August 29, 2015

Bank Asya seizure rattles Islamic banking sector in Turkey

A government crackdown on Turkey's largest Islamic lender, Bank Asya, seems to have beset the entire Islamic banking industry in the country, with the total profits of participation banks contracting by 47 percent year-on-year in May.

Islamic lenders, aka participation banks, refrain from involvement in financial activities deemed forbidden in Islamic teaching, and the operation of participation lenders is based primarily on interest-free banking since the earning of interest is forbidden in Shariah-compliant finance. According to recent data from the Association of Turkish Participation Banks (TKBB), profits from the participation banking sector slumped from TL 651 million in May of last year to TL 344 million this May, signaling a weakened confidence among depositors in the country's Islamic finance business. The whole banking sector, however, increased its profits by 8 percent in the same period. TKBB data also revealed that the share of participation banks dropped from 6.4 percent to 3.2 percent in the total profit posted by the industry.

After recording a profit every year since it was established, Bank Asya began to suffer from poor performance following the recent intensified government pressure on it. Bank Asya was founded in 1996 by sympathizers of the faith-based Gülen movement, also known as Hizmet, which the government sees as the mastermind behind investigations into massive corruption claims that became public in late 2013. Ever since the revelation of the investigations, pro-government media outlets circulated several damning reports against Bank Asya fueling worries among its depositors. After mass withdrawals by pro-government firms and institutions, state agreements with the bank such as tax collection and social security payment contracts were cancelled.

After an interim board administered the bank for three months, the Banking Regulation and Supervision Agency (BDDK) transferred control of the lender to the Savings Deposit Insurance Fund (TMSF) in late May, citing low transparency in the ownership structure. Prior to the assignment of the interim board, the BDDK unexpectedly asked Asya shareholders about their identification documents; however, only 37 percent of the shareholders managed to send them to the BDDK, with others asking for an extension of the due date.

Published on Today's Zaman, 28 August 2015, Friday