Regulatory landscape and Shariah governance in Turkey

Financial Reports 11.03.2021, 00:41
Regulatory landscape and Shariah governance in Turkey

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 golddenominated 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.


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 [email protected].

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