Interest -free banking in Turkey

The entry of Asya Finance House into the interest-free market in Turkey augurs well for a sector fast coming of age. Its timing coincides with the setting up of the new grouping of large Islamic economies called D8 which aims to stimulate trade and investment between member countries. But can Asya’s ambitions meet the competitive and political challenges facing special finance houses in Turkey

Anyone who considers that interest-free banking in Turkey is doomed to remain a marginal activity should think again.

Judging by the arrival of the country’s latest special finance house, Asya Finance House Inc. (AFH), interest-free banking is poised to take a bigger share of the banking system than the current two to three percent over the next few years. According to Asya Finance House which was launched in October, “there is about US$50bn - US$60bn of inactive funds (comprised of gold, real estate, and foreign exchange holdings) outside the (Turkish) banking system. Considering that Turkey’s external debt is about US$27bn, this subject becomes more significant. We will try to attract these funds into the (interest- free) banking system and channel them into investment and production activities.” AFH also predicts that these funds could be mobilized as a new Source of revenue for the Turkish economy and could have an important dampening effect on the spiraling inflation which has beset the country over the last two decades.

Asya is now the sixth special finance house in Turkey, the largest concentration of on-shore commercial interest – free banks anywhere in the world.

But in contrast to its competitors Al Baraka Turk Finance House, Faisal finance Institution, Kuwait Turk Finance House, Anadolu Finance and Ihlas Finance, all of which have adopted a softly-softly approach, Asya has entered the market with a new-found confidence.

It is not seeking to capture a slice of the existing interest-free banking market. It wants to tap new funds by expanding the total banking market through activating dormant funds outside the banking market. The choice of Asya’s first general manager Murat Ulus, is interesting. Mr. Ulus is a former Turkish Treasury Inspector of many years experience and until recently the assistant general manager of the state-owned Egebank. In fact, there is at last a growing interest in interest-free banking from the conventional banking sector - usually a sign of maturity of a market.

Asya’s board also comprises prominent Turkish industrialists including chairman Ihsan Kalkavan, who is big in shipping, and Mehmet Emin Hasircilar (textiles), Tahsin Tekoglu (textiles), Sadik Pisan (plastics), Turgut Aydin (textiles), Naci Altinbuken (Jewellery) and M. Sevki Kavurrnaci (textiles).

Asya’s assistant general managers, Mr. Ermin Darici, Mr. Unsal Sozbir and Mr. Furkan Erdeger, have also held senior managerial positions in the ministry of finance before. What is encouraging for the future is that the average age of Asya management and staff is 34.

Perhaps this confidence is due to the election of Turkey’s pro-Islamist Welfare (Refah) Party premier Necmettin Erbakan (in coalition with the secular centre-right True Path Party led by erstwhile premier Tansu Ciller). Mr. Erbakan has pledged to promote the interest-free banking system in Turkey and in co-operation with other Muslim countries. In early January 1997 Mr. Erbakan hosted the inaugural meeting of the Group of Eight (D8) Muslim countries of large economies comprising Turkey, Malaysia, Indonesia, Pakistan, Iran, Bangladesh, Nigeria and Egypt.

At a conference in Istanbul in October, Mr. Abdullah Gul, Minister of State in the Prime Minister’s Office in charge of the Economy, confirmed to Islamic Banker that the government is committed to help the interest-free banking sector and is looking into the possibility of amending the Government Decree on the Establishment and Functioning of ‘Special Finance Houses in Turkey’ (Decree No: 837506 dd. 16/12/1983).

Interest-free bankers in Turkey complain that the restrictions placed on the sector by the above decree are unfair and are stifling the development of the sector. Since special finance houses operate under profit-and-loss (PLS) principles, they should be subject to specific regulations and not the catchall ones of the conventional banking sector. Minister Gul stressed that the government can only move slowly on this matter given the sensitivities involved.

With a government seemingly supportive of its activities, it is not surprising that Asya has the very ambitious targets of having 50 branches throughout Turkey in three years; of being in the top ten banks in the country in terms of total assets within the next six years; and to have an international branch network, including the Middle East, Far East, Europe and the US within the next ten years.

AFH, which has a paid up capital of Turkish Lira two trillion (US$21 m), is an authorized deposit-taker. It is a wholly- owned Turkish entity and its shareholder base is comprised of leading independent Turkish businessmen, involved in sectors ranging from textiles, steel, to jewellery and tourism.

Some 14 industrialists own just under 87 per cent of the equity. With such a strong industrial connection, AFFI is keen to promote the interests of Turkish business. The bank sees itself playing an important role in assisting industrialists and exporters in foreign markets, especially the Middle East and Muslim countries in Asia and Africa.

AFH is also licensed to undertake all types of forex transactions including LCs, documentary collections, forex dealings, bills of exchange etc. It has correspondent banking arrangements with The Bank of New York in New York, Commerz bank and Bank Kreis in Frankfurt, Byblos Bank in Brussels, Den Danske Bank in Copenhagen, UBAF in Paris, Credito Italiano and BCI in Milan, BCP in Geneva, and Credietanstqalt-Bankverein in Vienna.

Asya Finance is now actively involved in the Turkish Interbank Forex market, quoting buying/selling prices of various currencies. AFFI is also linked to the Swift Alliance Interface System in its dealing room.

Its determination to establish itself quickly in the domestic market is under lined by the fact that AFH has deposit collection agreements with Turkiye Vakiflar Bank (315 branches), Ege Bank (45 branches) Yapi ye kredi Bank (360 branches) - all of whom are authorized to collect deposits on behalf of Asya through out the country.

Deposits of special finance houses have been increasing at a healthy rate in recent years. According to Ihlas Finance House, total deposits in the sector increased from TL67 trillion in September 1995 to TL122 trillion by September 1996. But despite this, these deposits represent only a very small fraction of deposits in the total banking system. Turkey’s conventional banking sector still accounts for some 96 per cent of all deposits in the banking sector.

Asya aims to increase its share of the market at least through meeting the needs of its customers through interest- free banking services; developing a global network, financing the foreign trade of Turkish companies competitively, efficiently and through quality services.

It also aims to tap the unbanked sector of the Turkish population; “the (banking) segment that is not sensitive to interest”; and to take interest-free banking to the wider business sector. In this way it hopes it will “make a direct contribution to the Turkish economy and have a positive effect on the controlling of inflation.”

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