Wednesday, January 18, 2012

New country, same story?

The boom in Islamic finance in Dubai from 2005-2008 was built on the back of the real estate sector and when real estate faltered, it brought down several Islamic finance institutions.  So it should bring a bit of caution to see that the Participation Banks in Turkey are concentrated in real estate construction as well.  An article in Today's Zaman (ht Islamic Finance Turkey) breaks down the loans from Participation Banks into the uses of these funds:
Business Loans
Construction loans: $8.01 billion
Trade: $3.52 billion
Textile: $2.05 billion
Food: $1.35 billion

Consumer Loans

Total: $3.46 billion
Of which housing loans: $2.03 billion

Adding the construction loans and housing loans gives just over $10 billion (out of  $20.6 billion in total loans).  Is this too much?  Only time will tell if this is sustainable.  An IMF paper looking at the exposure of US banks before the credit crisis found that they had a higher level of exposure to real estate (62.4%), although the exposure to commercial and residential real estate combined for just over 50%. 

So far Turkey's economy has been growing rapidly--as has its banking system (Participation Banks included)--and hopefully there will not be surprises down the road.  But it is never too early to consider whether there might be warning signs, though more analysis than just looking at the share of real estate financing in Participation Banks' loan books is needed.

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