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By MUSHTAK PARKER | ARAB NEWS
Published: Mar 28, 2011 00:07 Updated: Mar 28, 2011 00:07
Kuveyt Turk Participation Bank (KTPB), a subsidiary of the Kuwait Finance House (KFH), one of the
pioneers of global Islamic finance, is a leading Turkish participation (Islamic bank). While Turkish
participation banks in general are deemed to be conservative and cautious, KTPB has set the tone by
venturing abroad into Germany, Dubai, Bahrain and Kazakhstan and by pioneering new products based
on physical gold and exporting them to markets in Malaysia and elsewhere through the global network of
KFH. These include gold-backed exchange traded funds (ETFs), gold-backed banking accounts and
sukuk. UfukUyan, CEO of Kuveyt Turk Participation Bank, a doyen of Turkish Islamic banking, has been
at the forefront of the expansion of KTPB, taking it to the top 10 tier of Turkish banks. Here UfukUyan
discusses with Arab News the state of the participation banking sector in Turkey, the performance of
KTPB in 2010 and the prospects and challenges for the industry in 2011 and beyond.
What sort of year has 2010 been for KTPB?
The year 2010 was a perfect year for Kuveyt Turk in particular and in general for the participation banks in
Turkey. The growth of the participation banking sector was double that of the conventional sector. KTPB has now
become one of the top 10 banks in Turkey and in 2010 our balance sheet growth was about 50 percent
compared with 2009. Last year we opened 25 branches and our total number of branches is 156. It is important
for us to be near to our clients. For a medium-sized bank it is normal to have over 200 branches. We plan to
reach this by next year. By the end of this year we plan to have 180 local branches. We also have a branch in
Bahrain since 2002; in Germany; a representative office in Kazakhstan; and a full subsidiary in Dubai at the
DIFC. We also have plans to go to Northern Iraq and open a branch in Erbil; and some other locations which
have not been finalized as yet.

Can you clarify your license status in Germany?

We have a partial banking license in Germany, a financial services GMBH license which allows us to gather
deposits in Germany but for accounts opened at our bank in Turkey. In our recent discussions with BaFin (the
German Federal Financial Supervisory Authority), they would like us to convert the branch into a full-fledged
subsidiary. And hopefully we would be able to upgrade the license into a full banking license which would allow
us to take deposits, extend credits and so on. We have already got out board approval to convert our branch into
a subsidiary and we have put in the application with BaFin, which initially requested us to do this. We also plan to
promote our Dubai subsidiary because there are a lot of trade flows going through Dubai nowadays. The Dutch
authorities are creating big problems for Turkish conventional banks. They don't want them to extend credits and
are putting various restrictions on their business activities. Several of the Turkish banks have decided to move to
Dubai DIFC. Europe wise it is not easy for Turkish banks, although Turkey has long-standing trade ties with
Europe.

What has been your performance in 2010?

The year 2010 is interesting with respect to the financial results. We expect the net profit to be about $100 million
and total assets over $5 billion. We also launched many new products. For instance, we became very active in
gold accounts. We are collecting gold deposits - current account gold deposits and term accounts gold deposits.
We are distributing profit to these gold accounts.

Explain to me how this works?

Any client who wishes to invest in gold come to our branch and deposit Turkish liras or US dollars and convert
them into dollar-equivalent gram of gold. The client can thus at anytime redeem the deposit either in the form of
physical gold or in dollars equivalent to the price of gold at the time. This is for the current account. For the term
account, we swap the gold into dollars and invest the dollars and the return is distributed to gold account holders
in the same format. Gold investments are culturally acceptable in Turkey. Before and during the years of the
financial crisis many Turks preferred to keep their gold at home under the mattress. These accounts are also
totally Shariah-compliant and our Malaysian sister bank, KFH Malaysia has also opened similar accounts for its
clients. KTPB is a member of the Istanbul Gold Exchange so we keep the physical gold at the exchange. We are
one of the top three banks active in the exchange.
To attract institutional gold investors, we also launched the GoldPlus exchange traded fund (ETF) which is listed
on the Istanbul Stock Exchange and has been traded since August 2010. Although the size is small we expect it
to increase. The pension funds and the insurance companies have to keep some of their investments in the form
of gold, so that they can invest directly without losing on the buy-and-sell exchanges differences.
We have also started to give gold coins from our ATMs. These coins are certified by the Istanbul Gold Exchange
and the refineries. This is unique for any bank. If you go to one of our ATMs and want to buy gold coins you can
just pay through your debit card or cash and you will get the gold coin/s.
We also issued the first sukuk in Turkey in 2010 - a 3-year $100 million issuance sold to GCC, Turkish and
European investors. It was 40 per cent oversubscribed. Our intention is to issue a 5-Year Sukuk for a minimum of
$200 million in early 2012.
With all these activities, are you planning to increase your capital further?
Last year we increased our capital by $200 million. Our equity is around $800 million. Our capital adequacy is
about 17 percent so there is ample room to grow further.

