''KFK Designed as a Surety Company to Provide End-to-End Digital Services''

We talked to Ömer Karakuş, General Manager of Katılım Finans Kefalet, about the emergence of the PFI and the contributions of its establishment to the participation banking ecosystem.

First of all, what is the main purpose of surety companies and which areas of activity do they focus on?

Welcome and thank you for your visit.

The main purpose of surety companies is to contribute to the development of our country by supporting companies that have difficulty in accessing credit due to their inability to produce sufficient collateral. This support is especially important for small and medium-sized enterprises that have to access financing because they do not have sufficient equity. While banks meet the credit demands of firms up to a certain level, they demand collateral from their customers to reduce their risks as their credit demands grow. However, most of these enterprises have difficulty in meeting the collateral requirements. In this case, surety companies step in and act as guarantors for these enterprises, making it easier for them to access the financial support they need.

Can you give information about the processes experienced during the establishment phase and the support provided by the Ministry of Treasury and Finance?

There were companies established for this purpose in our country before. However, a special reference to the development of the Participation Finance ecosystem in the strategy report prepared by the Finance Office of the Presidency of the Republic of Turkey, as well as the directive of the Advisory Board of the Participation Banks Association of Turkey that an exclusive Surety company should be established to respond to the needs of customers who want to act in accordance with the principles of Participation Banking, has been a factor accelerating the establishment of our company.

The PBAT took the initiative to accelerate the process and initiated the establishment work in the first months of last year. Mr. Osman Çelik, who is currently the Deputy Minister of HMB, was the Chairman of the Board of Directors of the PBAT in his capacity as the General Manager of Vakıf Participation Bank at that time. The contributions of Mr. Osman Çelik and Mr. İsmail Vural, Secretary General of the PBAT, to the establishment work were very valuable. With the ownership of HMB, the process progressed rapidly and our company was registered and started its activities on March 29, 2023.

My involvement in the process coincides with the first period of the company's establishment. I worked for 33 years at Kuveyt Türk Participation Bank, my first workplace where I started my professional life. Throughout my working life, I worked in different positions in different areas such as loans, marketing, product development. Due to my engineering background, I was assigned with many infrastructure development, process improvement and organization works throughout my working life. Especially recently, I have worked on analytical decision support systems in credit transactions and took an active role in infrastructure projects at Kuveyt Türk. My background was deemed appropriate and I was assigned to establish the company at the end of February 2023 with the proposal of the PBAT and the approval of the HMB.

Surety companies assume surety risks based on two main sources. The first one is the equity that the shareholders put into the company, and the other and more important one is the resources provided by the Ministry of Treasury and Finance. HMB support is of great importance for surety companies due to the size of the credit volume it generates. In fact, this is the most important factor that increases the value and importance of surety companies.

The HMB uses different incentive mechanisms in managing the economy. Some of these mechanisms are provided directly by the HMB itself, while others are provided through intermediaries. The surety system is one of these methods. Surety companies are essentially the companies that manage the process that ensures that this incentive provided by the state reaches the right addressees and in the appropriate way.

Are there some conditions to benefit from this guarantee?

Of course there are. This is a great opportunity, but since the state assumes the risk of indemnification, it requires companies to fulfill certain conditions. For example, the state is cautious towards companies and their partners that have tax debts, have reduced solvency or have gone bankrupt in the past. It supports firms that are actually solvent but have problems accessing credit because they cannot meet the required collateral conditions. On the other hand, it also puts forward conditions such as the maturity of the loan, the purpose of use, the sector of activity, the size of the company and similar conditions. In other words, it provides this incentive to firms in selected sectors and regions, provided that they meet certain conditions.

What are the main reasons for the emergence of the DFI and what problems was it created to solve?

Guarantee companies demand that banks become partners in order to benefit from the guarantee opportunities they provide. For this reason, Participation Banks had to become partners of KGF and İGE in order to enable their customers to benefit from this service. This situation was deemed inappropriate by the Advisory Board of the PBAT due to the fact that these companies, of which they were partners, were also guarantors of loans that were not suitable according to the principles of participation banking, and an opinion was expressed that an exclusive surety company should be established. Since the decisions of the Advisory Board are binding, this issue was discussed at the TKBB Board of Directors and a decision was taken to establish a new surety company. In this way, an important gap in the Participation Finance Ecosystem was filled.

