|Stepping away somewhat from private equity, I would like to extend to my readers an article concerning Participation (Islamic) Banks in Turkey. This article was written and submitted to me by good friend, Paul Wouters, consultant at Bener Law Office in Istanbul, Turkey. Although, it has been sometime since it was first printed, the information contained is still relevant, and gives good insight to the Participation banking industry in Turkey.
This article was first published at www.islamicfinancenews.com on April 18, 2008.
Paul WOUTERS is consultant to Bener Law Office, Istanbul - Turkey and can be reached at email@example.com
All eyes set on Turkey
The Chief Prosecutor of the Turkish Supreme Court of Appeals - Abdurrahman Yalçınkaya - submitted on March 14th an indictment to the Constitutional Court aiming to shut down the governing Justice and Development Party (AK Party) on the grounds that it had become a focal point of "anti-secular activities". The indictment also envisages banning 71 of its members for 5 years from political party membership - including President Abdullah Gül and Prime Minister Tayyip Erdoğan.
One of the elements that appear to have been withheld by the Chief Prosecutor would be a speech delivered by Prime Minister Erdoğan in Malaysia, where he is said to have commented that as a moderate Islamic country, Turkey could serve as an example for the alliance of civilizations.
The Turkish Constitutional Court announced that it will hear the case. The decision was taken unanimously with 11/11 votes. The case against President Gül – who supposedly only can be tried for treason – was approved with 7/11 votes.
The case has shocked the world, moreover since the AK Party was the most moderate and democratic party of its kind ever in Turkish history. Only 7 months ago, the party came to the government through democratic elections, claiming 47 % of the popular votes. Strong disapproving reactions were specifically noted from the European Union that announced that the accession talks could be hindered if not endangered would the AK Party be disbanded.
The government appears not to be influenced by the ongoing procedure and is set to continue the present modernisation of the Turkish judicial and economical environment. A mini democracy reform package has been put forward and the calm leadership of the governing AK Party resulted in the absence of any overheated reactions. It may be expected that – though some further violent confrontations by opposing activist groups and individuals might be launched during the months to come – the government will succeed to control the situation.
The indictment appears to be construed in a very broad way and not to focus entirely on a few specific facts or allegations. Therefore surprises might pop up unexpectedly at any time and the outcome of the litigation cannot be predicted for sure. The AK Party prepares for its defense and also for a change of the Turkish Constitution that would make the ban of political parties more difficult in the future and that will lift the difficulty of such closures to European standards.
The participation banks are not expected to be hindered by or involved in the present discussions and their growth will most probably follow the general Turkish market fluctuations as usual.
During 2007 the business volume of the Turkish participation banks increased by 30-35 percent and a similar growth is expected to take place in 2008, said Osman Akyüz, the CEO of the Turkish Participation Banks Association.
The sector is waiting impatiently for the much needed Sukuk regulations. Considering the present global credit crunch and the consequences thereof, it will be clear that already lots of good opportunities already have been missed.
Albaraka Türk has absorbed the IPO from 2007 in good order and was able to raise the net profits by 50 % in 2007 over the previous year to YTL 85 million (approx USD 65.4 million).
Total assets increased by 48 %, to YTL 3.7 billion (approx USD 2.85 billion), and total loans increased by 44 % to YTL 2.85 billion (approx USD 2.2 billion). Deposits saw a 39 % increase, reaching a level of YTL 3 billion (approx USD 1 billion).
Publicly listed since 2006, Bank Asya increased its net profit in 2007 to YTL 221 million (approx USD 170 million), a 51 % increase as compared to 2006.
The capital equity of Bank Asya increased by 35 % to YTL 854 million (approx USD 657 million) and that its total assets reached YTL 6.26 billion (approx USD 4.81 billion), a 50 % increase as compared to 2006.
Deposits in the bank increased by 47 % to YTL 4.7 billion (approx USD 3.6 billion).
The Kuwaiti-Turkish joint-capital participation bank Kuveyt Türk announced that it had increased its profits in 2007 by 109 %, totalling YTL 74.1 million, compared to the preceding year 2006.
