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Viewing cable 09ISTANBUL209, PANEL WARNS TURKEY LAGS BEHIND IN ISLAMIC FINANCE

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Reference ID Created Released Classification Origin
09ISTANBUL209 2009-06-12 08:06 2011-08-24 01:00 UNCLASSIFIED Consulate Istanbul
VZCZCXRO7300
PP RUEHAG RUEHAST RUEHBC RUEHDA RUEHDBU RUEHDE RUEHDF RUEHDH RUEHFL
RUEHGI RUEHIK RUEHJS RUEHKUK RUEHKW RUEHLA RUEHLH RUEHLN RUEHLZ RUEHNP
RUEHPOD RUEHPW RUEHROV RUEHSK RUEHSR RUEHTRO RUEHVK RUEHYG
DE RUEHIT #0209/01 1630806
ZNR UUUUU ZZH
P 120806Z JUN 09
FM AMCONSUL ISTANBUL
TO RUEHC/SECSTATE WASHDC PRIORITY 9008
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCNISL/ISLAMIC COLLECTIVE
RUEAIIA/CIA WASHDC
RUEAWJB/DEPT OF JUSTICE WASH DC
RUEATRS/DEPT OF TREASURY WASH DC
RUEKJCS/DIA WASHDC
RUFOADA/JAC MOLESWORTH RAF MOLESWORTH UK
RHMFISS/JOINT STAFF WASHINGTON DC
RHEHNSC/NSC WASHDC
RUEKJCS/SECDEF WASHDC
RHEHAAA/WHITE HOUSE WASHDC
UNCLAS SECTION 01 OF 02 ISTANBUL 000209 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN TU
SUBJECT: PANEL WARNS TURKEY LAGS BEHIND IN ISLAMIC FINANCE 
 
REF: 07 ISTANBUL 1035 
 
1. (U) SUMMARY:  Representatives from Islamic finance 
institutions and local law firms met in Istanbul on June 4 
for a one-day session on Islamic Finance in Turkey.  Osman 
Akyuz, Secretary General of the Turkish Participation Banks 
Association, was enthusiastic about the growing strength of 
"participation banks,8 the Turkish legal term for 
Shariah-compliant banks.  The speakers discussed the strong 
potential for Islamic banking in Turkey, as well as product 
development and the unique problems that affect the sector in 
Turkey.  They stressed participation banking is socially 
responsible because it focuses on the real economy; money 
does not make money, they maintained, but is used to create 
social wealth, which should be shared.  The overall tone of 
the conference was optimistic, though several speakers 
expressed the view that the Government of Turkey (GOT) could 
do much more to provide regulatory clarity to the sector. 
They also opined that GOT,s reluctance to embrace 
Shariah-compliant financial products, such as Sukuk, is 
stifling Turkey,s ability to capture funds flowing into this 
market.   END SUMMARY. 
 
2. (U) Shariah-compliant banks are known as "participation 
banks" in Turkey, and in accordance with the Banking Law of 
2005 they are under the regulatory umbrella of the Banking 
Regulatory and Supervisory Agency (BRSA).  Modern Islamic 
banking began in Turkey in 1985 during the presidency of 
Turgut Ozal (see reftel for a greater background on Turkish 
Islamic banking).  According to Secretary General of the 
Turkish Participation Banks Association Osman Akyuz, 
participation banks have about a 5% market share in Turkey, 
with 4.5% of total Turkish deposits, 5.4% of loans and 3.9% 
of assets.  These figures have generally trended up in recent 
years, although the share of total loans is down slightly 
from 2007.  The industry has a modest target market share of 
10% of total deposits by 2015.  Leverage in Turkish 
participation banks is 7%, compared with 25% in Europe.  M. 
Fatih Bulac from Turkiye Finans boasted that Turkish 
participation banks can operate smoothly at these low rates 
due to strict government oversight enacted since Turkey,s 
financial meltdown in 2001. 
 