Could you give information about the process of the Republic of Turkey Ministry of Treasury and Finance becoming a partner of the PFI?

Mr. İsmail Vural, Secretary General of the PBAT, told Mr. Nurettin Nebati, our former Minister of Treasury and Finance, about the PFI A.Ş., which they decided to establish upon his question about the agenda and needs of the PBAT within the scope of improving the financial architecture and infrastructures initiated by the ministry. The Minister showed interest in the issue and expressed his Ministry's willingness to become a partner in the company. This decision of the Ministry further accelerates the process.

After the General Manager was appointed, the company was established in a small office allocated to the company at the headquarters of the PBAT, and the establishment of the company was completed in a short period of one month. Established on March 29, 2023, the company is the first company in which all participation banks are shareholders. It is our greatest desire that this situation, which is a source of pride for us, will be a pioneer for new unions and joint projects in the Participation Finance Sector.

Could you give us more details about the developments following the establishment of the PFI and the changes in the shareholding structure?

Following the establishment of the company, action was quickly taken to complete the necessary staff. On the one hand, we focused on the infrastructure work required for the management of surety processes. We had to act quickly because with the establishment of the PFI, Participation Banks had to terminate their partnerships in other surety companies and meet the surety needs of their customers through the PFI.

With an intense effort, we were able to provide our first surety from our own resources exactly four months after the establishment. Of course, we cannot say that we still have a perfect infrastructure. But with the improvements we have made, we are rapidly progressing towards having a more secure, more useful and user-friendly infrastructure every day.

As you know, Hayat Participation and TOM Bank were the first banks to obtain licenses in the field of digital banking in Turkey. As soon as both participation banks completed their infrastructure work and started their operations, partnership negotiations with KFK were initiated. The PBAT, which took an active role in the establishment of KFK and had a 6% stake in the company, transferred its shares to these two digital banks in equal shares and left the partnership. Since the workflow processes of digital banks are different from conventional banks, we need to adapt our system infrastructure to meet these new needs.

With the new shareholding structure, 96% of our company's shares belong to Participation Banks and 4% to HMB. Unlike other surety companies, the main shareholders of the PFI are the Participation Banks. In a sense, Participation Banks are both the boss and the customer of KFK.

Could you tell us about the need for a surety system for digital participation banks?

Now, digital participation banks are actually the institutions that need the surety system the most since they have to perform all their transactions end-to-end digitally. They can receive real estate mortgages as collateral through digital channels, but the legal infrastructure is not yet ready to receive customer checks or other similar collateral. For this reason, the guarantees provided by the PFI are of critical importance for digital participation banks in terms of securing the funds disbursed.

Of course, in order for the process to proceed through end-to-end digital channels, there will be some adaptations that need to be made in the infrastructures of both Digital Participation Banks and the PFI. For example, since Digital Participation Banks do not have branches, they have to make data entry directly through an interface that the customer enters directly, rather than through branch personnel as other participation banks do. Of course, this requires increasing some security and control elements in the PFI infrastructure. By collaborating on this issue, we will work on what can be developed to both facilitate the workflow and secure the process by identifying the necessary control points.

What do you think about the impact of digital banking on corporate customers?

In fact, digitalization in Retail Banking in our country and in the world has come a long way. Transactions such as account opening, deposit relationships and the establishment of simple credit relationships have largely been digitized end-to-end. However, digitalization on the corporate side is not yet at the expected level, it is still in the maturation stage. While branch banks are working on solutions that will respond to the needs of legal customers through end-to-end digital channels in order to provide fast and on-site service to reduce costs, this issue has accelerated and gained importance with the introduction of digital banks. In line with the requirements of the future, KFK was designed as a surety company that will provide end-to-end digital services.

Can you tell us about KFK's target audience and digitalization process?

