Fitch Ratings-Dubai/London: Medium-term growth prospects for Islamic banking in Turkey are supported by the segment's strategic importance to the authorities, above-sector-average growth (aided by the entry of three state-owned banks), and Turkey's favourable demographics, Fitch Ratings says. Nevertheless, the Turkish operating environment is challenging, and low public awareness, limited segment distribution channels and a lack of product standardisation constrain growth.

The share of Islamic banks in Turkey rose to 7.8%, 6.9% and 10.5% of end-2021 banking sector assets, loans (financing) and deposits, respectively. Segment FX-adjusted financing grew by 29.7% in 2021 versus 8.4% for conventional banks. The segment’s consistently above-average growth reflects its low base and growth at the state banks, whose market shares have increased relative to the participation banking segment as a whole.

Islamic banking’s strategic importance in Turkey and the large, untapped Muslim population could support medium-term prospects. Potential new regulation to increase segment product standardisation and transparency could also support segment growth.

The segment non-performing financing ratio fell to 3.2% at end-2021 (sector: 3.2%), partly flattened by growth, while the Islamic banks’ Stage 2 ratios were 0.2%–9% of respective financings. However, asset quality risks are high given macro volatility, high segment foreign-currency (FC) financing (47%), exposure to risky sectors such as construction, and seasoning risks.

Forbearance on risk-weighted assets (RWAs) and uplift from the alpha factor support the end-2021 11.6% segment common equity Tier 1 ratio. The inflationary environment could boost profitability, but banks’ capitalisation remains sensitive to lira depreciation, asset quality risks and growth.

Turkish Islamic banks are mainly deposit-financed (end-2021: 86% of total funding) with above-sector-average deposit dollarisation (73%). Reliance on FC wholesale funding is low. Deposit dollarisation is likely to remain high despite the FX-protected lira deposit scheme. FC deposit outflows, if not offset by shareholder support, could pressure banks’ FC liquidity.

-Ends-

Media Relations: Louisa Williams
Email: louisa.williams@thefitchgroup.com

Peter Fitzpatrick, London
Email: peter.fitzpatrick@thefitchgroup.com

Additional information is available on www.fitchratings.com

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