3.  (U) Modern Shariah-compliant banking is relatively new in 
both Turkey and the rest of the world, and Islamic capital 
markets are in their infancy.  Nearly all the participants 
pointed to Shariah-compliant bonds (Sukuk) as a vital means 
to raise capital. (NOTE: According to an Islamic Finance 
website, Sukuk financing should only be raised for trading 
in, or construction of, specific and identifiable assets. 
All Sukuk returns and cash flows must be linked to acquired 
assets, or must be generated from an asset once it is 
constructed, and not from interest-based income. END NOTE). 
Despite a number of countries issuing Sukuk bonds -- such as 
Malaysia and Kuwait -- Turkey is lagging behind in this area, 
according to all the participants.  According to Faruk 
Sabuncu of PriceWaterhouseCoopers, the BRSA concentrates on 
conventional banks and the GOT,s failure to mesh its 
standards and terminology with generally-accepted Islamic 
practices causes many pious Muslims to be wary of Turkish 
Shariah-compliant products.  For example, the Central Bank 
did issue Shariah-compliant bonds earlier this year (one in 
January for USD 330 million and one in April for USD 485 
million), but the legislation authorizing these bonds 
intentionally avoided the word Sukuk due to its religious 
connotation, which caused many potential customers to 
question the bonds, Shariah compliance.  Moreover, many 
Islamic scholars, whose imprimatur is required in the 
issuance of a Sukuk, have labeled these Turkish bonds as 
non-Shariah compliant.  Sabuncu identified the lack of 
clarity regarding taxation of Islamic financial instruments 
as another barrier to product development and marketing. 
Several interlocutors stated that a number of conventional 
banks in Turkey are very interested in opening an "Islamic 
window", or in setting up an offshore subsidiary, but are 
reluctant to do so without government approval.  These banks 
are interested in, inter alia, the issuance of Islamic 
corporate bonds. 
 
4. (U) The two largest markets for Shariah-compliant products 
are the Middle East and Malaysia.  According to Paul Wouters 
of the Bener Law Office in Istanbul, Persian Gulf money is 
 
ISTANBUL 00000209  002 OF 002 
 
 
gravitating to Southeast Asia and Turkey should be attracting 
some of it through more aggressive marketing.  Turkey has 
strong financial institutions, yet legal barriers create an 
uneven playing field for Turkish banks trying to "grab this 
money floating over our heads".  Wouters criticized 
secularists in Turkey for blocking necessary reforms to 
capture the Islamic market. Non-Muslim majority countries 
such as France and Luxemburg have enacted legislation to 
encourage Shariah-compliant banking and financing.  Toyota 
recently started an Islamic auto finance operation in 
Malaysia, a phenomenon that could potentially be replicated 
in Turkey.  Moreover, Islamic trade finance might hold great 
growth potential, given Turkey,s large export-import sector. 
Although capital markets development will probably lag 
banking in the near term, it is noteworthy that BMD 
Securities issued the world,s first Islamic exchange traded 
fund, based on a Dow Jones index that measures the 
performance of global Islamic bonds.  According to Wouters, 
the Islamic mutual fund sector is USD 50 billion, mostly in 
equities, but fixed income and money market funds are needed. 
 The industry estimates that global Islamic financial assets, 
which at present amount to USD one trillion, will grow to USD 
four trillion over the next five years.  Wouters claimed 
Turkey should realize that it is losing out to non-Islamic 
nations when it comes to Islamic financing. 
 
5. (U) The participants emphasized that Islamic finance 
should broaden its customer pool to non-Muslims seeking sound 
and socially-responsible finance vehicles.  Investment 
opportunities in solid projects, such as ship building or 
constructing schools, rather than low-quality sub-prime 
mortgages, would likely attract a diverse group of investors 
in today,s environment, according to Wouters. Participation 
banks generally lend up to 95% of their deposit base, mostly 
in the real sector, although during the current crisis that 
amount declined to 80-85%. Most of the banks, remaining 
funds were invested in revenue index bonds, not T-bills or 
T-bonds.  Cenk Karacaoglu of Bank Asya noted that Islamic 
financial institutions do not view loan pricing as a 
competitive advantage; rather, service and quality are what 
distinguish them.  Karacaoglu spoke of the "structure and 
methodology" of Islamic finance as a differential 
advantage.  Bennar Balkaya, Partner at Balkaya and Balkaya, 
noted that arbitration in Islamic banking is a good means for 
keeping business matters confidential. By mutual agreement, 
parties can agree to settle business disputes through 
arbitration, thus ensuring that the dispute, and the terms of 
the contract, remains out of the courts and out of the public 
eye. 
 
6. (SBU) A strong message from the conference was government 
aversion to Islamic finance is harming Turkey,s goal to be a 
financial hub.  While Islamic banks hold only about five 
percent of deposits and loans in Turkey, there are champions 
of the sector who think Turkey is missing an important 
opportunity to attract more money from Middle Eastern and 
strict Islamic customers.  The underlining theme from the 
conferees was that the Islamic-rooted Justice and Development 
Party (AKP) is reluctant to propose pro-Islamic finance 
legislation, because of fears of a strong backlash from 
secularists deeply suspicious of the ruling party,s 
motivations. 
WIENER