Wednesday, September 14, 2011

Turkish participation banks should enter Europe

S&P recently suggested that Turkish participation banks, as Islamic banks are known in the country, could sustain their recent growth (they accounted for 5% of assets in the country at year-end 2010, compared with 2.8% in 2005) if they leverage their international ties further (three of the four participation banks have GCC-based owners).  I would take this one step further and suggest that they could provide a lead in continental Europe for Islamic banking with financial support from their owners. It is already underway with Kuveyt Turk, the Turkish subsidiary of Kuwait Finance House, opening a branch in Germany and Bank Asya planning an acquisition in the Balkans.

Not only does the bank's affiliation with larger GCC-based Islamic banks provide the financial resources to pursue international expansion, they are geographically closer to Europe than GCC-based banks are and Turkey has been in long-running talks to join the European Union.  In addition, the history of dealing with sensitivity towards the "Islamic" label in Turkey should make it easier for them to adapt the Islamic branding to local conditions better where the "Islamic" label could attract controversy.

There is nothing that requires an Islamic bank to drop the "Islamic" branding, although many people (I have heard Rushdi Siddiqui raise this point several times at various conferences) have suggested it is better if they do so in order to allay suspicions that Islamic banking is just for Muslims.  Removing the "Islamic" label--perhaps even by adopting the "participation bank" identity that they are used to in Turkey--will focus the attention of the regulators, politicians and the broader public (i.e. the bank's potential customers) on the products they are offering.

Given the general unfamiliarity with Islamic banking in Europe, the focus should be on the products the bank offers and not the fact that they were designed with a focus on Shari'ah-compliance.  If Islamic banks are offering a superior product, there is no need to introduce an element of unfamiliarity into the marketing process.  That being said, the Islamic banks have to make sure they focus on creating products that do actually provide a benefit to the bank's customers.  While initially the focus will (naturally) be on the Muslim populations in these countries (e.g. the large Turkish minority in Germany), sustainable growth will only come by attracting non-Muslims (as has occurred in Malaysia).

If non-Muslims are going to adopt Islamic banking, there has to be a benefit.  Saying the banks work without interest will only create more questions (are you giving away money for free?).  There has to be an actual benefit.  Perhaps a focus more on the prohibition of gharar and maysir would be better.  A European participation bank could attract non-Muslims by appealing to the restriction that prohibits banks from engaging in deceptive products that contain excessive contractual uncertainty and prohibit the banks from taking speculative bets through conventional derivatives, credit default swaps and collateralized debt obligations. 

This same exercise should not be limited to Turkish participation banks in Europe.  The Islamic banking industry needs to find some real reason why it is different.  Either it competes on cost or there has to be a substantive difference with conventional banks.  Appeals to Shari'ah-compliance alone will work for a time, but narrowing the potential market to just the Muslims who are otherwise unwilling to work with a bank risks the future growth prospects for the industry. 

No comments: