Türkiye Participation Finance Sector Outlook

The ICD-LSEG Islamic Finance Development 2023 annual report, outlining significant developments and ecosystem activities in the Islamic finance sector, has been released. İsmail VURAL, Secretary General of TKBB, shared insights with readers on the growth of the participation banking sector in Türkiye in 2023, along with projections for the future.

Global Economy 06.12.2023, 12:54 06.12.2023, 13:11
Türkiye Participation Finance Sector Outlook

In today’s world, a strong financial system and banking system are the main pillars of the globalising and growing economic system. The activities that constitute the banking system are the utilization of savings, providing the collected resources as financial support to the economy and mediating the realisation of financial transactions in the process of economic activities.

Islamic Finance Institutions (IFIs) are an important alternative for individuals and societies who do not want to participate in  activities include the interest element in the banking system, due to religious sensitivities or the distorting effects of interest on income distribution. 

Participation banking (Islamic Banking) activities in Türkiye started one year after the establishment of "Special Finance Houses" was authorised by the decision of the Council of Ministers in 1983, gained momentum in the 1990s and was included in the scope of the Banking Law in 1999. In 2005, with the publication of the Banking Law No. 5411, Turkish IFIs, which had been operating in the sector as Special Finance Houses for more than 20 years, changed their name and became Participation Banks.

Participation banking, which underwent organisational and structural development processes at both national and global levels in the 2000s, has reached a more qualified and strategic position with the expansion of participation finance activities to areas such as financial product development, portfolio management and private pensions. With the contribution of public initiatives since the mid-2010s, the participation banking sector has gradually gained steady growth momentum.

The first participation bank in Türkiye was Albaraka Türk, established in 1984. Subsequently, Kuveyt Türk was established in 1989 and Türkiye Finans in 2005. The main shareholders of all three participation banks are foreign investors. In 2015, the public authority established Ziraat Katılım, the first public participation bank, in order to increase the share of participation banking in the sector.

Subsequently, Vakıf Katılım was established in the same year, and its operating licence was granted in 2016. In 2019, a new public participation bank entered the sector and Türkiye Emlak Katılım was established to operate especially in the housing sector.

In 2022, the Banking Regulation and Supervision Agency (BRSA) authorised the establishment of three new participation-based digital banks through the Regulation on the Operating Principles of Digital Banks and Service Model Banking published at the end of 2021, and two digital Islamic banks, T.O.M Bank and Hayat Finans joined the participation banking sector in March, 2023. With the inclusion of new participation banks in the system, it is aimed to increase the market share of participation banks in the Turkish banking sector and to improve financial inclusion from the perspective of customers and distribution channels as well as product and service diversity.

Participation Banks with Statistics

As of September 2023, the total asset, deposit and loan size figures of participation banks and their sector shares have increased significantly. According to September 2023 data, the total asset size of participation banks operating in Türkiye increased by 50.6% compared to the previous year and reached TL 1 trillion 787 billion 160 million ($65 Billion). As of September 2023, the net profit of participation banks increased by 82.6% to TL 38.165 billion ($1.4 Billion), while total shareholders' equity increased by 48.4% to TL 125.170 billion ($4.5 Billion). 

The total number of domestic and foreign branches the participation banks operating in Türkiye increased by 4.3% to 1,438 in 2023. The number of branches of participation banks constitutes 13% of the total branch network of the banking sector. Participation banks has continued its support to labour market in the country. According to 2023 updated data, the total number of employees of participation banks increased by 8.8% compared to the previous year and reached 19,438 persons.

Contribution of Participation Banks to the Turkish Economy 

Participation banks continued its contribution to economic growth in multiple ways in 2023. Participation banks have an increasing share in the development of the banking system with its role in bringing idle funds that cannot be included into the financial system into the system, its regulatory effects on income distribution, recording unregistered economic activities, transferring resources to the real sector and increasing employment.
Participation banks continued to their support to SMEs with  cash and non-cash financing  solutions. As of September 2023, the total number of SME customers of participation banks reached 413.516. According to the distribution of loans analysis, the share of commercial and corporate loans within the total loans was 46% with TL 375.142 billion, the share of SME loans was 43.3% with TL 351.924 billion, and the share of consumer loans (including credit cards) was 10.4% with TL 84.411 billion.

As part of the excellency of financial infrastructure for Islamic Finance ecosystem, Islamic Credit Guarantee Fund (KFK) was established on 29 March 2023 in partnership with  the Ministry of Treasury and Finance, Participation Banks Association of Türkiye (TKBB) and 6 participation banks in order to provide access to financing for small and medium-sized enterprises (SMEs) within the framework of participation finance principles and to provide such enterprises with competitive advantage in the sectors in which they operate. Aiming to announce new packages that will create a financing volume of 900 million TL by the end of 2023, KFK will contribute to the strengthening of the participation ecosystem by meeting the surety needs of the sector for accessing the financing.

Sukuk Issuance Performance of Participation Banks

Turkish participation banks have performed significant performance on sukuk issuances in domestic and international markets. The total amount of sukuk issuances in Turkish Lira by participation banks in Türkiye since 2013 has reached TL 359 billion. PBs issued  TL 83 billion amounted sukuk in 2022, and issued amount of sukuk in the first 10 months of 2023 is appoximately TL 50 billion.

Under the thematic sukuk issuances, Kuveyt Türk issued "Global Sustainable Tier 2 Subordinated Sukuk" for the first time in Türkiye and in the world in line with the principles of participation finance. In addition, Emlak Katılım received the "Best Sukuk Issuance of the Year Award" in the world on a sector basis at the Islamic Finance News Awards with Türkiye's first green sukuk issuance based on labour-capital partnership carried out through the Private Fund Pool Participation Account.