How are you using the proceeds from the sukuk?

We are using to for balance sheet purposes to finance trade and projects. We have entered the project finance
sector especially the energy sector, which is undergoing privatization. We have clients who are bidding for these
projects in electricity generation and natural gas supplies. They need financing. In order to reduce the mismatch,
this is a very important step for us. We are building the portfolio.

How will Basel III provisions impact on the participation banks?

It will impact on the sector by increasing the capital requirements as with conventional banks. But we do not have
any derivative type products as in the conventional sector. However, we are significantly active in the mortgage
market and it is not clear which ratios will be applied to mortgage loans under Basel III. Of the total Islamic
mortgage market in Turkey we have a market share of 30 percent. Some 25 percent of our consumer financing is
mortgages.

How do you see the prospects for participation banking in 2011 and beyond and what can the
government do to help the sector?
In terms of long-term borrowing, conventional banks can borrow 3-years or 5-years through bond issues and the
taxation side has been in place for many years. We need similar treatment for the participation banks. There is
only one route which is Sukuk issuance. Recently Parliament passed the tax neutrality measures for IjaraSukuk,
but we need the same level playing field for other sukuk structures.
There also no instruments to accommodate the central bank funding requirements of participation banks. So we
need the central bank to issue Sukuk, participation government notes and securities.
This year will be a volatile year for the Turkish banking sector as a whole because of the political environment
because of the elections which are due in January 2012.

