Dr. Cihan Aktas Deputy Executive Director Banking and Financial Institutions Department Central Bank of the Republic of Turkey Session III: Supporting Oman Real Economy and Entrepreneurships Oman Second Islamic Banking & Finance Conference
Oman Second Islamic Banking & Finance Conference Cihan Aktaş Deputy Executive Director Central Bank of the Republic of Turkey BANKING AND FINANCIAL INSTITUTIONS DEPARTMENT 17 March 2013
Outline Financial Stability, Real Economy and Participation Banking in Turkey Islamic Banks role in MENA Region 2
FINANCIAL STABILITY, REAL ECONOMY AND PARTICIPATION BANKING IN TURKEY
Using new policy tools to sustain financial stability and at the same time focusing primarily on price stability objective Price Stability Financial Stability Structural Tools Cyclical Tools
12 Why was it needed? Financial stability concerns mounting after global stimulus Credit Growth and Current Account Deficit (Percent, 12-Month Cumulative) 16 10 CAD/GDP Δ Credit Stock/GDP (right axis) 14 12 8 10 6 8 4 6 4 2 2 0 0 Source: CBRT. Last Observartion: December 2012 5
New Policy Framework: Structural and cylical tools have been put into effect Structural Tools Maturity Based Reserve Requirements Price Stability Financial Stability Leverage Based Reserve Requirements Reserve Options Mechanism Structural Tools Cyclical Tools Cyclical Tools Policy Rate Interest Rate Corridor TL Liquidity Management FX Liquidity Management
47 Credit growth has been pulled down to reasonable levels in regard to financial stability Total Loan* Growth (Year on Year Change, Percent) 42 37 32 27 22 17 Total Loan Growth Total Loan Growth (FX adjusted) 12 7 Source: CBRT. *Total banking sector, credit cards included, NPLs excluded. Last Observation: February 15, 2013. 7
Curbing credit growth has allowed to rebalance CAD Current Account Balance (Seasonally Adjusted, 3-Month Average, Million USD) 2000 1000 0-1000 -2000-3000 -4000-5000 -6000-7000 CAD CAD (excluding energy and gold) -8000 Source: CBRT. Last Observation: December 2012 8
Real effective exchange rate (REER) movement also has been closely monitored CPI Based REER (Base year: 2003) 140 130 QE2 Policy Reaction - I 120 110 100 90 REER 2 percent 1.5 percent EZ Crisis Policy Reaction - II 80 Source: CBRT.
Smooth GDP increase has been obtained during the process 4,75 Actual GDP (Base Quarter: 2008Q1, Seasonally Adjusted, Natural Logarithms) 4,70 4,65 4,60 4,55 4,50 4,45 4,40 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 2005 2006 2007 2008 2009 2010 2011 2012 Source: TURKSTAT, CBRT.
Average growth rates shows stable and resilient growth despite gloal downturn 8 7 7 Growth rates 2002-2006 (average) 2007-2011 (average) 6 5 4 3 4 2 1 0 Turkey Emerging market and developing economies Middle East and North Africa World Euro area Emerging market and developing economies World Middle East and North Africa Turkey Euro area Source: IMF, World Economic Outlook, October 2012
Strong export performance has been obtanied in the last decade 12 10 Export Performance (Average Annual Growth Rate, 2001-2011) 11 10,6 8 6 5,1 5,5 4 3,8 4,2 2 0 World Euro Area Devloping Asia MENA Countries Latin America Turkey Source: TURKSTAT, IMF World Economic Outlook April 2012
01.2003 05.2003 09.2003 01.2004 05.2004 09.2004 01.2005 05.2005 09.2005 01.2006 05.2006 09.2006 01.2007 05.2007 09.2007 01.2008 05.2008 09.2008 01.2009 05.2009 09.2009 01.2010 05.2010 09.2010 01.2011 05.2011 09.2011 01.2012 05.2012 09.2012 Market share shifting from EU to MENA enables to diversify risks and contributes stability of growth 60 Exports (exc. gold) Market Share (6-month cumulative, per cent) EU-27 50 40 30 Other Europe North America Asia MENA 20 10 0 Source: TURKSTAT. 2012 Last Observation: November 13
