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Erdogan Retooling Turkish Banks to Boost Islamic Finance

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Aug. 21 (Bloomberg) -- Turkey’s biggest state-owned bank is branching out from being a traditional lender to farmers to providing the country’s largest corporate loan as the government pushes an expansion ahead of an initial public offering.

TC Ziraat Bankasi AS, the Ankara-based lender founded in 1863 during the Ottoman Empire, lent a record $1.6 billion to Cukurova Holding AS in July. The bank is also planning an Islamic finance unit, it said in a public filing today, while it ended talks about buying shariah-compliant lender Asya Katilim Bankasi AS as it said a deal “is not in line with our bank’s priorities.” Bank Asya would have pursued talks if Ziraat had made an official bid, it said in a public filing today.

Deputy Prime Minister Ali Babacan, also in charge of banks, said earlier this month the government would welcome Ziraat’s purchase of Bank Asya.

“We will be in all areas that we think will support Turkey’s growth,” Ziraat Chief Executive Officer Huseyin Aydin said in an interview Aug. 19. He declined to discuss concrete targets.

Turkey’s government, which has said it plans to eventually sell shares in the bank, has encouraged Ziraat and two other state-owned lenders to broaden their offerings and include Islamic banking. The move may increase the state’s sway over financial institutions’ strategy, said Apostolos Bantis, a credit analyst at Commerzbank AG in Dubai.

“While Ziraat remains 100 percent controlled by the government, these transactions will increase concerns about the bank’s corporate governance policies and the government’s influence on the Ziraat’s business strategy,” he said.

Planned Sale

Aydin took over the top job at the bank in 2011 from another state lender, Turkiye Halk Bankasi AS. He’s charted new territory with the loan to Cukurova, the biggest yet by a Turkish bank to a domestic company.

Cukurova used the money to repay debt to Russia’s Alfa Group to recover a 13.8 percent stake at Turkcell Iletisim Hizmetleri AS, Turkey’s biggest mobile operator.

“Ziraat is in a phase of growing its assets as a prerequisite for its planned IPO,” said Bulent Sengonul, an analyst at Istanbul-based Is Yatirim, in a telephone interview Aug. 18. “It will be positive for the bank to grow its capital through profits and its subsidiary base through participation banking.”

Bank Asya was established by followers of Fethullah Gulen, a U.S.-based imam, who is at the center of a power struggle with President-elect Recep Tayyip Erdogan’s Ak Party that has accused Gulen and his supporters of illegal wiretapping aimed at plotting a coup to topple the party.

Bank Asya said on Aug. 8 that talks about a deal with Qatar Islamic Bank SAQ had ended while Ziraat said in today’s public filing that the lender is in discussions with investors for a possible stake sale. Several government institutions canceled contracts earlier this month for the lender to act as cash collector for them. Turkey’s capital markets regulator also didn’t approve the bank’s application for a sukuk sale, citing uncertainty over its ownership structure.

“There is a risk that the Bank Asya transaction, which reportedly has links with the Gulen movement, might be interpreted as a tool to assert political pressure on the government’s opponents,” said Bantis of Commerzbank.

To contact the reporter on this story: Ercan Ersoy in Istanbul at eersoy@bloomberg.net

To contact the editors responsible for this story: Benedikt Kammel at bkammel@bloomberg.net James Doran, Benjamin Harvey