By Zehra Aydoğan, Hurriyet Daily News
Turkey’s İslamic finance system has been developing but the country has a long way to go, a partner at Ernst&Young says. Despite remarkable progress in participation banking, Turkey needs new regulations that will enable it to establish new institutions and launch new instruments
Turkey has made good progress in the Islamic finance system in the participation banking field, but there is a long way to go for Islamic insurance system (takaful) and Islamic capital markets, says Ashar Nazım, partner at Global Islamic Banking at Ernst&Young.
There is a financial cycle to be completed in Islamic finance: a banking system (participation banks), which was already founded and growing in Turkey, Islamic insurance system (which they hoped would soon come to Turkey) and capital markets, Nazım said in an interview with the Hürriyet Daily News.
“The participation banks’ volume was under $40 billion in 2012 but the Turkish government is aspiring to a 15 percent market share by 2023. [That means] an increase of five times in terms of participation bank assets, to more than $200 billion by 2023. It is an ambitious target that is achievable as well if certain steps are put in place,” Nazım said.
Three key priorities
“The challenge and opportunity for Turkey is to understand and define ‘How Turkey can be the intellectual capital of the Islamic Finance World.’ Because, the next phase of development will be about innovation,” he said, noting that there were three key priorities that should be completed in Turkey to develop the Islamic finance system.
The first priority is regulation, said Nazım. “Regulatory clarity is extremely important. Because the investors like a predictable, well-articulated and distinct framework.”
There isn’t currently a special regulation for participation banks in Turkey, they are in compliance with the current banking regulations, which are obstacle against the sector’s growth, he said, adding that there were some countries that had exclusive regulations for participation banks.
Because of a gap in regulations, there aren’t currently any takaful companies in Turkey, he said. Also, Turkey has sukuk as a capital market instrument but the capital markets have a broader meaning with a number of different instruments that don’t take place in the country, he noted.
The second priority is the supply side, he continued. “Establishing of institutions and making enough private and public sector financing of it and capital available for it: To achieve 2023 targets, between seven and 10 participation banks are needed. Also they should be created in 18-24 months. Any delay would mean slowdown in industry,” he said. Turkey needed to increase capitalization of participation banks 10-fold over 10 years, he added.
Moreover, creating new institutions on the banking side, Islamic insurance side and capital markets was necessary, and new companies in the sub-financial sectors insurance, like asset management, leasing, should be founded, he said.
The final priority is creating talent, Nazım said. Human resources should be developed to enhance this sector, he said, adding that Islamic finance could be a great opportunity to create new employment.
Turkey a prominent Islamic finance market
Nazım said there were six key markets for Islamic finance in the world: Qatar, Indonesia, Saudi Arabia, United Arab Emirates, Malaysia and Turkey. However, Nazım urged that the next 12-24 months would be critical for Turkey.
“If Turkey establishes enough institutions which are handsomely capitalized in terms of financial capital and human capital, we’re going to see a very strong growth trajectory which can make Turkey one of the leading global centers for Islamic finance, particularly in capital markets, wealth management and trade finance. That’s why we said Turkey is in an ideal position between Europe, Central Asia and Middle East and very well connected,” he said.
According to Nazım, there are two main reasons differences to choose Islamic finance system: Islamic finance offers a more balanced distribution of risks and rewards. The second is that Islamic financial activities are much more closely linked to the real economic activities.
Meanwhile, the term “socially responsible finance” has been replacing Islamic finance because it is a broader definition as this sector doesn’t target only Islamic countries or Muslims.
The World Islamic Banking Conference (WIBC) in Bahrain will be held between Dec. 3 and 5. As Ernst&Young is one of the major sponsors of this event, they will release their World Islamic Banking Competitiveness Report in December.