Albaraka Türk became the first participation bank to be included in the Borsa Istanbul (BIST) Sustainability Index and achieved one of the highest ratings in the banking sector with its efforts within the scope of the Carbon Disclosure Project (CDP). While the Development and Investment Bank of Türkiye issued Türkiye's first social sukuk amounting to TL 50 million to be used in the agricultural sector, Ziraat Katılım Participation Bank, which has signed the first international sukuk issuance carried out by a public participation bank in Türkiye successfully completed its first international sukuk issuance and issued USD 500 million. 

On the global scale, Türkiye has taken its place among the top 5 countries in the global sukuk issuance league with Malaysia, Saudi Arabia, the United Arab Emirates and Kuwait as of 2023. In the sukuk issuance volumes made by the public sector, various studies are being carried out by the Republic of Türkiye Ministry of Treasury and Finance in order to diversify the financing instruments issued and expand the investor base. While the total TL-denominated sukuk issuance between 2012-2023 was approximately TL 286 billion, approximately 233 Tonnes of gold-based sukuk issuance volume was made between 2017-2022, and 3 billion USD in USD and 4 billion EUR in EUR sukuk issuance was carried out.

Borsa Istanbul and Participation Index

Borsa Istanbul and the Participation Banks Association of Türkiye (TKBB) launched the Participation Indices in 2021 by evaluating the companies whose shares are traded on Borsa Istanbul according to participation principles. For the evaluation process of the companies to be included in the indices,the  Advisory Board takes as basis the "Standard for Issuance and Trading of Equity Securities" (Standard) and the "Guidelines for Determining Companies Operating in Compliance with Participation Finance Principles" (Guideline) prepared by the Central Advisory (Sharia) Board. 

Participation Banking and Digitalisation 

While increasing technological and financial know-how in order to enable customers to access financial services through digital channels has become a common goal of institutions. The technological and legal infrastructure for customer acquisition through remote access using up-to-date technologies was prepared and put into operation by banks as of May 2021, providing a significant impetus to the development of customer portfolios and service efficiency.

Participation banks have considered the possibility of remote customer acquisition as a very productive opening with their digital equipment and organisational preparations, and have succeeded in continuously increasing the number of customers they have registered through this channel since the implementation began.

Thanks to innovation-friendly regulations, the fintech ecosystem in Türkiye has grown every year, and as of March 2023, the number of active fintechs reached 629, the number of licensed payment and electronic money institutions reached 74, the number of crowdfunding platforms reached 8, and the payments space stood out with 255 fintechs. Contrary to the global downward trend, fintech investments in Türkiye broke a record in 2022, reaching an all-time high with USD 89 million invested in 37 fintech companies.

The effective use of increasing digital opportunities by participation banks and the expansion of open banking applications with the support of the fintech ecosystem is an important threshold in the development of the sector. 
While fintech investments in Türkiye reached a record high in 2022, the support and guidance of the government and regulatory bodies are also important for the development in this field.

The "National Fintech Strategy Document" prepared by the Finance Office of the Presidency of the Republic of Türkiye is expected to serve as a roadmap for the Turkish fintech ecosystem to stand out in the international arena and take its rightful place.

Development of Standardization 

The Central Advisory Board was established under the umbrella of TKBB in 2018 with the decision of the BRSA as a standard-setting institution with the aim of improving Islamic finance practices in Türkiye. The Board has been in operation for 5 years with 7 board members and 6 experts. To date, the Advisory Board has taken 78 Shariah decisions and published 5 Shariah standards, and all standards can be accessed publicly on the Advisory Board's website in Turkish, English and Arabic.

These standards are Share Certificate Issuance and Trade Standard, Murabahah Standard, Tawarruq Standard, Suretyship Standard and Mudarabah Standard. While one standard is in the process of publication: Non-Compliant Incomes with the Participation Finance Principles and their Elimination Standard, two more standards are in the process of being drafted, namely the Musharakah Standard and the Wakalah Standard.

15 % Market Share Target for 2025

The Istanbul Finance Centre project aims to make Türkiye one of the world's leading financial centres. With the right steps to be taken and a sound institutional structure to be established in this context, Istanbul is expected to become not only a financial centre but also a centre of interest-free finance.

The Participation Finance Strategy Document, which is Türkiye's first national strategy document in the field of participation finance, is a road map for positioning Türkiye as a leading country in participation finance. In addition, the strategic road map of the banking sector covering the 2021-2025 period published by TKBB has been updated and 6 main strategic targets have been determined as "communication", "ecosystem", "product diversity", "standards and governance", "digital" and "competence building".

The main focus of participation banking until 2025 will be to expand services with the driving force of digital transformation and to achieve gains in the number of customers by upgrading the customer experience, effectively using remote customer acquisition and increasing financial literacy.

With the inclusion of digital participation banks in the participation banking ecosystem, the sector's market share is expected to reach double digits and rise to 10.6% in 2023. The sector's target for 2025 is to reach a market share of 15% and an asset size of TL 1.77 trillion.

In the Turkish participation finance industry, which has effectively completed its financial architecture, an seperate law for participation finance institutions, which is expected to enter into force in the coming period, will be an important catalyst for the holistic governance of the ecosystem and to ensure both financial development and customer expansion.

The participation finance sector, which aims to increase its market share with the inclusion of new participation banks in the sector, is expected to achieve a tremendous growth momentum with the development of insurance, capital markets and non-banking financial institutions.

İsmail VURAL
Secretary General of the Participation Banks Association of Türkiye

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