100% Mena countries has increased their importance as a main trade partner of Turkey in recent years Export composition by region (as % of total export) Other Countries MENA Eurozone 90% 80% 70% 65 65 64 65 66 60 57 56 56 48 60% 50% 40% 30% 20% 15 16 17 17 18 24 26 27 26 34 10% 0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: TURKSTAT, CBRT
12.08 02.09 04.09 06.09 08.09 10.09 12.09 02.10 04.10 06.10 08.10 10.10 12.10 02.11 04.11 06.11 08.11 10.11 12.11 02.12 04.12 06.12 08.12 10.12 12.12 12.08 06.09 12.09 06.10 12.10 06.11 12.11 06.12 12.12 The financial sector is mainly dominated by Banks and basic indicators stress out continued resiliency Return on equity Return on Assets (right axis) 21 20,3 3,0 Non-performing Loans Ratio (%) 20 19 2,7 2,8 2,6 Banking sector Participation Banks 18 2,4 Deposit Banks 17 2,2 6 5 4 3 5,27 4,7 3,01 16 15 14 1,8 2,0 1,8 14,5 1,6 2 1 0 2005 2006 2007 2008 2009 2010 2011 2012 21 20 19 18 Capital Adequacy Ratio (%) Tier 1 Capital Ratio (%) 17,9 17 16 15 15,1 14 15
2003Q1 2003Q3 2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3 2002/12 2003/06 2003/12 2004/06 2004/12 2005/06 2005/12 2006/06 2006/12 2007/06 2007/12 2008/06 2008/12 2009/06 2009/12 2010/06 2010/12 2011/06 2011/12 2012/06 2012/12 Low market penetration: Turkish banking sector has considerable growth opportunies onwards 120 Banking Sector Assets (as % of GDP) Total Deposits and Loans (USD billion) Deposit Loan 100 80 60 40 20 500 450 400 350 300 250 200 150 100 50 0 0
CAR ratios indicate strong stance and resiliency Capital Adequacy Ratio (banking sector %) CAR Ratios 35,0 30,0 25,0 20,0 25,1 CAR legal limit(basel) target level(brsa) 30,9 28,2 23,7 21,9 18,9 18,0 20,6 19,0 16,6 17,9 25 20 15 23,73 Banking Sector 12,45 Participation Banks 17,87 13,9 15,0 10 10,0 5,0 5 0,0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 0 2005 2012
Turkish Participation Banking Experience 18
Participation Banking - Milestones Regulation with decree in force of law 83/7506. (Establishment of Special Finance Houses ) -Establishment of Special Finance House Association -Special Finance House Security Fund came into effect Transfer of Special Finance House Security Fund to Saving Deposit and Insurance Fund 1983 1999 2001 2005 Inclusion within the Banking Law Transformation to Participation Banks from Special Finance Houses 19
Rapid growth Total Assets (Billion USD) 39 Funded Credits (Billion USD) 27 17 17 22 28 30 12 12 16 20 20 7 10 5 7 1983 1999 2001 2005 2005 2006 2007 2008 2009 2010 2011 2012 2005 2006 2007 2008 2009 2010 2011 2012 Funds Collected (Billion USD) 21 21 18 13 13 27 2005 5,1% 2012 Market Share 6,0% 6,2% 4,2% 3,3% 6 8 2,5% 2005 2006 2007 2008 2009 2010 2011 2012 Assets Loans Deposits 20
Mainly funded by deposits but need to access alternative funding Liability Composition (%) Sukuk Issuance Wholesale 1983 funding 1999 2001 14% Equity 10% Other 8% Funds Collected 68% US$100 m Kuveyt Türk US$350m Kuveyt Türk April 2010 Rent certificate (sukuk) regulation February 2011 Tax incentives for rent certificates August 2010 3 years 5.25% October 2011 5 years 5.875% 21
Large exposure to SMEs and neeed to diversify asset mix Asset Composition (%) Funded Credits (%) Other 8% Liquid Assets 20% Securities 4% 1983 1999 2001 Corporate 34% Households 19% Funded Credits 68% SME 47% 22
New sovereign sukuk issues provides to diversify asset structure and gives facility to liquidity management Sep 2012 1st Int. Sovereign Sukuk : US$1.5 billion, 5.5 y, 2.8% Oct 2012 1st TL Sovereign Sukuk : TL1.6 bn (US$0,9 bn), 2 y, 7.5% 1983 1999 2001 Feb 2013 2nd TL Sovereign Sukuk: TL1.5 bn (US$0.8 bn), 2 y. 23
