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Cablegate: Turkey's Islamic Banking Sector

VZCZCXRO3045
PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHIT #1035 3381128
ZNR UUUUU ZZH
P 041128Z DEC 07
FM AMCONSUL ISTANBUL
TO RUEHC/SECSTATE WASHDC PRIORITY 7722
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHDA/AMCONSUL ADANA PRIORITY 2325
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY

UNCLAS ISTANBUL 001035

SIPDIS

SIPDIS

TREASURY FOR J. ROSE

E.O. 12958: N/A
TAGS: EFIN TU
SUBJECT: TURKEY'S ISLAMIC BANKING SECTOR

1. Islamic banking in Turkey began in 1985 when the Ozal
government authorized the creation of "special financial
institutions" and Albaraka Turk, an offshoot of Al-Baraka
Banking Group of Bahrain, opened as the first interest-free
banking institution in Turkey. Interest-free banks in Turkey
eschew the "Islamic" label and go by the euphemism
"participation bank" (katilam bankasi). Four of the 51
commercial, participation and investment banks in Turkey are
interest-free: Bank Asya, Turkiye Finans, Albaraka Turk and
Kuveyt Turk. A fifth participation bank (Ihlas Finans)
failed during the 2001 financial crisis due to poor
management, primarily a failure to diversify risk adequately.
Although some international banks with operations in Turkey
(Citibank, HKSB) have Islamic banking operations in other
countries, none market interest-free banking in Turkey.

2. Participation banks currently account for 4% of all
deposits and 6% of all loans as well as 3% of the sector by
asset value. Unal Kabaca, President of Asya Bank, noted the
participation banks' share of total asset value has been
steadily rising, moving from 2.8% in 2006 to 3.1% in the
first half of 2007 with a projected 3.4% by end 2007. Kabaca
argued that Bank Asya's focus on medium-sized companies and
comprehensive marketing efforts would underpin expansion in
the coming years. He claimed the sector still had room to
expand and indicated the four banks hoped to reach a 10%
share by asset value of the total industry by 2017. Adnan
Buyukdeniz, General Manager of Albaraka Turk, agreed there
was significant room for expansion noting that the
participation banks' share of the deposit and credit markets
was far below their potential.

3. According to Osman Akyuz Secretary General of the Turkish
Participation Banks Union (TKBB), participation banks have a
total of 419 branches throughout the country with just under
9,000 employees. Although Turkiye Finans is based in Kayseri
and focuses its operations in that city and the surrounding
provinces, the remaining three participation banks are not
regionally focused. Bank Asya has 180 branches with 52 in
Istanbul, 9 in Ankara, 6 in Izmir, 4 in Antalya and the
remainder scattered more or less evenly throughout the
country. Albaraka's 60 branches are also distributed
throughout the country.

4. Turkey's participation banks tend to focus on
commercial/corporate lending rather than retail loans. Short
term inventory financing, letters of credit, financial
leasing, bid bonds and performance bonds as well as cash
management services are market niches where interest-free
banks have demonstrated an ability to compete without needing
to collect or pay interest. Kabaca explained that Bank
Asya's construction finance business was based on commission
income with the bank charging commissions on bid and
performance bonds. Bank Asya also provides cash management
services including payroll, purchasing, and subcontractor
payment that encourage intra-network linkages thereby
increasing Bank Asya's customer base. Financial leasing
(full payout leases) comprises 20% of Albaraka's credit
portfolio and enable customers to finance in-kind rather than
in cash. Under this system Albaraka purchases a good
(generally machinery or equipment) and leases it to the
customer for a defined multi-year period. At the end of
the term of the lease the title is transferred to the lessee.

5. Charge cards as well as mortgage lending and auto finance
are the retail banking areas in which participation banks see
the most opportunity for expansion. Kabaca cast providing
charge card services as a social responsibility which happens
to be profitable. "Asya card" currently has a 1% share of
the credit card market with 600,000 card holders and a target
of 1 million card holders. It is a charge (not debit or
credit) card that does not permit cash withdrawals. Payment
is due in full at the end of each month. Although late
payments are assessed a fee equal to 4% of the overdue
amount, compound interest is not charged on overdue amounts.
Mortgage loans are normally structured as installment payment
plans with the customer holding the title and the bank
placing a lien on the property. Down payments in the region
of 20-30% are required and the term of the loan ranges from
36 to 60 months.

WIENER

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