 31 – Developing insurance products (2010-2012)
“i) Practice and legislation which might hinder the development of existing products
or the creation of new products in the Turkish insurance sector shall be revised.
ii) Works for product liability insurance shall be accelerated.
iii) Works shall be done for developing financial loss insurance. ”
For the moment, all those measures are encapsulated in an impressive plan which
demonstrates all parties’ good intentions. But most importantly, the political will to
move forward exists and it is a groundbreaking step for the Turkish Islamic banking
sector to be formally recognized as a valid consultation partner. Timing and
lobbying will be of crucial importance now.
A growing population, the huge potential for Islamic mortgages (in a virtually non-
existing local mortgage market), an abundance of infrastructure projects and the
possibility of a Takaful market further offer exponential growth prospects. The SAP
also envisages the establishment of an arbitration and mediation center, which