Financial Reports 11.03.2021, 23:31 11.03.2021, 23:40


The world has changed. How our industry - participation banking, finance and investment - chooses to respond to these changes may be a generation-defining moment. How can participation finance mobilize to address the imminent challenges of the real economy and provide not just liquidity support, but solvency support to the vital Turkish SME and corporate sector? Can participation finance in Turkey and the region use this opportunity to become truly responsible, inclusive and ethical, while at the same time contributing to the country’s growth and development? How can we as an industry ensure this is substance over form on a permanent basis? What opportunities do the UN Principles for Responsible Banking offer participation financial institutions in Turkey? How can the core values of participation finance be further applied to sustainable and socially responsible finance and investment strategies?We ask a respected panel for a new roadmap to success for participation banking, finance and capital markets in Turkey.


Turkey is a crucial market for Islamic finance (which it calls participation finance) and has made both substantial efforts to develop its sector and significant strides in moving it forward. Up until now, it has struggled to raise awareness and build market share beyond 5% of the banking market, but recent events have shown that progress is most certainly being made. On the 26th and 27th October 2020, IFN was delighted to present its annual IFN Turkey Forum, in which leading regulators, practitioners and stakeholders came together to discuss the challenges, opportunities and insights of the Islamic finance industry in 2020. LAUREN MCAUGHTRY writes.

Despite the huge diversification of all alternative financial instruments, the banking sector still accounts for 90% of the financial industry. Turkey hopes to raise the share of participation finance in total banking assets to 15% as of 2025, but how can it achieve that — and in particular, how can it leverage and benefit from the growth of sustainable and responsible finance to support this growth?

The country is starting from a strong footing, with a 99.8% Muslim population. Although there is no dedicated legislation for Islamic banking, the law takes Shariah compliance into account when it comes to Islamic transactions. Out of 53 banks in Turkey, six are fully-fledged Islamic banks, including several high-profile state conversions.

The capital markets are also gradually developing. The Turkish government regularly auctions gold-based Sukuk and issues Islamic lease certificates, while in 2019 both Turkish Airlines and ferrochrome producer Eti Krom announced plans to issue Sukuk. There are also three fully-fledged Islamic asset managers in Turkey.

Movement is now afoot. In January 2020, the European Bank for Reconstruction and Development said it would explore opportunities in Turkey, and expects issuances from Turkish entities to grow. Also in January 2020, AAOIFI and the Participation Banks Association of Turkey signed an MoU to collaborate in enhancing the awareness and promotion of Islamic finance in Turkey, and in February 2020 the Halal Accreditation Agency of Turkey and Pakistan’s National Accreditation Council signed an MoU with a view to developing uniform standards within the Halal sector. But are these steps enough to propel the country onto the world stage and fulfill its potential both on a domestic and global level?

Back to basics

How can participation finance mobilize to address the imminent challenges of the real economy and provide not just liquidity support, but solvency support to the vital Turkish SME and corporate sector? Can participation finance in Turkey and the region use this opportunity to become truly responsible, inclusive and ethical, while at the same time contributing to the country’s growth and development? How can we as an industry ensure this is substance over form on a permanent basis? We asked a respected panel for a new roadmap to success for participation banking, finance and capital markets in Turkey.

Moderated by Fatma Cinar, the manager of international relations at the Participation Banks Association of Turkey, the discussion ranged across a wide landscape of complex issues, with plainspeaking and frank, honest admissions from all participants — especially when it came to the challenges of handling the current coronavirus crisis.

“The pandemic has been a disaster for human lives, and it has changed a lot of things in the world — behaviors, economies and government approach,” admitted Osman Karakutuk, the executive vice-president at Ziraat Katilim. “The growth rate in the economy has decreased very rapidly, and financial institutions have decreased their facilities. Our country has been impacted, but I think participation banks — especially state banks — have come through this well. We have not seen much interruption in our business activities during the pandemic. As a public bank, our focus has been on meeting the needs of the Turkish people, in order to help them withstand that negative economic consequences of the pandemic. Branches have continued their services and successfully used alternative channels like internet and mobile banking.”

The central bank has introduced a substantial raft of measures to support the economy during the crisis, including reducing the policy rate from 10.75% to 9.75%, providing banks with as much liquidity as needed through intraday and overnight standing facilities, raising the liquidity limits of primary dealers of open market operations and lowering foreign exchange reserve requirement ratios by 500bps and offering banks with targeted additional liquidity facilities to secure uninterrupted credit flow to the corporate sector. “The main issue is liquidity and financing of corporate customers,” explained Osman.

“That’s why we accelerated our financing to SME and corporate clients, to ensure that sufficient liquidity with reasonable profit rates could be provided to support the real economy. We’ve provided a business support package of TRY5 billion (US$594.03 million), as well as restructuring the existing facilities of corporate clients and providing them with additional finance as needed to support their cash flow.

But, pointed out Fatima, the pandemic could also be an opportunity for SMEs, as the banks look to support them strongly and lots of additional measures are made available. Is it a risk issue converted into an opportunity?

