IFN 2024 ANNUAL GUIDE PUBLISHED!

Although Islamic banking has a very modest size compared to conventional banking, it is developing both nationally and internationally with continuous momentum by revealing its potential. In the field of participation banking in Türkiye, the understanding of service shaped in line with customer expectations and needs in the financial services sector; In the light of technological developments, it provides the opportunity to improve the operational efficiency of banks, increase service quality and improve customer experience. Developments in regulatory issues and new generation technologies are increasing the effectiveness of new ecosystem players such as neo-banks and fintechs (financial technologies) in the market. It is important for banks to be accessible to provide end-to-end service to their customers in order to meet customer expectations. With the pandemic, the issues of sustainability and access to financial opportunities have come to the fore. In line with these developments in the banking sector, institutions continue to closely follow new generation technologies and changing trends.

Review of 2023

Considering human-centric business models in participation finance system, our inclusiveness expands even more with the awareness of our social responsibilities. For the healthy and sustainable growth of the economy, all the efforts continue to provide resources to the real sector with a focus on production, employment and exports. The market share of participation banks (PBs) in Turkish banking sector, which was 5% in 2017, increased to 8.5% in 2023, and asset size increased by 50.6% compared to the previous year to TRY1 trillion 787 billion 160 million (US$65 billion). The net profit of participation banks increased by 82.6% in 2023 and was recorded as TRY38,165 billion (US$1.4 billion). Total shareholders' equity increased by 48.4% to TRY125,170 billion (US$4.5 billion).

While developing the digital channels without lagging behind technology, Turkish PBs also continue to invest in our traditional distribution channels. The number of branches has reached 1,438 and the number of employees has reached 19,261. When we look at its development in recent years, it is seen that we PBs have achieved an outstanding growth performance above the sector in 2023. 

Important steps in the sector

While ensuring institutional, functional and mutlidimensional development of participation finance industry in Türkiye, important steps have been taken to implement the legislation and institutions needed by the ecosystem. With the regulation made by Banking Regulation and Supevision Authority (BRSA) for digital and service banking, two new digital participation banks named Hayat Finans and T.O.M started their operations in 2023. It is anticipated that digital participation banks will make a significant contribution to the growth and product diversity of the sector with their new banking approach. 

Due to its direct funding of trade, service and production, the real sector has always been the most important stakeholder of Participation Banks. In this context, it was decided to establish Islamic Credit Guarantee Fund- Katılım Finans Kefalet A.Ş. (KFK), which will support the real sector, especially Small and Medium Enterprises (SMEs) to access the financing they need established in partnership with the Ministry of Treasury and Finance and Turkish Participation banks. KFK is expected to make a significant contribution to the growth of the participation finance sector while meeting the collateral needs of the real sector.

On the other hand, participation finance, which is positioned to become a hub of regional interest, will have a crucial impact on augmenting the proportion of participation finance in the sector with the inauguration of the Istanbul Finance Centre (IFC). The growth of participation finance in Türkiye, particularly in the Turkic Republics and Africa, and the International Finance Corporation's aim to become a global financial centre, led Istanbul to emerge as an international hub of attraction for participation finance.

Participation Banks Associaiton of Türkiye (TKBB), as the facilitator institution of participation banks, , collaborate extensively with public authorities, bank associations, financial institutions, and academic institutions that require assistance in the areas of training, certification, and technical services for the development of capacity for the participation finance industry in different jurisdictions. Participation Finance and Fintech, key focus areas in the IFC project, are rapidly expanding in Türkiye and have the potential to be strategic partner for other countries, thereby providing opportunities for capacity-building activities.

Borsa Istanbul and Participation Index

Borsa Istanbul and the Participation Banks Association of Türkiye (TKBB) unveiled the Participation Indices after assessing firms listed on Borsa Istanbul in line with participation principles. The goal is to assist retail investors, who base their investment strategies on participation principles, in selecting companies that comply with such principles. This initiative aims to raise awareness on participation principles and facilitate more funding opportunities for companies committed to interest-free finance principles.

In determining the companies to be included in the indices, the Board bases its decisions on the "Standard for Issuance and Trading of Equity Securities" and the "Guidelines for Determining Companies Operating in Compliance with Participation Finance Principles" prepared by the TKBB Advisory (Shariah) Board. These guidelines form the technical groundwork for evaluating and selecting eligible companies.

Sukuk

Today, sukuk has become the foremost capital market product of the global Islamic finance sector. Türkiye has secured its position among the top five jurisdictions in the global sukuk issuance league, alongside Malaysia, Saudi Arabia, the United Arab Emirates and Kuwait as of 2023.

The initial sukuk issuance by participation banks was conducted by Kuveyt Türk Participation Bank in 2010 with a 3-year sukuk issuance of TL 100 million that welcomed and appreciated by international investors. Whilst a sukuk issuance volume of TL 359 billion was accomplished between 2010 and 2023, approximately TL 50 billion worth of sukuk was issued in the first 9 months of 2023. The Turkish Treasury and Finance Ministry issued sukuk worthed TL 1.6 billion for the first time during 2012-2023. In the same period, the total issuance of TL-denominated sukuk reached around TL 286 billion. Furthermore, the issuances of gold-based sukuk amounted to approximately 233 ton between 2017 and 2022. The issuance of Sukuk by the public sector is highly significant in guiding the private sector while being regarded as a crucial financing instrument for achieving necessary funding for the growth of the economy.