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By MUSHTAK PARKER | ARAB NEWS
Published: Apr 3, 2011 22:53 Updated: Apr 3, 2011 22:53
The UK Treasury is fast-tracking a number of laws in the Finance Bill 2011 to plug several tax avoidance
loopholes including those related to high-end stamp duty land tax (SDLT) in commercial property
transactions ² both conventional and alternative (Islamic) real estate transactions.
The loophole includes the use of offshore vehicles to avoid paying full stamp duty tax on property transactions,
normally in excess of 500,000 pounds up to a few millions of pounds.
Chancellor of the exchequer, George Osborne, in his recent 2011 budget speech to the House of Commons
emphasized that ³there¶s one area that needs extra work in the coming months, and that¶s on the taxation of very
high value property, where evasion and avoidance are widespread and some of the wealthiest are not paying
their fair share. We will be redoubling our efforts to find ways of ensuring that owners of high value property
cannot avoid paying their fair share. Unfortunately, not enough has been done in recent years to tackle this
injustice. Her Majesty¶s Revenue and Customs (HMRC) estimate that 14 billion pounds were lost through
avoidance and evasion in 2008. We will close down three forms of stamp duty land tax avoidance, tighten capital
gains rules for companies ² and end the practice of disguised remuneration, which sees highly paid employees
offered tax-free, lifetime loans that are never repaid.´
There have been some ill-informed reports in the British media a few days before the budget speech on March 23
warning that the Shariah is being used by Muslims to dodge SDLT for Islamic mortgages. Suffice to say that the
loopholes have nothing to do with the Shariah or Islamic financial law, because the UK does not recognize this in
its finance legislation. Any enabling legislation in successive finance bills over the last few years dealing with
Shariah-compliant financial products does not refer to anything Islamic. These products are classified as
alternative financing schemes, whether mortgages or financial investment bonds (sukuk) and come under the
provisions of the UK banking laws.
The loopholes in the SDLT are exploited by savvy lawyers and tax accountants whether for conventional or
Alternative Islamic property transactions and HM Treasury have been aware of these for some time but hitherto
successive Chancellors have failed to act to plug the loopholes.
According to HM Treasury, the new tax avoidance measure will affect those who seek to avoid paying SDLT on
the purchase of an interest in land. As such, legislation will be introduced in finance bill 2011 to make three
changes to ensure or put beyond doubt that certain SDLT avoidance schemes are ineffective. The changes affect
the relationship between the rules on sub-sales and the alternative (Islamic) finance reliefs; the definition of a
³financial institution´ for the purposes of the SDLT alternative (Islamic) finance reliefs; and the way the
consideration is determined where land is exchanged.
The measure, maintains HM Treasury, supports the government¶s objective of a fairer tax system by ensuring
that SDLT is not avoided. Due to the risk of forestalling, HM Treasury did not embark on a formal consultation
with the market. However, a limited, confidential discussion has taken place with some external stakeholders.
³The changes will have effect on or after March 24, subject to the details of the commencement provisions. If
transactions or arrangements span March 24 then careful consideration of the commencement provisions will be
necessary, but, broadly speaking, where transactions or arrangements were entered into before 24 March 2011
but completed afterward, the old rules will apply,´ said a Treasury explanatory note.
The Treasury does not anticipate any adverse equalities or financial inclusion impact. Two of the proposed
changes relate to reliefs for ³alternative finance´ products i.e. financial products designed to be compliant with
Islamic law. However, HM Treasury stresses that the changes will not restrict the availability of the reliefs except
where they are being misused to avoid tax.
The Treasury may have put any UK debut sovereign sukuk origination on ice, but one area it continues to consult
and refine is tax matters relating to Islamic finance. As shown above, this deal with both neutrality issues to
ensure that there is a level playing field for equivalent Islamic financial products and to make sure that the UK
taxpayer and HMRC are not put at a disadvantage through any potential loopholes or peculiarities of Islamic
financial structures.
In fact, the SDLT on alternative property financing and refinancing was amongst other things discussed at the last
Islamic finance tax technical working group meeting on Oct. 6, 2010 at HM Treasury. The included the draft
capital gains legislation, an update on the position with regards to capital allowances; purchase and resale
arrangements and linked purchase and resale arrangements relating to property transactions.
The meeting revealed that:
a) There are no plans to issue further guidance on VAT rules for Islamic finance products at this time.
b) An EU working party is in the process of reviewing VAT and financial services. In respect of Islamic finance,
this was being considered within the negotiations of the draft directive and regulation text but was not considered
directly as a subject matter (although that may change going forward).
c) The value for money (VFM) case for not issuing a UK debut sovereign sukuk is poor (conceded the Treasury)
but that the situation is under review.
d) Market players offered to provide HM Treasury with further evidence in support of a UK sovereign sukuk and
the likely demand from investors.
In fact, HMRC put its latest draft of proposed changes to income and corporation tax to cater for the Shariah-
compliant equivalent of a variable rate loan and also a regime to cater for the developing market in Islamic
finance derivatives out for consultation with the deadline of 31 March 2011 for any responses.
These relate to purchase and resale arrangements in Murabaha contracts including linked ones and where
returns are in foreign currency; and those involved in Islamic finance derivatives.
³Islamic finance derivative products,´ according top the draft, ³are a developing area, and often use arrangements
such as Murabaha or other combinations of Islamic finance products to bring together the desired product. In
order for these arrangements to benefit from the rules contained within Part 7 Corporation Tax Act 2009, some
modifications are needed to certain provisions. Our aim is to create a regime for Islamic finance derivatives by
creating the concept of an ³alternative hedging arrangement´. This would be an arrangement in addition to the
existing forms of derivative product catered for in Part 7 Corporation Tax Act 2009, but which is broadly
equivalent to the conventional products already provided for within the rules.´
In fact, the document uses the term ³alternative hedging arrangement´ instead of the previous ³alternative
derivate arrangement´ as it is closer to the wording used in the ISDA/IIFM Ta¶Hawwut Master Agreement.
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