Islamic banking assets in Turkey are set to double within 10 years as government initiatives drive growth in the sector, Moody’s Investors Service said in a report.

Turkey’s Islamic finance sector is currently smaller than those in other large Muslim countries, and its slow start means it has ample room to expand, the report noted.

According to the ratings agency, Islamic banking accounted for just over 5.8 per cent of banking assets at the end of September 2019, compared to Malaysia’s 33 per cent and between 15 and 77 per cent in the Middle East.

Turkey’s Islamic banking sector is benefitting from evolving regulation and supervision. Borsa Istanbul, Turkey’s stock market operator, launched trading in sukuk (Islamic bonds) in August 2018, deepening the country's Islamic capital market activities.

The International Financial Centre in Istanbul (TKBB) also created a Central Advisory Board to ensure standardisation of Islamic banking products and alignment with international Islamic banking practices.

Among other initiatives, the government set up three new state-owned Islamic banks between 2015 and 2019, broadening access and increasing competition.

In addition, a state-funded $2.6 billion International Financial Centre in Istanbul (IIFC), scheduled to open in 2023, is expected to drive growth. It is intended to establish Istanbul as global centre for finance. The development of Islamic finance is a key pillar of the IIFC strategic plan.

There are also plans to equalise tax treatment for equivalent financial activities of commercial and Islamic finance institutions, which is expected to further broaden the sector.

In June, 2019, Moody’s cut Turkey’s sovereign credit rating deeper into “junk” territory, saying the risk of a balance of payments crisis continued to rise, and with it the risk of a government default.

Following this move, Moody’s downgraded 18 of Turkey’s banks, cutting their local currency long-term deposit ratings, and their local and foreign currency senior unsecured and issuer ratings (where applicable) by one notch and maintaining the outlooks as negative.

(Writing by Brinda Darasha, editing by Seban Scaria seban.scaria@refinitiv.com)

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