(Updates with Erdogan comments, background, detail)
By Ebru Tuncay
ISTANBUL, May 29 (Reuters) - Turkish President Tayyip Erdogan said the launch of Ziraat Bank’s Islamic business should help to attract new funds to Turkey and urged other state lenders to help to triple Islamic banking’s share of the market by 2023.
Islamic finance has developed slowly in Turkey, the world’s eighth most populous Muslim nation, partly because of political sensitivities and the secular nature of its laws. However, the landscape began to change in 2012, when the government issued its first $1.5 billion Islamic bond and kick-started regulatory moves to allow wider use of Islamic finance contracts.
Speaking at Friday’s launch ceremony for Ziraat’s new business, Erdogan said he also expects Ziraat to set up an Islamic insurance operation and called on other state lenders to introduce Islamic banking divisions soon.
“All three state lenders should quickly enter Islamic banking,” Erdogan said. “We should raise the share of Islamic banking to 15-20 percent by 2023 from the current 5 percent.”
The Islamic unit of Ziraat, the country’s largest state-run bank, will have capital of $300 million, Ziraat’s general manager Huseyin Aydin has said.
Turkey’s other two state lenders, Vakifbank and Halkbank, have also been looking to set up Islamic banks as part of the government’s efforts to develop the sector and tap a pool of cash-rich investors in the Gulf and southeast Asia.
Since its debut Islamic bond the government has issued both dollar and lira-denominated Islamic bonds and is finalising plans for another deal.
There are currently four Islamic banks operating in Turkey, holding a combined 5 percent share of total banking assets — Albaraka Turk, Bank Asya, Turkiye Finans and Kuveyt Turk, a unit of Kuwait Finance House.
Bank Asya’s profit and capital base had been eroded after it became caught up in a feud between Erdogan and a U.S.-based cleric whose followers founded the lender. Regulators took over the management of the bank in February and the banking watchdog said in March that Savings Deposit Insurance Fund had seized preferred shares in the bank. (Writing by Humeyra Pamuk; Editing by Daren Butler and David Goodman)