RegionsMiddle EastAll Eyes Set on Turkey

All Eyes Set on Turkey

This article was originally published on on islamicfinancenews.com.

The Chief Prosecutor of the Turkish Supreme Court of Appeals – Abdurrahman Yalçinkaya – submitted on 14 March an indictment to the Constitutional Court aiming to shut down the governing Justice and Development Party (AK Party) on the grounds that it had become a focal point of ‘anti-secular activities’. The indictment also envisages banning 71 of its members for five years from political party membership, including President Abdullah Gül and Prime Minister Tayyip Erdogan.

One of the elements that appear to have been withheld by the Chief Prosecutor is a speech delivered by Prime Minister Erdogan in Malaysia, where he is said to have commented that as a moderate Islamic country, Turkey could serve as an example for the alliance of civilisations.

The Turkish Constitutional Court announced that it will hear the case. The decision was taken unanimously with 11/11 votes. The case against President Gül – who supposedly can only be tried for treason – was approved with 7/11 votes.

The case has shocked the world, moreover since the AK Party was the most moderate and democratic party of its kind ever in Turkish history. Only seven months ago, the party came to the government through democratic elections, claiming 47% of the popular votes. Strong disapproving reactions were specifically noted from the EU that announced that the accession talks could be hindered if not endangered if the AK Party was disbanded.

The government appears not to be influenced by the ongoing procedure and is set to continue the present modernisation of the Turkish judicial and economical environment. A mini democracy reform package has been put forward and the calm leadership of the governing AK Party resulted in the absence of any overheated reactions. It may be expected that – though some further violent confrontations by opposing activist groups and individuals might be launched during the months to come – the government will succeed to control the situation.

The indictment appears to be construed in a very broad way and not to focus entirely on a few specific facts or allegations. Therefore surprises might pop up unexpectedly at any time and the outcome of the litigation cannot be predicted for sure. The AK Party prepares for its defence and also for a change of the Turkish Constitution that would make the ban of political parties more difficult in the future and that will lift the difficulty of such closures to European standards.

The participation banks are not expected to be hindered by or involved in the present discussions and their growth will most probably follow the general Turkish market fluctuations as usual.

Figure 1: Participation Banks: Key Figures

Source: BRSA Monthly Bulletin No 34

Business in Turkey

During 2007, the business volume of the Turkish participation banks increased by 30-35% and a similar growth is expected to take place in 2008, said Osman Akyüz, the CEO of the Turkish Participation Banks Association.
The sector is waiting impatiently for the much-needed Sukuk regulations. Considering the present global credit crunch and the consequences thereof, it is clear that lots of good opportunities have already been missed.

Albaraka Turk

Albaraka Türk has absorbed the IPO from 2007 in good order and was able to raise the net profits by 50% in 2007 over the previous year to YTL85m (approx US$65.4m). Total assets increased by 48%, to YTL3.7bn (approx US$2.85bn), and total loans increased by 44% to YTL2.85bn (approx US$2.2bn). Deposits saw a 39% increase, reaching a level of YTL3bn (approx US$1bn).

Bank Asya

Publicly listed since 2006, Bank Asya increased its net profit in 2007 to YTL221m (approx US$170m), a 51% increase compared to 2006. The capital equity of Bank Asya increased by 35% to YTL854m (approx US$657m) and its total assets reached YTL6.26bn (approx US$4.81bn), a 50% increase compared to 2006. Deposits in the bank increased by 47% to YTL4.7bn (approx US$3.6bn).

Kuveyt Turk

The Kuwaiti-Turkish joint-capital participation bank Kuveyt Türk announced that it had increased its profits in 2007 by 109%, totalling YTL74.1mn, compared to the preceding year. Kuveyt Türk CEO, Ufuk Uyan, explained that the bank had reached a historically high profitability rate and aimed to grow by 59% in total assets, to YTL6bn (approx US$3.8bn), and by 63% in loans extended to YTL5bn (approx US$ 4.6bn) in 2008. End 2007, Kuveyt Türk had around 1,800 employees and this figure is said to increase to 2,189 this year. Twenty five new branches are expected to be opened, bringing the total number of branches to 113. Due to the ongoing uncertainty in the global financial markets, the IPO that was planned earlier this year has been delayed. No new date has been fixed yet.

Türkiye Finans

Still privately owned, Türkiye Finans aims for 30% growth in assets in 2008, 27% growth in capital and 46% growth in loan issuance. The goal for YTL203m (approx US$156m) in profit before taxes could be hindered by the raise in the value-added tax imposed on leasing transactions at the beginning of 2008.

Yunus Nacar, the CEO of Türkiye Finans, said leasing was one of the primary tools of participation banks for financing new investments. “This latest regulation [tax rise] not only blocks the usage of an important financial tool, but also decreases the accessibility of loans with 48-60 month-long maturity periods for small entrepreneurs,” he said.
The bank aims to increase the number of branches by 27% from 138 to 175 and intends to hire around 1,000 employees, bringing the total number of employees from 2,500 to 3,500.

Thanks to outstanding performance in the previous years, the bank had attracted the attention of foreign investors and received no less than 15 merger and acquisition proposals. After it had been agreed to sell a 60% stake to Saudi Arabia-based National Commercial Bank NCB in July 2007 and the transaction was approved by the Turkish banking regulator BDDK in early March 2008, the factual hand over proceedings were completed at the end of the same month.

Qatar Islamic Bank – Turkish Bank

As of end March 2008, Qatar Islamic Bank announced it was filing an application to run a participation bank (Islamic bank) in Turkey. It would be the fifth licence of its kind and a valuable addition to the market. The partnership talks between the National Bank of Kuwait NBK and Turkish Bank, established in 1982, have ended positively. NBK, a leading finance co-operation of the Gulf Cooperation Council’s (GCC), will buy 40% of Turkish Bank’s shares for US$160m. Turkish Bank is a conventional operating bank and will not apply for a licence as participation bank.

Conclusion

The present political turmoil set aside, the most interesting news will be generated from the result of the renegotiation of the ongoing stand-by programme of the IMF that will soon expire. The programme has dominated the Turkish financial policy for a long time and resulted, combined with sound economical reforms, in the exceptional growth and stability in Turkey over the last few years.
Among the alternatives for a replacement are post-programme monitoring and a precautionary stand-by programme that does not include funding. This will most probably result in the continuation of the present policies and will further sustain growth amidst the present turmoil on the global financial markets.

Turkey will be able to obtain the remaining loans from the IMF and if the latest review is approved by the IMF Executive Board, US$3.6bn in loans will be released.
The IMF expects Turkey’s gross domestic product (GDP) to grow by 4% in 2008 and 4.3% next year. According to the recently released, IMF ‘World Economic Outlook’ report, Turkey’s rate of inflation based on consumer prices might be estimated to be 7.5% this year 2008 and 4.5% in 2009. The expectation on the current account deficit for 2008 is 6.7% of GDP and 6.3% for 2009.

Though every economy will be affected more or less by the present credit crunch, the Turkish economy – and certainly the Turkish participation banks – appears to be relative safe. Subject to further developments in the closure case, this results in stable to slightly positive prospects for Turkey during 2008 and well into 2009.

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