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