The issuance of green Sukuk, a vital capital market product where Islamic finance meets green finance in the global arena, is also surging rapidly. The significant expansion of conventional green finance globally led to the orientation of Islamic finance in this industry, resulting in the establishment Islamic green finance field. This field saw remarkable growth, particularly after 2017. The quantity of green Sukuk, the principal financial instrument of Islamic finance in the realm of green finance, has burgeoned rapidly over the past 5 years.

In accordance with participation finance principles, Kuveyt Türk issued the "Global Sustainable Tier 2 Subordinated Sukuk" marking the first time this innovative Sukuk model was utilized in Türkiye and worldwide. Emlak Katılım, another participation bank, followed suit by issuing Türkiye's first green sukuk based on labor-capital partnership through the Private Fund Pool Participation Account, leading the way in the development of innovative sukuk models in accordance with participation finance principles.

Albaraka Türk has been awarded the "Best Sukuk Issuance of the Year Award" on a sector basis at the Islamic Finance News Awards for their innovative green sukuk based on labour-capital partnership, a first in Türkiye. The inclusion of Albaraka Türk in the Borsa Istanbul (BIST) Sustainability Index as the first participation bank is a testament to their commitment to sustainability. Their efforts within the scope of the Carbon Disclosure Project (CDP) have earned them one of the highest ratings in the banking sector. 

While the Development and Investment Bank of Türkiye issued Türkiye's first social sukuk amounting to TRY50 million to be used in the agricultural sector, Ziraat Katılım Participation bank has accomplished its first international Sukuk issuance, raising US$500 million, which piqued the interest of 135 investors from 24 countries.

Steady progress of sector towards its 2025 targets

The Istanbul Finance Centre project has set a goal to establish Türkiye as a foremost global financial hub. Achieving this objective necessitates adopting the proper measures and structuring institutions soundly. Consequently, Istanbul is anticipated to serve as a financial hub and become a center for interest-free finance. The Participation Finance Strategy Document, Türkiye's inaugural national strategy document within the field of participation finance, serves as a blueprint for establishing Türkiye as a preeminent player in participation finance.

Furthermore, considering the changes in customer expectations and dynamic business environment in the industry during post-pandemic period, TKBB revised the strategic road map of the participation banking sector for the period 2021-2025. Six vital strategic targets including communication, ecosystem, product diversity,standards and governance, digital, and competence building will be enlightening the road-map of the sector for advancing their mutual collaborations and tapping 15% market share by 2025.

Development of standardization 

The Central Advisory (Shariah) Board was founded in 2018 by the BRSA under TKBB, as a standard-setting institution. The Board aims to improve practices in Islamic finance in Türkiye with regards to Shariah compliance. Its objectives include reducing regulatory and implementation differences, as well as enhancing positive perception among society. The Board has been active for 5 years and consists of 7 board members and 6 experts.

To date, the Advisory Board has made 78 Shariah rulings and issued 5 Shariah regulations. These standards are available online, in Turkish, English, and Arabic on the Advisory Board's website. The regulations include Share Certificate Issuance and Trade, Murabahah, Tawarruq, Suretyship, and Mudarabah.

Moreover, an additional standard named Non-Compliant Incomes with the Participation Finance Principles and their Elimination Standard is currently under process for publication. Furthermore, two standards, named the Musharakah Standard and the Wakalah Standard, are being drafted.

Convergence of sustainable finance with participation finance

When considering the principles such as "Islamic Finance Principle", "Social Benefit Principle", "Mutualisation/Solidarity Principle", "Full-Service Principle", and "Trade Principle", which are among the "Essential Banking" principles published by Participation Banks Association of Türkiye (TKBB), the current values of PBs can exactly comply with social and environmental development.

PBs are taking active agenda of expanding their product range through sustainable finance activities, appealing to a broader customer base, and increasing their reliability, awareness, and reputation within the society.

In this regard, among Turkish PBs, steps are being taken to internalise sustainability and transform it into a management and finance approach. Published strategic plan by Banking Regulation and Supervision Authority (BRSA) for Sustainable Banking covering period of 2022-2025 with the vision of effectively management of the environmental and social risks and opportunities including climate change, and providing the financing needed for the transition to a low-carbon economy on favorable terms and also Draft Guidelines on Effective Management of Climate-related Financial Risks by Banks and Draft Communiqué on Green Asset Ratio by BRSA are pioneering initiatives which will shape the adaptation of banking industry for the sustainable finance transformation. 

Preview of 2024

In 2023, two digital Islamic banks, TOM Digital Participation Bank and Hayat Finans, entered the participation banking sector. With the inclusion of these digital participation banks in the system, it is aimed to increase the market share of participation banks in the Turkish banking sector and also to improve financial inclusion from the perspective of customers and distribution channels, as well as product and service diversity.

The effective usage of increasing digital opportunities by participation banks and the spread of open banking applications with the support of the fintech ecosystem is an important leverage for the development.

A separate law for participation finance institutions, which is expected to come into force by first quarter of2024 in the Turkish participation finance industry will be an important catalyst in terms of holistic governance of the ecosystem and ensuring both financial development and customer penetration. The participation finance sector, which aims to increase its market share with the inclusion of new participation banks in the sector, is expected to continue that growth momentum with the engagement and development of insurance, capital markets and non-banking financial institutions.

Conclusion

In order to achieve the targeted development of Islamic banking worldwide, political and economic stability in certain markets, elimination of regulatory gaps, capacity and competence development through growth, transition to scaled economies, increasing technological investments, adaptation for sustainable finance requirements and improving the quality of operations are important.

Today, the digitalization processes that develop with advancing technologies will make significant contributions to the sector and customers, contributing to the continuous rotation of the wheels of the economy and growth targets.