IFN Correspondent Report: Türkiye The role of participation indices for development of participation finance

IFN Correspondent Report: Türkiye

The role of participation indices for development of participation finance

By Fatma Cinar

The evolving landscape of finance has increasingly highlighted the significance of ethical and sustainable investment practices. In Türkiye, the collaboration between Borsa Istanbul and the Participation Banks Association of Türkiye (TKBB) marks a pivotal development in promoting participation finance principles. This partnership has led to the establishment of participation indices, which evaluate companies listed on Borsa Istanbul. The indices are designed to guide individual and institutional investors who prioritize adherence to participation finance principles in their investment decisions.

By creating a structured framework for assessing companies, Borsa Istanbul and TKBB aim to enhance investor awareness and accessibility to enterprises aligned with ethical financial practices. A total of six participation indices are traded on Borsa Istanbul, with approximately 270 companies included in these indices. This initiative not only assists investors in identifying compliant firms but also shaping the future of finance in the region and fostering a more inclusive and principled investment environment.

The Advisory Board of the participation index, operating under the auspices of TKBB, plays a crucial role in the development and governance of the participation indices. This board is tasked with the meticulous evaluation of companies whose shares are traded on Borsa Istanbul to determine their eligibility for inclusion in the indices based on adherence to established participation finance principles.

Key to the role of the Central Advisory (Shariah) Board is the development of the Share Certificate Issuance and Trade Standard (Standard) and its accompanying guidelines and supporting documents. These resources serve as a basic tool for assessing whether companies are in line with the principles of participation finance.

To facilitate the assessment process, the Advisory Board has implemented the Participation Finance Principles Information Form (Information Form). This form is designed to gather essential data from companies, enabling the Advisory Board to evaluate their adherence to the standards and guidelines. The Advisory Board, composed of representatives from both TKBB and Borsa Istanbul, is responsible for reviewing and verifying the accuracy of the submitted information. 

The framework for this evaluation is primarily based on the ‘Share Certificate Issuance and Trade Standard’ and the ‘Guidelines for Determining Companies Operating in Compliance with the Principles of Participation Finance’. This committee's oversight ensures that the data reflects the current operational practices of the companies, thereby maintaining the integrity of the indices.

Companies included in the participation index are obliged to the responsibility of regularly updating their Information Forms. By responding to the inquiries outlined in the Information Form, companies not only demonstrate their commitment to transparency but also enhance their eligibility for participation in funding opportunities within the participation finance sector.

In contemporary financial markets, non-financial factors, particularly ESG criteria, have emerged as critical components in the investment decision-making process. Investors increasingly recognize that a company's adherence to ESG principles can significantly influence its long-term viability and profitability. This shift in focus highlights the need for a holistic understanding of investment opportunities, where ethical considerations and corporate responsibility play a pivotal role alongside financial performance.

Investing with an ESG lens allows investors to assess not only the financial health of a company but also its impact on society and the environment. Companies that effectively integrate ESG factors into their business strategies are often viewed favorably, as they tend to be better equipped to navigate risks related to regulatory changes, social shifts, and environmental challenges. For instance, a company that proactively addresses climate change through sustainable practices may mitigate potential liabilities and enhance its brand reputation, thereby attracting a broader base of investors.

In the context of the participation indices established by Borsa Istanbul and TKBB, the emphasis on non-financial factors aligns with the principles of participation finance. These principles advocate for ethical investment practices that support social welfare and sustainable economic development. By fostering a market environment that values ESG considerations, the participation indices aim to guide investors toward companies that not only comply with participation principles but also demonstrate a commitment to responsible governance and positive societal impact.

In summary, the criteria for inclusion in the participation indices are meticulously crafted to uphold the principles of participation finance. This structured approach not only aids investors in making informed decisions but also promotes broader awareness and adherence to participation principles among companies listed on Borsa Istanbul. Through these efforts, Borsa Istanbul and TKBB strive to cultivate a robust participation finance ecosystem in Türkiye.

Table: Type of Participation Indices 

Source: https://www.borsaistanbul.com/tr/sayfa/10350/katilim-finans

Fatma Cinar is the deputy secretary general of the Participation Banks Association of Turkiye (TKBB). She can be contacted at fatmacinar@tkbb.org.tr.