Interest-free pension funds have been making inroads into Turkey ever since the requirement necessitating holding at least 30 percent of Treasury bills and bonds in investment portfolios was lifted in 2008.
After the establishments of participation banks, interest-free pension funds were next in line. The Capital Markets Board (SPK) lifted the requirement that 30 percent of the funds in the pension funds pool should be in Treasury bills and bonds.
With the new regulation, participation banks have begun 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 revenues 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. His administration first released bonds tied to the revenues of the Bosporus Bridge in 1984 and the Keban hydroelectric power plant in 1985. Current data show participation banks in Turkey have 2.2 million customers, with funds reaching TL 11 billion. When looking at the big picture, participation banks in total represent only 1 percent of the total banking sector, but the number of customers and funds is growing by 10 and 25 percent, respectively. According to Leyal Özkul and İsmail H. Genç’s thesis “Islamic Pension Funds: Investment and Development,” a pension is a fixed payment continuing until the end of your life starting from the day you retire, which differs for men and women and occupation. Pensioners also have the option to receive a lump sum of money on a pre-arranged date after retirement. The lump sum at retirement will contain interest because the pensioners’ deposited capital will always be less than the lump sum. The pensioner will deposit, in most cases monthly, a pre-determined amount of money to the pension fund. The pension fund will then invest this pool of money in various investment assets such as commodities, stocks, interest-bearing tools or in companies which deal in fields prohibited by Islam. Moreover, conventional pension funds contain uncertainty. This is because the payment of the pensioner is postponed to a future date without considering whether the particular person can reach that age. Lastly, conventional pension funds contain excessive risks such as leverage and stock options. Since these tools lead to gambling, their inclusion is not allowed in the pool of Islamic pension funds.
Similar in theory
Their counterpart, Islamic pension funds, theoretically look similar to conventional pension funds but differ in practice. For instance, Islamic pension funds have a well-diversified portfolio whose composition is regulated to ensure stability and to guarantee that the investments are both socially and economically desirable, such as infrastructure projects. Moreover, Islamic pension funds may not invest in interest-bearing instruments such as Treasury bills of corporate bonds or in companies working with alcoholic beverages, pork meat production or conventional banks. But they can invest in Shariah-compliant Islamic bonds, such as stocks and sukuks. Financial tools such as contra trading, margin trading and short selling are not allowed as they bear excessive risk. The pensioner should be treated like a shareholder and has the right to sell-off future installments, which solves the uncertainty found in conventional pension funds. So, the very basic difference is that retirees with Islamic pension funds face the risk that a project could make a loss while retirees in conventional pension funds are not concerned about the loss. Islamic pension funds reinforce ethical way of financing while in their counterparts do not. It is not possible to give out a loan or invest based upon synthetic products in Islamic pension funds while conventional pension funds may be involved in tools that are too risky. Moreover, fund management will also have a Shariah advisory board that will ensure the funds are invested in conformity to Islamic religious requirements.
First retirement solution
Türkiye Finans Participation Bank was the first financial institution to introduce interest-free retirement solutions for its customers. Speaking to Sunday’s Zaman, Abdullah Akdemir, the assistant general manager of the department of individual banking, said they are highly impressed with the current interest shown in the retirement packages. “After the SPK removed the obligatory holding of interest-bearing instruments, we started to collect GESs issued by the state in 2009 to present a new way for those who want to save for their retirement but, for religious reasons, are opposed to interest-yielding pensions. Our next step was to find a strong partner who had experience in pension funds. We and Garanti Emeklilik have been offering interest-free retirement packages since April 2010,” Akdemir said. He noted that Türkiye Finans is currently only using GESs in its investment pool but plans to add interest-free instruments such as commodities and stocks. Akdemir points out they aim to reach 10,000 private retirement customers by the end of 2011. Albaraka Türk Participation Bank is also planning to introduce an interest-free pension fund together with Anadolu Hayat Emeklilik. Assistant General Manager Mehmet Ali Verçin said they look forward to taking part in Turkey’s private pension system. He noted that the legal regulation -- necessitating interest-bearing instruments -- prevented them from entering the sector. “Islamic pension funds pledge high gains for the economy because people sensitive to interest will have the opportunity to continue to maintain their welfare level even after retirement. This encourages people to invest in long-term savings, which will then be invested in various projects. We are proud to contribute funds to the economy,” Verçin said. He noted that their primary tool in the pension fund is the GES but that they will also include stocks, currencies and commodities. Verçin added that they aim to attract 10,000 retirees in the next year. Paul Wouters, a lawyer and legal analyst who specializes in Islamic finance in Kuala Lumpur, stated the Islamic model of finance supports a more resilient real economy which gives more back to the community and leads to a better spread of return since the money of the individual is directly used in favor of the real economy. He adds that investments in Islamic finance are more secure than usual targets in conventional finance because long compound growth is more important than short-term gains. Moreover, Wouters reminds that Islamic finance prevents speculation since there is always an asset supporting every investment transaction (either asset-based or asset-backed). Wouters pointed out that Turkey had escaped the global financial crisis -- except for the fall out of the scaling down of the real economy as a consequence of the credit crunch -- thanks to the banking model, which stayed closer to the Islamic one. Islamic pension funds are ready to give Turkey its place on the global stage if the varieties of investment products increase. After all, Turkey is a relevant member within the Islamic economy. Moreover, it seems there is still more space for interest-free pension funds in Turkey as these pension funds represents only a small proportion of the total private system. We should not be surprised to see the other two participation banks in Turkey reveal their private pension funds soon.
source : Todays Zaman