Asst Prof Dr Kinan Salim, the head of Islamic digital economy at the International Centre for Education in Islamic Finance, believes so. “COVID-19 has shown the fragility of our economies,” he said. “One big shock has had a huge impact on all businesses across the world. First, we see disruption in the supply chain, and the second is the drop in market demand. And we are seeing that SMEs are far more financially fragile when market demand is down. They still need to pay their bills and salaries, so they are accumulating losses. Some banks are trying to help by postponing payments, but that doesn’t solve the real problem. This crisis shows the need to create more resilient economies and businesses. This is everyone’s responsibility. But it gives an opportunity for participation banks to develop new solutions to fix these systematic problems. This can be achieved through sustainable and responsible banking that can make a positive impact on society: driven by profit, but always keeps an eye on social and environmental performance.” Sustainable finance is of course a key trend for this year, and Turkey demonstrates some unique opportunities within the space. Ahmet Ilyas Collu, the vice-president and head of international banking for the Treasury and Strategy Group of Vakif Katilim Bankasi, urged the importance of building on the momentum within the responsible finance sector, particularly around sustainable energy. “We are importing a lot of energy and we want to produce our own renewable energy within Turkey,” he explained. “We also support the municipalities in their investment in technology, building smart cities, smart car parking, smart transportation, smart agriculture and waste recycling. Based on our investments in sustainable energy, we plan to issue a green Sukuk down the line, possibly a local or an international Sukuk. Green Sukuk is an attractive concept — we’ve only seen one green Sukuk issuance in Turkey this year, from an investment bank, and as a state-owned participation bank we want to be active in this sector so we are preparing for this.”

Omer Cekin, the head of the Participation Banking Unit at the Banking Regulation and Supervision Agency, gave a comprehensive summary of the agency’s achievements in recent years in developing a constructive environment for Islamic finance in Turkey. Islamic finance in Turkey. “The regulatory framework is very important, and we are a sophisticated country when it comes to infrastructure,” he concluded. And finally Kamola Bayram, an assistant professor at KTO Karatay University, raised the point of Islamic finance education as a focal point of the wider ecosystem, particularly as a means of developing the human resource capacity for the participation banking sector in Turkey. “We have six participation banks in Turkey and 16,000 people employed in this sector,” she noted. “But when we look at the share of Islamic finance in the banking sector it is still just 5%, and Islamic finance education is very important as a means of reaching the desired market share of 15–20%. Research shows that increasing the number of banks and branches alone is not enough. We need to increase public awareness, which comes with education. I receive a lot of questions from students abroad who want to continue their studies — of course Malaysia and the UK and Gulf countries are popular, but today in Turkey we also have the infrastructure, with 10 universities, to invite students to come here to continue their Islamic finance studies. In Turkey, we need to promote these opportunities more, perhaps through an initiative like the FAA [Finance Accreditation Agency] in Malaysia, to help it flourish.” “As of today, the market share of participation banks has reached 7% with assets of more than US$53 billion,” revealed Fatima at the end of the session, noting that growth is continuing despite the challenges.


Two state-owned participation banks clearly expressed their strong support for the real sector and thus, SMEs have been prioritized with innovative solutions and initiatives taken from participation banks, as the competitive advantage of pandemic measures favor the industry. Participation banking has proven its solid and resilient business model during the pandemic via both the increasingly solid performance of participation banks and sustainable projects which are attracting the attention of society to the universal values driven by the Islamic finance system which assures that the principles of participation banks are exactly in line with responsible, inclusive and ethical financing values. For the development of the participation finance industry, education is one of the key pillars which affect all institutions and personnel of the sector as it is the main constituent for healthy and deliberate growth of the industry. Turkey has a 2.6% market share from global banking assets with its outstanding and continuous Sukuk performance and has achieved an 8.7% market share from global Sukuk issuances, ranking among the top five jurisdictions globally. the Turkish Sukuk market will definitely maintain its continuous growth in Sukuk issuances and enhance its penetration with regards to both domestic and international investors. Fatma Cinar is the manager of international relations at the Participation Banks Association of Turkey.

Vakif Katilim as a state-owned bank has been very active in supporting SMEs and start-ups particularly, with growing technology and innovations. Many projects have been carried out together with government agencies and local municipalities to support technology and sustainability projects. Turkey’s share in the global Sukuk volume has a significant potential to grow with local and international issuances by the government, financial institutions and corporate issuers. We expect to see more green Sukuk issuances which are likely to help a comeback to the international markets. Ahmet Ilyas Collu is the vice-president and head of the International Banking, Treasury and Strategy Group at Vakif Katilim Bankasi.

In Turkey, Islamic finance traces its roots back to the 1980s when Islamic financial institutions known as special finance houses were introduced. However, it took another three decades for Islamic finance education to commence. Today, there are six participation banks operating in Turkey, and 16,000 people are employed in this sector. With the introduction of new participation banks and branch expansion in particular, the need for human resources in the Islamic finance sector has grown further. The first postgraduate program in Turkey was introduced by Istanbul University in 2014, followed by the postgraduate program introduced by Sakarya University in 2016. In 2016, KTO Karatay University and Istanbul Sabahattin Zaim University launched Bachelor’s degree programs and this year we produced our first graduates. Today, there are 10 universities offering Islamic economics and finance (IEF) undergraduate and postgraduate programs in Turkey. Due to COVID-19, universities across the world have been experiencing massive flight from traditional in-class face-to-face education to online education. IEF education providers must adjust to the ‘new normal’ as well. Dr Kamola Bayram is an assistant professor at KTO Karatay University

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