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Tuesday, 10 February 2015

Bank Asya Seizure Hastens Turkey’s Islamic Finance Drive

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.

Islamic Lenders

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.

‘Under Banked’

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.
(Cathay Pacific / 09 Febuary 2015)
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Facing sanctions, Russian banks look to build Islamic finance know-how

Russian banks are developing their expertise in Islamic finance to help broaden funding sources for local firms, though Western sanctions over the Ukraine crisis and the absence of a regulatory framework could hinder those efforts.
Russia's Islamic banking sector is still in its infancy. But an estimated 20 million Muslims living in the country are a potential source of money, as are cash-rich Islamic funds abroad.
Islamic finance has become a mainstream funding source for some other governments and companies over the past several years, with even non-Muslim nations such as Britain and South Africa issuing debut Islamic bonds (sukuk) last year.
However, the European Union and the United States are seeking to cut overseas funding to Russian firms over Moscow's support for rebels in eastern Ukraine. Banks in the Middle East and southeast Asia, the major markets for sharia-compliant debt, are wary of becoming tangled in the sanctions.
So some Russian lenders are trying to build their own in-house knowledge of Islamic finance.
State development bank Vnesheconombank (VEB) [VNSCB.UL], which has been targeted by the sanctions, is seeking help from Middle East firms to develop its Islamic finance expertise, a spokesperson said, without naming those institutions.
"VEB sets as it goal diversification of project financing instruments, and among those considers Islamic finance tools."
VTB Bank, Russia's second-largest lender and another sanctions target, is exploring sukuk deals for several of its clients, although some questions remain over the accounting treatment of such transactions, the bank said in response to Reuters questions.
"Nonetheless, this remains a current issue, especially given growing interest in Asian markets."
In December, officials from institutions including Moscow Industrial Bank, VEB, SME Bank and the Russian Direct Investment Fund took part in a trade mission to the Gulf region, with Islamic finance featuring in the discussions.
In the same month, Russia's National Rating Agency signed an agreement with the Bahrain-based Islamic International Rating Agency to jointly assign ratings for Islamic financial products.
This will allow sharia-compliance quality ratings to be assigned for sovereign debt and Islamic financial institutions, the Russian agency said in a statement. Firms ranging from an Islamic leasing firm in the Russian republic of Dagestan to a fish skin leather manufacturer in Ingushetia, another Russian republic, have received such ratings in the past.
The lack of a Russian regulatory framework for Islamic finance is an obstacle; both issuers and investors rely on clear regulations to reduce risk and costs.
In October, the Association of Russian Banks asked the central bank to help develop Islamic finance, suggesting it adopt a special federal law.
The regulator continues to study the question of introducing Islamic finance regulation but work is at an early stage, a central bank spokesperson told Reuters last week. It is not yet clear when any new rules would be drafted, he added.
The central bank could draw on the experiences of former Soviet republics Azerbaijan, Kyrgyzstan and Kazakhstan, all of which are drafting new laws to regulate Islamic banking.
Even without a regulatory framework, Russia's banking sector has seen some small-scale Islamic finance deals. Kazan-based AK BARS Bank, Russia's 18th largest bank by assets, has raised a combined $160 million via two Islamic syndicated loans since 2011 and is open to tapping the market for a third time.
"We will continue working in this direction, further diversifying our funding," said Elina Khayrullina, an official at AK BARS.
A sukuk issue by a local or regional government would be needed to encourage issuance by Russian companies, she said. "In general, sukuk might be an option for Russian companies given there is a benchmark at state or regional level."
Azerbaijan's largest bank plans to set up a stand-alone Islamic unit which would seek business across the region, including through its Russian subsidiary.

There have been false starts, however. The Russian republic of Tatarstan has planned for a sukuk issue as far back as 2011, but no deal has materialized.
(Reuters / 09 Febuary 2015)
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