Bank Asya Seizure Hastens Turkey’s Islamic Finance DriveIsobel Finkel
Turkey’s takeover of Bank Asya is making the government an even bigger player in the Islamic finance industry, just as state-owned lenders prepare to start Shariah-compliant units to challenge the privately-owned banks.
Ziraat Bank, Halkbank and Vakifbank are all starting arms that will adhere to the Islamic ban on interest. That’s part of a government goal to about triple the market share of Shariah-compliant banking to 15 percent within the next decade.
Turkey’s ruling party has its roots in political Islam and Recep Tayyip Erdogan, for 11 years the prime minister before winning presidential elections in August, has repeatedly stated his opposition to interest-based finance. Turkiye Finans, Albaraka Turk and Kuveyt Turk Karilim are the largest Islamic lenders who’ll be challenged by the government-backed entrants.
“The state’s involvement in participation banking would represent a fairly significant competitive pressure,” Cadgas Dogan, an analyst at BGC Partners in Istanbul, said in an interview, referring to Islamic banking. “The initial idea as announced by officials was that the newly-established banks would not chase existing participation banks’ clients but instead focus on rural areas and increase the total pie.”
The government has pushed for Islamic finance teaching in economics departments and almost all of the country’s population is Muslim. In 2013, the World Bank opened an Islamic finance center in Turkey.
President Erdogan’s government has repeatedly voiced the ambition of increasing the size of “participation” or Islamic banking, which accounts for about 5 percent of banking assets, up from about half that a decade ago.
The three state deposit banks are all among the country’s seven largest. Bank Asya, one of two home-grown Islamic banks, had assets of 29 billion liras ($11.6 billion) in the third quarter of 2013, making it among the biggest of the Shariah-compliant lenders. A year later, those assets had slumped almost 50 percent after the lender became embroiled in a political feud and state companies withdrew their business.
The bank was founded by allies of Fethullah Gulen, a self-exiled Muslim cleric who is now Erdogan’s enemy after the President accused him of instigating a coup attempt.
Asya’s takeover is the latest in a yearlong regulatory campaign against the bank. Citing a “lack of transparency in ownership,” the government replaced the former management with a new board who entered the head office late on Feb. 3 accompanied by police, according to deposed Chief Executive Officer Ahmet Beyaz.
A day before the seizure, Gulen criticized the ruling party in the New York Times. Supporters of Gulen and Erdogan have sought, by turn, to take measures that weaken or strengthen the bank in the last 12 months.
Finance Minister Mehmet Simsek said in an October interview he considered the Islamic finance industry in Turkey to be “under-banked” and that the government looked favorably on the idea of issuing new licenses to lenders.
Still, the prohibition under Shariah of mixing interest-earning and non-interest earning assets means the new entrants can’t just use their size to leverage growth and will instead need to build the businesses each year, according to Aykut Ahlatcioglu, an analyst at Oyak Securities in Istanbul.
Vakifbank will get a $300 million loan from the Islamic Development Bank to help fund its Islamic finance arm, while Halkbank plans a capital raising to finance its unit.
“The state banks have a high growth potential and they might squeeze out these private banks over time,” Ahlatcioglu said.