Kuveyt Türk CEO Ufuk Uyan explained that the bank had reached a historically high profitability rate and aimed to grow by 59 % in total assets, to YTL 6 billion (approx USD 3.8 billion), and by 63 percent in loans extended to YTL 5 billion (approx USD 4.6) in 2008. End 2007 Kuveyt Türk had around 1,800 employees and this figure is said to increase to 2,189 this year. 25 New branches are expected to be opened, bringing the total number of branches to 113.
Due to the ongoing uncertainty in the global financial markets, the IPO that was planned earlier this year has been delayed. No new date has been fixed yet.
Still privately owned, Türkiye Finans aims for 30% growth in assets in 2008, 27 % growth in capital and 46 % growth in loan issuance. The goal for YTL 203 million (approx USD 156 million) in profit before taxes could be hindered by the raise in the value-added tax imposed on leasing transactions at the beginning of 2008.
Yunus Nacar, the CEO of Türkiye Finans said leasing was one of the primary tools of participation banks for financing new investments: “This latest regulation [tax rise] not only blocks the usage of an important financial tool, but also decreases the accessibility of loans with 48-60 month-long maturity periods for small entrepreneurs.”
The bank aims to increase the number of branches by 27 % from 138 to 175 and intends to hire around 1,000 employees, bringing the total number of employees from 2,500 to 3,500.
Thanks to outstanding performance in the previous years, the bank had attracted the attention of foreign investors and received not less than 15 merger and acquisition proposals. After it had been agreed to sell a 60 percent stake to Saudi Arabia-based National Commercial Bank NCB in July 2007 and the transaction was approved by the Turkish banking regulator BDDK early March 2008, the factual hand over proceedings were completed at the end of the same month.
At those formalities, NCB CEO Abdulkarim Abu Al-Nasr stated that the partnership with both the Boydak and Ülker groups would offer great opportunities. There is a growing global interest in interest- free banking and there still is much more potential that can be tapped in Turkey. Besides access to larger financial resources and business accomplishments, the cooperation is expected to result in a substantial transfer of know how and a fast implementation of the latest IT banking techniques.
QATAR ISLAMIC BANK - TURKISH BANK
Just now, end March 2008, Qatar Islamic Bank announced to be filing an application to run a participation bank (Islamic bank) in Turkey. It would be the fifth license of its kind and a valuable addition to the market.
The partnership talks between the National Bank of Kuwait NBK and Turkish Bank, established in 1982, have ended positively. NBK, a leading finance cooperation of the Gulf Cooperation Council's (GCC), will buy 40 % of Turkish Bank's shares for USD 160 million.
Turkish Bank is a conventional operating bank and will not apply for a license as participation bank.
The present political turmoil set aside, the most interesting news will be generated from the result of the renegotiation of the ongoing stand-by program of the IMF that will soon expire. That program has dominated the Turkish financial policy for long times now and resulted, combined with sound economical reforms, in the exceptional growth and stability in Turkey over these last years.
Among the alternatives for a replacement are post-program monitoring and a precautionary stand-by program that does not include funding. This will most probably result in the continuation of the present policies and will further sustain growth amidst the present turmoil on the global financial markets.
Turkey will be able to obtain the remaining loans from the IMF and if the latest review is approved by the IMF Executive Board, USD 3.6 billion in loans will be released.
The IMF expects Turkey's gross domestic product (GDP) to grow by 4 percent in 2008 and 4.3 percent next year. According to the just released IMF “World Economic Outlook” report, Turkey's rate of inflation based on consumer prices might be estimated to be 7.5 % this year 2008 and 4.5 % in 2009. The expectation on the current account deficit for 2008 is 6.7 % of GDP and 6.3 % for 2009.
Though every economy will be affected more or less by the present credit crunch, the Turkish economy – and certainly the Turkish participation banks – appears to be relative safe.
All in all, subject to the further developments in the closure case, this results in stable to slightly positive prospects for Turkey during 2008 and well into 2009.
consultant to Bener Law Office
Istanbul – Turkey
Labels: Albaraka Turk, Bank Asya, Bener Law Office, Islamic Banking, Kuveyt Turk, Participation Banking, Turkiye Finans