Plans to continue above sector growth will deliver results by maintaining current capital ratios Capital Adequacy Ratio (%) 25 23.7 21.9 20.6 20 18.9 18.0 19.0 17.9 16.5 16.1 16.6 15 1983 1999 2001 15.2 15.3 15.1 14.0 13.9 12.5 10 5 0 2005 2006 2007 2008 2009 2010 2011 2012 Participation Banks Banking Sector 24
ISLAMIC BANKS ROLE IN MENA REGION
Increasing path in Trade Volume Among Developing Countries Necessitates more Linkages 26
Inflation trends in MENA Region is more unstable 20 Inflation Outlook (end of period consumer prices, %) 18 16 14 12 10 8 6 4 2 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013* World Euro area Emerging and developing economies MENA Turkey Source: IMF, World Economic Outlook, October 2012
Export performance should be developed in MENA Countries 12 10 Export Performance (Average Annual Growth Rate, 2001-2011) 11 10,6 8 6 5,1 5,5 4 3,8 4,2 2 0 World Euro Area Devloping Asia MENA Countries Latin America Turkey Source: TURKSTAT, IMF World Economic Outlook April 2012
New financial sector treatments should be implemented New Regulatory Structure Liquidity Constraints Adaptation of potential Challenges MENA banks readiness to Basel III Liquidity Coverage Ratio Need for Level 1 Assets 29
Treatment Framework New Regulatory Framework necessitates new formulas for Islamic Banks Level 1 or Level 2A Assets are needed Low Risk and High quality Shariah Compliance Risk should be minimized by Central Advisory Board Deep Financial market Origination of new products 30
Value of Islamic Banks Financial Inclusion Close linkages to real economy Value Major driving force-sukuk 31
Achievements of Islamic Banks Showed resilience in Global crisis US$1.3 trillion of total shariah compliant assets in 2012. Achievements Rapid growth momentum (19% per year since 2006). $131bn sukuk issuance with 54% increase than 2011. 32
Opportunities Scope for its development less than 1% the global financial industry even in jurisdictions with substantial Muslim populations largely concentrated on the banking sector (banking -93%, capital markets - 5% and takaful -2%) Potential to diversify into new growth areas such as trade and infrastructure financing especially in emerging economies. Meet the increased demand for simpler and more transparent products and back-to-basics finance. 33
Challanges Remain a form of financial intermediation that serves the real economy. Differences in accepted standards of Shariah compliance. IFSB, IDB, AAIOFI Challenges The regulatory treatment of the new and innovative Islamic financial solutions The legal framework that ensures attention to sustaining financial stability. 34
Challanges Lack of alternatives to conventional Repo agreements and treasury management practices Difficulties related with managing liquidity through Open Market Operations (OMOs). Lack of enough emergency facilities. Difficulties related with deposit insurance-takaful 35
Significance of Supervising Mikro prudential surveillance of Islamic finance should be supported by macro prudential framework The development of indicators for assessment of the soundness as well as vulnerability of the whole system Significance of supervision 36
To sum up... Robust and resilient PB is crucial for financial stability Have brought the idle funds into the system Provided alternative financial opportunities to manufacturers and businessmen using funds PBs and Islamic Banks can help financial inclusion Operating environment supports future growth but there are many challanges 37
Oman Second Islamic Banking & Finance Conference Cihan Aktaş Deputy Executive Director Central Bank of the Republic of Turkey BANKING AND FINANCIAL INSTITUTIONS DEPARTMENT 17 March 2013