Poor markets forced Islamic bank Kuveyt Turk to pull its IPO in Turkey this month, but prospects for Sharia-compliant banks remain bright as growth is set to outstrip conventional rivals. Turkey's Islamic banks, which do not charge or pay interest but reward depositors with a share of their profits, saw assets grow 27 percent in the first nine months of last year, albeit from a low base.
By comparison Turkey's top conventional lenders Akbank and Isbank increased their assets by 13 and 2 percent respectively. Islamic banks only control 3 percent of Turkey's overall banking assets, but this is expected to more than treble, according to Mustafa Boydak, deputy head of the company which sold Islamic lender Turkiye Finans for a record price last year.
"We want it to reach 10 percent, of course that's possible. As a first target we want to reach 5 and then 10 percent," Boydak told Reuters. He expects the sector's assets to grow more than 2.5 times in the next five or six years.
This year, Boydak said he expects Turkiye Finans, whose 60-percent sale to Saudi National Commercial Bank (NCB) is awaiting watchdog approval, to see asset growth at least match last year's 36 percent. Among other restrictions, Islam bans the receipt of interest, equating it with usury, and instead requires banks to invest with its customers, sharing the risk. For instance, rather than lend money to a customer to buy a car, the bank buys the car and rents it back to the customer until the cost - and a profit for the bank - is paid. Boydak Holding and industrial group Ulker set a record in Turkish banking when they sold their stake in Turkiye Finans to NCB at 5.8 times book value after strong interest from Gulf and Asian institutions.
Analysts and bankers reckon another buyer could come into the sector and No 1 lender Bank Asya could be a target, although its fragmented shareholding made up of textile manufacturers and industrialists would make negotiation tricky. Hostile bids are rare in Turkey and its free float is some 40 percent.
The conventional banking sector has also seen a string of foreign purchases as investors seek exposure to Turkey's economic growth story and young, fast-expanding population. Meanwhile, the government has courted potential Gulf investors.