David O'Byrne in Istanbul -

A little over a year ago, Turkey's largest Islamic finance house, Asya Katilim Banka, boasted Sharia-compliant assets of $12.1bn – enough to place it in the top 30 of the world's Islamic financial institutions. Today, however, the future of Bank Asya, as it’s commonly called, is in doubt following a roller coaster few months that saw its shares repeatedly suspended over mounting criticism of the bank's operations and suspected government pressure over its ownership.

Much of that criticism has come from pro-government quarters, culminating in the claim by Turkish President (formerly prime minister) Tayyip Erdogan in mid-September that Bank Asya was effectively bankrupt and that the country’s banking regulator, the BDDK, should step in and take it over.

Certainly market confidence in Bank Asya, has taken a hit. Suspended for five weeks to September 15, when the shares they started trading again on the Istanbul Stock Exchange (BIST) they immediately fell by 40% to an all-time low of TRY0.64, less than a third of their price a year earlier.

In the short term the bank's problems stem from second-quarter results that showed a 25% fall in deposits over the first half of 2014 – a capital outflow widely blamed on state companies and government supporters closing their accounts. Media reports suggested this resulted in as much as TRY4bn ($1.76bn) being withdrawn in the second quarter alone. "A huge outflow of deposits, especially from state companies, has caused a short-term liquidity problem for the bank," says a banking analyst at a major Istanbul brokerage, asking not to be identified.

This liquidity problem has been exacerbated by an unusually high rate of non-performing loans (NPL) of 10% – way above the 2.5% average for all Turkish banks and the 3.5% average for Turkey's Islamic lenders. "A high NPL ratio means high provisioning, which again reduces liquidity," explains the analyst, pointing out that despite the liquidity issue, on paper at least, the bank remains in good health with a capital adequacy ratio of 15%, comfortably above the 12% minimum decreed in Turkey's banking regulations.

A TRY225m ($100m) capital increase was approved on October 15, which will provide the bank with some short-term relief, but analysts suggest it’s likely to be followed by further requests for funds.

Ownership issues

Analysts concur that Bank Asya's position is unlikely to be solved without a change in the bank's main shareholders.

Currently 54% of Bank Asya stock is traded on the BIST, with 40% of the remainder held directly or indirectly by the bank's eight-man board, all believed to be supporters of the religious movement of US-based moderate Islamist preacher Fetullah Gulen

Heading a movement that reportedly boasts anywhere from 1m to 8m adherents in Turkey and a business empire that includes Turkey's Zaman newspaper group and Samanyolu TV channels, a nationwide chain of schools, Gulen was until around two years ago an important ally of Erdogan's Justice and Development Party (AKP).

The relationship benefited both sides: Gulen's support is widely credited with having helped bring the AKP to power in 2002, and the resulting favourable economic climate in turn helped the movement's businesses.

Bank Asya itself enjoyed a rapid expansion from being a minor participation bank (as Islamic banks are called in Turkey) with a few branches, to a major provider of small business loans with a countrywide network of 272 branches and even a branch in the Iraqi Kurdish capital of Erbil.

That rapid growth though has contributed to the bank's current dire position, argue analysts. Unable to compete directly with Turkey's main small and medium-sized enterprise (SME) loan providers Halkbank and Garanti, Bank Asya has grown aggressively by targeting second-tier SMEs, which by definition carry a greater risk of default.

The spectacular fallout between Erdogan’s AKP and the Gulen Movement, which resulted earlier this year with the leaking allegedly by Gulen supporters of illegally recorded phone conversations suggesting corruption at the highest level of government, has made that risk look all the greater.

Manoeuvrings

What will happen now is unclear. Analysts suggest that the country’s banking regulator could press for a change in the major shareholders, but talks over the summer between existing shareholders and both Qatar's Islamic bank and Turkey's Ziraat bank came to nought, with the latter instead being granted approval to launch its own Islamic banking arm.

Bank Asya itself has warned it may take the banking regulator to court if it doesn't act to protect the bank from go court if the regulator doesn't act to protect it from damaging reports. Indeed, Turkish banking law allows for the prosecution of anyone disseminating negative publicity about a bank that could cause it to collapse – a stipulation apparently lost on both the government and much of the pro-government media. "Bank Asya didn't do anything wrong; before the capital withdrawals it was in good shape," says Emre Deliveli, economic columnist on Turkey's English language daily Hurriyet Daily News, suggesting that the bank's problems are a direct result of government actions.

"The bottom line is that if you do anything to displease or anger Erdogan, you can expect problems," he says.