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Bank Asya keeps a finger on pulse of economy

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Points of Essence:

  • Bank Asya an Islamic bank known as a participation bank in Turkey, has emerged leader of the Islamic financial services sector in Turkey. It operates on Islamic principles and provides financing to merchants and leases machinery and other business capital for business start-ups. It however, does not trade government bonds and securities.
  • The industry looks set for a bright future with the establishment of four participation banks from among a total of 50 banks in Turkey. Over the last few years, it has seen the strong growth of the sector, which has outperformed its conventional counterpart.
  • Bank Asya is an Observer member of the Islamic Financial Services Board.

Parallel to the growth in the Islamic finance industry worldwide, Turkish participation banks, formerly called special finance houses, have also been expanding and attracting new customers, with Bank Asya having emerged as a leader in the sector.

“We take the pulse of the economy every second,” said Ünal Kabaca, general manager of Bank Asya, the largest participation bank in Turkey. Speaking to Today’s Business in an exclusive interview, Kabaca explained the risks and advantages associated with the industry. “Since we are on the frontline when the tides of the economic change, we have to be able to monitor the real market very closely,” he pointed out. Bank Asya, like other participation banks in Turkey, operates on Islamic principles and does not trade government bonds and securities. It extends loans to merchants and leases machinery and other business capital needed to start or expand businesses. “This pushes us to be very vigilant and to be able to sense what is going to happen in the market before it happens,” he explained.

The industry experienced the shock of the 2001 financial crisis when İhlas Finance House went bankrupt and caused the loss of 40 percent of the deposits held by the sector at that time. The subsequent aftershocks led to losses of an additional 35 percent by other special finance houses, though they were not hit as hard as other banks because of their ties to the real economy. The industry recovered rapidly and the deposits at participation banks have now been taken into the banks’ guarantee fund (to avoid other shock withdrawals). Since the crisis, the sector has acquired bank status.

“As part of the legal requirements instituted in 2005, we had to change the name to Bank Asya, along with four other participation banks in Turkey,” said Kabaca. However, he added: “Nothing changed in terms of the operation and functioning of the bank. … The principle of interest-free banking is still at the core of the modus operandi.” He strongly dismissed allegations that the name change also indicated a change in the rules of Islamic banking, saying, “Those are just rumors implanted to curtail the growth of the sector.”

The market share of participation banking in Turkey is not that large — they hold only 3.2 percent of active deposits. In terms of credit usage, participation banks own 4.4 percent of total credit extended to consumers in Turkey. “Considering only four participation banks exist among a total of 50 banks in Turkey, this is a sizable portion of the market,” said Kabaca. He also pointed out that all participation banks in Turkey are medium-sized financial institutions. In his opinion, the striking feature of the participation banking system in Turkey is the strong growth of the sector, which has outperformed its conventional counterpart now for eight consecutive years.

Kabaca also explained how the participation system works and how they managed to post record profits. “The system is based on loss and profit, and there is no predetermined rate of return on your investment. You might get your share of loss if, say, the leasing of machinery is lost and can’t be recouped by the bank,” he said. The bank note only says how much of the profit or loss will be shared by the consumer and the bank — usually 20 to 80 percent, respectively. All funds are deposited in a common pool.

Participation banks also profit on sales of capital investment and leasing. For example, a bank might sell machinery to a merchant with a markup from the supplier.

Misconceptions about participation banking are caused mainly by the similarity of the rate of returns with the interest rates offered by conventional banks. However, Kabaca said this was not always the case. “For example, we were offering 2.5 percent profit/loss share on foreign currency deposits in 2002 while other conventional banks were providing 25 to 30 percent of interest rate to their consumers. That is almost tenfold of what we were able to offer,” he said.

Kabaca is a believer in the future importance of participation banking in the world. “Turkey will become the most important economy in the region, and participation banks will play a role in that growth,” he stated. “We are in the real economy and our lending policies contribute to the growth of the economy by adding a positive value every step of the way,” he added.

Kabaca also talked about the mortgage crisis and its impacts on banking in Turkey. He said, first of all, the sub-prime lending crisis was nonexistent in Turkey, and also that there are important cultural factors at play when it comes to house lending. “Turkish people are very sensitive about their debts,” he said. “They use their savings to pay most of the home price when buying houses and use credit for the rest.” This protects both consumers and lenders in Turkey. He added that only 6 percent of Bank Asya loans are extended for home mortgages and that the bank does not expect defaults on these loans.

Kabaca also responded to questions related to Turkey’s political conditions. He clearly stated that they do not endorse one or another political party. “The important thing for us,” he said, “is the country’s stability and general economic outlook. … Just like other financial institutions and banks, we would like to see what is ahead, as the market does not like uncertainties.” Kabaca stressed the need for democracy in politics, adding, “whoever convinces the public through fair and free democratic elections gets the mandate to rule the government.”

Kabaca also values Turkey’s relationship with the International Monetary Fund (IMF). “We do not need to part ways with the IMF. We can look for standby agreements that are not binding on the government but that will serve as an important anchor for the economy. It will enhance our standing in international markets,” he stated.

As a pro-competition bank, Bank Asya strongly supports the privatization of state-owned banks. Kabaca explained that funds in state hands had become an impediment to competition. He also argued that privatization would drive interest rates downward and would benefit the public as well. “The government can still borrow money from private financial institutions,” he said.

Kabaca said he saw great growth potential in the credit card sector in Turkey. “Forty million credit cards have been issued in Turkey and this is not high when you compare it to a population of 70 million — the second-largest in Europe after Germany,” he stated. He noted that the credit card sector “will eventually stabilize itself.” Karaca also dismissed what he considers to be credit card debt mania theories in Turkey. “The default rate is around 7 percent right now, which is a very tolerable number,” he said.

Bank Asya recently launched Asyacard DIT, a new card to “make life easier.” It’s a multi-application chip and PIN card combining the power of MasterCard EMV OneSmart features with an integrated municipal toll and transit application. The card also offers the additional benefits of MasterCard PayPass contact-less technology.

In Kabaca’s view, Bank Asya’s approach of putting toll and transit functions onto contact-less smart cards has allowed it to seize the opportunity offered by the Kahramanmaras Public Transportation Project, a municipal initiative in eastern Turkey. AsyaCard DIT owners can also use their cards for the tolls on motorways and bridges, including the two bridges over the Bosporus in İstanbul that connect Europe and Asia.

Kabaca said his company would continue to provide its customers with a variety of new and exciting products under the motto “Different Solutions for Different Expectations.” He stated, “While we carefully examine the needs of our customers through various distribution channels, we serve our client base with the latest technological developments in the banking sector.”



Written by Suapi Shaffaii

August 30, 2008 at 5:21 am

One Response

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  1. Nice info. Thanks for sharing.

    January 10, 2010 at 12:06 am

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