İMKB launches new index to attract Middle Eastern capital

İMKB launches new index to attract Middle Eastern capital

İMKB’s chairman Hüseyin Erkan (r) with Bizim Securities chairman Bekir Boydak during the ceremony to launch the Participation Index.

January 08, 2011, Saturday/ 17:30:00

The İstanbul Stock Exchange (İMKB) launched its first Participation Index comprising 30 listed companies in line with a strategy to attract interest in the country’s Islamic finance sector.

The İMKB on Thursday hosted the presentation and signing ceremony of the Participation Index. Bizim Securities will serve as the consultant of the Participation Index, which some have also termed the “Islamic Index.”

Association of Turkish Participation Banks (TKBB) President Fahrettin Yahşi spoke during the ceremony at the İMKB and stressed the importance of the participation banks’ experience in stock trading. “This is the first step towards the standardization of the capital markets. This [participation] index is part of our strategy to expand investment tools in this field and add new financial services for investors,” Yahşi said.

Interest in interest-free Islamic pension funds is also rapidly increasing, so Islamic bankers are looking for new ways to expand the interest-free pension fund sector. Establishing a participation index could also be perceived as one of the steps towards presenting additional investment tools to their customers.

The İMKB hosted the presentation and signing ceremony of the Participation Index that comprises 30 listed companies which are in line with participation banks’ principles. Retail and industry-related companies form the overwhelming majority of companies represented in the index that is expected to be used as an investment tool in Islamic pension funds

There has so far been no benchmark index that meets the needs of investors sensitive about interest in Turkey. With the establishment of the Participation Index in the İMKB, the gap of attracting interest-sensitive investors both from Turkey and from foreign countries such as the Gulf region is now possible.

The Participation Index started to trade on the İMKB as of Thursday under the KATLM symbol.

Theoretically, it looks similar to conventional indexes on the stock exchange but differs in practice. Participation indexes do not include conventional banks’ stocks since their business purpose is to trade “money” which results in paying and receiving interest. Moreover, companies whose operations include alcoholic beverages, pork meat production, interest-bearing commodity trading, gambling, etc. will not be listed in the index In general, the index will include the stocks of companies that conform to Islamic norms.

Moreover, companies that would like to be listed in the Participation Index should not have loans that exceed 30 percent of their market value, while income from non-Islamic compliant business operations and interest-bearing investments should be no more than 5 percent of the company’s total revenue.

The 30 biggest companies that comply with these criteria now form the Participation Index. Retail and industry-related companies form the overwhelming majority of companies represented in the index, which will be reviewed every three months and used as an investment tool in investment and index funds, and Islamic and conventional pension funds.

Companies listed in the Participation Index include BİM, Türk Telekom, Enka İnşaat, Bank Asya, Emlak Konut GYO, Ford Otosan, Petkim, Koza Altın, Aygaz, Trakya Cam, Çimsa, Sinpaş GYO, Doğus Otomotiv, Gübre Fabrikaları, Albaraka Türk, Türk Traktör, Bagfaş, Mardin Çimento, Akçansa, Adana Çimento, Pınar Süt, Nuh Çimento, Afyon Çimento, Netaş Telekom, Mondi, Tire Kutsan, Vestel Beyaz Eşya, Deva Holding and Pınar Et.

The US-based Dow Jones Islamic Market Indexes is one of the biggest and most widely used indexes in this field. It includes thousands of broad market, blue chip, fixed income and strategy and thematic indexes that are in line with Islamic norms.

Islamic financing makes inroads in Turkey

Turkey’s Islamic financing started in 1985 when Albaraka Türk, part of the Albaraka Banking Group, and Faisal Finance established their operations in Turkey. The small but growing participation sector in Turkey has four members: Albaraka Türk, Bank Asya, Kuveyt Türk and Türkiye Finans. The size of the assets of these banks surpassed TL 37 billion as of the second quarter of 2010 while the number of personnel in this sector is now over 12,500.

The basic principle of these banks is to offer an ethical and equitable mode of finance such as no investments in alcohol, tobacco or gambling. The rules are derived from the Islamic Law and a supervisory board established within the bank always has to approve any transactions to make sure they are in accordance with Islamic norms. Investment tools and transactions handled by these banks may not include any interest, certain types of uncertainty and gambling activities.

In line with attracting the wealth of interest-sensitive customers in Turkey, the Capital Markets Board (SPK) lifted the requirement that 30 percent of the funds in the pension fund pool should be in Treasury bills and bonds. With the new regulation, participation banks began offering retirement packages to customers who do not want interest-bearing accounts. The primary investment tool used in the pool of these pension funds is income-indexed bonds (GES) since the Islamic mode of finance depends on assets and not on money itself.

GESs distribute the revenue of the Turkish Petroleum Corporation (TPAO), the State Supply Office (DMO), the State Airports Management General Directorate (DHMİ) and the Directorate General of Coastal Safety (KIYEM). The very first example of a GES was introduced by the late Turgut Özal, a former prime minister and president of the Turkish Republic, in 1984.