Our target audience is primarily SMEs. Large companies have an advantage over SMEs in accessing loans due to the strength of their financial structures and their capacity to produce collateral. However, banks need to be cautious when allocating loans due to the fact that it is more difficult to access consistent data of small enterprises on a yearly basis and many of them are unable to provide the necessary collateral conditions. This makes it difficult for SMEs to access financing. As Katılım Finans Kefalet, we were established to facilitate SMEs' access to finance and we aim to become an end-to-end digital surety company. Currently, we have not yet reached the desired level of automation in our guarantee allocation processes... However, we aim to complete the necessary integrations and infrastructure work and integrate our decision support system, which we are currently working on, into our GFCS infrastructure by the end of the year.

What are your thoughts on artificial intelligence-based decision support systems?

This is already our goal. To carry out the guarantee allocation processes with as objective criteria as possible. Banks have experienced customer dissatisfaction and customer losses due to the so-called "auto-allocation" models they use. For this reason, they now prefer to use decision support systems (DSS) that leave the final decision to the user, learn from their mistakes and improve themselves. These artificial intelligence-based models make most of the decisions themselves, but leave some decisions, called "gray areas", to the user. The user examines the machine's recommendation and makes a decision based on their own opinion. This final touch minimizes customer dissatisfaction and losses.

Can you tell us about KFK's surety infrastructure?

As a company, we are building a bail infrastructure that is completely customized for us. The design and software is unique to us. At the beginning of the work, we held meetings with our stakeholders and received their opinions. We designed our software by taking their opinions into consideration.

As I mentioned before, as KFK, we started to provide guarantees from our own resources. Currently, we do not have any partner that does not use guarantees except for the digital banks that have recently joined us. In order to use Treasury resources, we need to meet the minimum requirements set by the HMB. We have fulfilled most of these requirements, which are of a very high standard, and we have signed our protocol with the HMB. When we complete some small deficiencies that will be closed in a short time, we will be able to start providing guarantees from HMB resources.

Can you give information about the incentive and grant programs provided by the government? Can you share the contents of the GFC package?

When necessary, the government provides incentives to selected sectors and companies in line with its periodic strategies. For example, the current treasury packages were prepared for exporters and investment firms. There are also additional incentives for companies operating in the earthquake zone.

As KFK, we have 3 announced and ongoing guarantee packages based on our equity. One of them is for the financing of operating expenses, while the other two were organized for exporter companies and companies making investments in parallel with the current policies of our economic administration.

Could you tell us about the process of determining your packages?

We first announced a pilot package for financing the operating expenses of companies. After reviewing our infrastructure with the experience gained from this package, which will expire at the end of March, we announced two more packages for exporter and investor companies. We organized our last two guarantee packages to address selected sectors in parallel with the HMB's economic program. If we are lucky, we will soon announce a larger guarantee package based on equity. With this package, we will support companies' access to the financing resources they need by providing guarantees for business financing under the theme of "sustainability".

In the upcoming period, we will work on collaborations with KOSGEB and EXIMBANK. We are also evaluating opportunities to utilize domestic and foreign special purpose funds.

What do you think about the economic process and the upcoming elections?

Since the fight against inflation is the main focus, the economy is trying to cool down. However, I believe that the credit needs of companies will continue to increase in the coming days. In an inflationary environment, companies' operating costs and accordingly their financing needs increase, but their ability to provide collateral decreases. Some companies have so far been able to carry out the process with their reserves, but eventually they will have to turn to foreign resources, even if their costs are quite high. On the other hand, we may see deterioration in the balance sheets of firms with collection problems. This will make access to finance even more difficult. For this reason, I think there will be an increase in surety demands in the coming period.

It is also admirable that the Participation Banks are establishing such a joint company while competing among themselves.

It really is. KFK is the first enterprise in which all Participation Banks are partners. This situation not only makes us proud but also imposes some responsibilities on us. We need to show a successful performance in order to establish similar enterprises in the coming period.

Aware of this responsibility, we manage competition among our partners in a balanced manner. We announce packages taking into account the needs of our partners and treat capital as a trust. This is very important for us. I can say that our biggest advantage is that we employ employees from almost all participation banks. Naturally, this situation bears traces of the culture of all participation banks. As a result, we are inspired by the cultures of all participation banks to create KFK's own unique structure. Our aim is to provide our stakeholders with the best customer experience with a unique service standard.

Thank you for your enlightening information. I wish your company all the best for the Participation Finance Sector.

Interview Mustafa Özkan