Islamic banking, terminologically known in Turkey as participation banking, is regulated by the Banking Regulation and Supervision Agency ( BRSA ) under a single Banking Law and associated regulations. One of the significant milestones of the participation banking sector is the establishment of the Central Advisory Board ( Shariah Board) with a decision of the BRSA on the 22nd February 2018.
The Central Advisory Board is an independent board under the Participation Banks Association of Turkey ( TKBB ) and its decisions are binding on participation banks. The main responsibility of the board is to set standards and principles for participation banks and the other Islamic finance industry stakeholders in Turkey.
In
Turkey, each participation bank has its own advisory committee. The
main principles of financial products will be coming from the Central
Advisory Board, where advisory committees will be responsible for
managing the
Shariah
issues
at the institutional level and apply the standards of the Central
Advisory Board to the transactions. Also, they will be reporting
their decisions to the Central Advisory Board periodically as
well.
In addition to the
Shariah
board,
there are interior and exterior audit mechanisms within participation
banks. The internal auditing department works with the advisory
committee regarding the details of its operation. These auditors are
certified by
TKBB
through
a standardized and comprehensive certification program.
The Public Oversight Accounting and Auditing Standards Authority (KGK) published regulations on auditing standards where audits will be done in a unified and systematic way. Another topic KGK is working on is on external auditor companies that are to be added to the system.
Review
of 2020
Banking
and finance
In
Turkey, there are six fully-fledged participation banks (three of
them are state-owned) out of 52 banks:
Albaraka
Turk
,
Emlak
Katilim
,
Kuveyt
Turk
,
Turkiye
Finans
,
Vakif
Katilim
and
Ziraat Katilim. As of September 2020, the total asset size of the
participation banking industry is around US$55 billion with a market
share of 7.1% via a recorded performance increase of 57% compared to
the end of 2019.
With the dedication of banks’ management to improve the asset quality of participation banks in Turkey, the participation banking industry achieved 3.6% of the non-performing receivables ratio by October 2020 which was 5% at the end of 2019. By October 2020, the six participation banks in Turkey has a total network of 1,243 domestic and foreign branches, operating with 16,859 personnel with an increase by 5% compared with the end of 2019.
Starting from 2019, development and investment banks are allowed to provide financing with interest-free financial products, limited to the resources they provide with interest-free methods according to a new amendment at BRSA published in the Official Gazette dated the 25th January 2019. As the pioneering institution, Turk Eximbank obtained official authorization from the BRSA to give funds under the participation finance methods as a development and investment bank. In August 2020, Turk Eximbank announced that within the scope of investment credits to be provided with the principles of participation finance and the Murabahah contract made with the IsDB under the guarantee of the Ministry of Treasury and Finance, US$100 million-worth of resources will be provided by the bank directly for the investment fund needs of Turkish exporters within the terms between four and 10 years.
According
to the
IFSB
Stability
Report 2020, although Turkey has a 2.6% market share from global
banking assets with its outstanding and continuous
Sukuk
performance,
it managed to get an 8.7% market share from global
Sukuk
issuances
and is ranked among the top five jurisdictions in the
global
Sukuk
market
industry.
Due to significant performance from both sovereign and private issuers, high demand from investors and the willingness of the government to develop the Sukuk market, there is no doubt that Turkey will be one of the key markets for enhancing the Sukuk market globally. The issuance of green Sukuk is also on the agenda of participation banks which will take the banks back to the international markets.
The accumulated Sukuk issuance performance of the Turkish Treasury was remarkable, reaching TRY75 billion (US$9.78 billion) in 2020 including inflation indexed lease certificates compared with TRY1.2 billion (US$156.4 million) in 2012. The regular issuance of the lease certificates in domestic markets continued in 2020 and Turkish Treasury raised TRY36.6 billion (US$4.77 billion) through the Turkish lira-denominated issuances in the period of January to October. In 2020, the Turkish Treasury continued to issue gold-denominated lease certificates which were issued for the first time in October 2017, in order to broaden the investor base and to diversify borrowing instruments. The total amount of issuances in 2020 reached 51.1 metric tons of gold-denominated lease certificates. Participation banks also gradually developed their Sukuk portfolio and the accumulated volume of Sukuk issuance of the banks as of October 2020 with a currency breakdown is as follows: TRY117.7 billion (US$15.34 billion), US$3.5 billion and RM1.9 billion (US$464.04 million).
Participation insurance ( Takaful )
Currently,
there are 12
Takaful
operators
in Turkey and four of them are fully-fledged with the rest operating
with windows. Participation insurance received a boost following the
implementation of the participatory insurance regulatory framework
starting from 2017. The framework was launched as a separate class of
business in the Turkey following the issuance of a regulation
published in the Official Gazette in September 2017 by the General
Directorate of Insurance. The market share of the
Takaful
sector
in Turkey reached TRY3 billion (US$732.7 million) and achieved a
market share of 5% by September 2020 which was 2.8% in 2017.
Preview
of 2021
In
line with the New Economy Programme for 2021–23 and the 2021
Presidency Annual Programme, the Finance Office of the Presidency of
Turkey (CBFO) has started working on a draft strategy development
document and a roadmap for participation finance, which will
encompass not only participation banks but also other sectors of
participation finance in Turkey. The strategy document will revolve
over key concepts such as
Maqasid
Shariah
,
value proposal, risk-sharing and human-centric finance. One of the
goals of the strategy document is to intensify the links among
participation finance, socially responsible finance, impact
investing, sustainable finance and environmental, social and
governance finance, in line with the Istanbul Financial Center
project which posits participation finance as one of its two pillars.
Among others, the CBFO also has plans to initiate academic
collaborations including a new journal on participation finance.
Conclusion
Despite
the disruptions in economic and commercial activities due to
COVID-19, participation banks performed well during 2020. Strong
support from the government and regulators with the necessary
measurements is crucial for the adaptability of the sector during
challenging conditions. With the strategic vision of having Istanbul
as an international finance center, the participation finance
industry in Turkey will initiate solid actions which will attract
both the domestic and international markets. Keep your eyes on Turkey
as it is time for it to shine.
Fatma Cinar is the head of international relations at the Participation Banks Association of Turkey . She can be contacted at fatmacinar@tkbb.org.tr .
This
article was first published in IFN Annual Guide 2021