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Friday, 14 November 2008

Islamic Investment in Turkey

(Kocatepe Mosque, Ankara, Turkey)

Riyadh, Asharq Al-Awsat- The Ottoman Caliphate ruled the Islamic world from Turkey for six centuries (1299 AD– 1924 AD). Today however, the world perceives Turkey as a stereotypical secular state, yet despite such extreme secularism, Islamic banking has gained a foothold there when a number of as financial institutions called Special Finance Houses, began offering Islamic banking services in 1980.
In 2001, despite its economy going through a turbulent financial crisis, turkey had a landmark year in Islamic finance when Islamic banking institutions began achieving unprecedented growth. Annual growth rates of assets increased by 40 percent, financing 53 percent and deposits 40 percent, according to data released by the Participation Banks Association of Turkey.
Another significant milestone in Turkish Islamic finance took place in November 2005, when the supervisory authority's approval of the Partnership Banks Law No. 5411. The law which complemented the principles of Islamic Shariaa governing this industry stipulated opening interest-free current accounts named Special Current Accounts and allowed Partnership Banks to receive deposits in accordance with speculation contracts named Profit-and-loss Participation Accounts.
Regarding the Financing aspect, this is done via dividends, lease-and-own and partnership contracts. Turkish Banking Law prohibits Islamic branches in traditional banks. So far, the number of banks operating under this law amounted to four: Albaraka Türk, Bank Asya, the Kuwaiti-Turk Financing House, Türkiye Finans, 60 percent (US$1.8 billion) of which is now owned by the Saudi National Commercial Bank.
Assets of four these banks amounts to 19.477 billion Turkish liras, constituting 3.4 percent of the entire assets of Turkish banks, financing 14.889 billion Turkish liras, constituting 5.2 percent of the entire Turkish bank loans, and deposits 14.834 billions, constituting 4.2 billions of the entire deposits. The assets of the Participation Banks Association of Turkey are expected to exceed US$ 25 billion in the next decade, constituting 10 percent of the entire assets of Turkish banks, according to a recent report by the Turkish Partnership Bank Association in March 2008.
Since coming to power in 2002, the Justice and Development Party has been acting to transform the capital Istanbul into a hub for the Islamic banking industry, and a bridge linking the east and the west owing to its geographic location, and historical and religious backgrounds. It is indeed qualified for such a role due its strong legislative and organizational structure.
However, this alone is insufficient because the Turkish government still needs to be more open and flexible regarding laws governing foreign investment in the Islamic financial sector. This is because the Turkish banking laws prohibit foreign Islamic banks operating in Turkey, unless it is a joint venture with a local Turkish bank.
There's no doubt that many Islamic financial institutions and Muslim investors who are interested in getting a foothold in the Turkish market shy away due to the costly requirements involved in terms of finance and manpower.
As we know, the establishment of an Islamic bank is easier in procedure than possessing a traditional bank and then converting it into one that is Islamic-compliant. This in addition to the fact that many traditional banks will resort to exaggerating their value when selling to Muslim investors, who don't have many options available to them, because of the Partnership Banks Law. Therefore this law and the like will limit influx of foreign capitals seeking investment in the Turkish market, hindering the government from achieving its goal to put Istanbul on the map of international Islamic financial centers like London, Kuala Lumpur, Dubai and Manama.
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Alfalah Consulting - KL: www.alfalahconsulting.com 
Islamic finance consultant: www.ahmad-sanusi-husain.com 
Islamic Investment Malaysia: www.islamic-invest-malaysia.com



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