Turkish Islamic banks’ market shares will grow further, says Fitch Ratings in a new report, given the strategic importance of participation banking to the government and the government’s strategy to grow participation finance more broadly in Turkiye – as outlined in Turkiye’s recently published Participation Finance Strategy Document.
The segment’s market shares have risen in recent years, mainly been driven by the entry and rapid growth of three state-owned banks. At end-2022, Islamic banks accounted for 8.3%, 7.6% and 10.1% of banking sector assets, financing and deposits, respectively.
The government’s target is for participation banks to reach 15% of banking sector assets by 2025. Limited distribution channels and low public awareness could constrain the segment’s prospects.
Risks to Islamic banks’ credit profiles are heightened by exposure to macro and market volatility amid policy uncertainty, high inflation, Turkiye’s external vulnerabilities, seasoning risks and construction sector exposure, among other factors.
Uncertainty over the impact of the elections and earthquakes also creates downside risks. However, the segment non-performing financing ratio fell to 1.6% at end-2022, supported by high nominal financing growth and collections in the inflationary environment.
Turkish Islamic banks are largely deposit-funded, which results in fairly limited external FC debt exposure, mitigating refinancing risks. Nevertheless, segment deposit dollarisation is high, and FC liquidity could come under pressure from sector-wide deposit instability, if not offset by shareholder support, or prolonged market closure.
Segment capitalisation is adequate, supported by full total reserves coverage of non-performing financings and pre-impairment profit buffers. The segment CET1 ratio (end-2022: 14.6%) includes 350bp–400bp uplift (Fitch estimate) from the alpha factor (50% reduction in risk-weighted assets financed by profit-share accounts) and sector-wide risk-weighted asset forbearance. Nevertheless, capitalisation is sensitive to macro and asset quality risks, lira depreciation and growth.— Fitch Ratings
