ECONOMIC REFORM PACKAGE AND PARTICIPATION FINANCE
Various topics included in the strategy studies have become substantial actions with the Economic Reform Package announced on March 12, 2021
The development of the participation finance system, which actively began operating in Turkey in the mid-1980s with the establishment of special finance houses, can roughly be divided into three periods. The first is the “period of laying foundations” that is covered between 1984 and 1999. The second is the “period of prudent development” covered between 1999 and 2014, during which the sector realised important initials under the constraint of conventional regulations. The third is the “strategic development period” that covers the years between 2014 and 2020, led by the institutional/legal regulations based on the public’s view of participation finance as a strategic actor.
The period between 2021 and 2025 is aimed to be a “strategic transformation period” during which policy steps will be taken to ensure that participation finance is integrated and sustainably achieves its deserved position. The Turkish President’s statements regarding the concept of participation finance and participation finance institutions in 2019 have become a crucial axis for the strategic transformation of participation finance.
The first and foremost point that should be emphasised regarding the development of the participation finance strategy, vision and ecosystem are to clarify the definition of participation finance and determine its scope. In summary, participation finance refers to the financial system that encompasses all actors, products and services that operate following the participation finance principles. Therefore, sectors such as participation finance institutions, participation capital markets, participation insurance and participation social finance are expressed under the umbrella concept of participation finance.
During the first quarter of 2021, the Participation Finance Department was established under the Finance Office of the Presidency of the Republic of Turkey. Established with the Presidential Decree published in the Official Gazette on February 6, 2021, the main task of the Department is to develop strategies in the field of participation finance, ensure coordination among relevant institutions and organisations within the scope of these strategies, and monitor the implementation of strategies. Thus, a fundamental step was taken towards the founding of Turkey’s participation finance strategy with an integrative approach.
Some of the duties assigned to the Participation Finance Department include increasing cooperation and ensuring coordination among the public-private sector, universities and NGOs in the field of participation finance while carrying out national and international activities. Also, working towards strengthening Turkey’s position in international markets, incorporating new financial tools into the system, developing financial products and projects to increase diversity are some of their other responsibilities. In addition, the follow-up of implementing the strategies, coordination activities, studies and projects will be reported to the President of Turkey regularly.
Within the context of the strategy studies, preparations have started for the Participation Finance Strategy Document covering the period between 2021 and 2025. The finalised version of the Participation Finance Strategy Document, which will be presented to the Turkish President in the upcoming months, aims to establish a strategy, targets and actions for the Istanbul Finance Centre Project to operate with the essence of participation finance, which is one of the two pillars of the project, and achieve the position it deserves.
In addition to the possible global tectonic developments in the field of economy and finance in the coming period, the vision of the Istanbul Finance Center project, macroeconomic targets for robust, sustainable and inclusive growth, and international realities such as the United Nations Sustainable Development Goals (SDG) are taken into account while determining the goals and objectives used in the formation of the Participation Finance Strategy Document. In addition, with its vision, mission, goals and objectives, attention will be paid to formulate the content of the Participation Finance Strategy Document within the framework of four basic principles. These principles can be summarized as follows:
• Holistic Approach:
Considering the synergy that will emerge from the mutual interaction and support of the sectors that reconciliate it, the participation finance system has a potential far beyond the speed of development of its constituent parts. In this context, the Participation Finance Strategy Document will acquire a holistic perspective and an understanding to enact a potentially accurate inter-sectoral interaction.
• Ideal Principles:
The participation finance system will operate on the foundation of compliance with the relevant orders, prohibitions and rules of Islam. This framework, which will be defined as the principles of participation finance, is the defining prerequisite of participation finance. At the same time, providing that they comply with the principles of participation finance, there are other ideal principles, including risk-sharing, asset backed, and compliance with Islamic rulings. The Participation Finance Strategy Document will have an understanding that will encourage and support the participation finance to operate in line with the ideal principles. Taking substantial steps to realise the ideal principles is expected to immensely contribute to increase the positive perception towards participation finance and to make Istanbul Finance Centre a global participation finance centre.
The Participation Finance Strategy Document primarily focuses on the holistic transformation of participation finance and establishing the necessary basic infrastructure and supporting mechanisms. It is considered that issues related to methods of increasing the diversity of financial products will be planned and implemented in a further accurate way by the sectors. Thus, the Participation Finance Strategy Document aims to be purpose-oriented (strategic transformation, integrity, infrastructure and supporting mechanisms) while having a literal structure.
• Unique to Turkey:
Best practice examples in the world and experiences of other countries will undoubtedly guide the preparation of the Strategy Document. At the same time, as emphasised in the institutional economics and economic development literature, local factors such as country-specific socio-cultural structure, corporate governance, legal infrastructure and economic behaviour play a dominant role in the action-oriented success of strategies. Therefore, developing a model specific to Turkey is attempted. Copying and applying the Malaysian or Dubai model during the formulation of the participation finance strategy is out of the question.
Within the framework of the constraints and principles mentioned above, a roadmap for preparing the Participation Finance Strategy Document has been prepared and put into practice. The first step of the roadmap was the Stakeholder Suggestion Form, which has been prepared for institutions, organisations and individuals included in or considered to be related to the participation finance system. With the Stakeholder Suggestion Form, the current situation analysis, determinations, expectations and solution suggestions of the stakeholders regarding participation finance have been shared with us. In the second stage of the roadmap, working groups have been assigned under eight topics (participation finance institutions, participation capital markets, participation insurance, integration with the halal value chain, corporate governance structure, perception with human capital, awareness and financial literacy) that will form the foundation of the strategy document. Four meetings have been planned for each working group on the determined topics. Studies on topics regarding the vision, mission, and strategic goals of the Participation Finance Strategy Document also continue.
Various topics included in the strategy studies to establish the infrastructure and supporting mechanisms of participation finance have become substantial actions with the Economic Reform Package announced on March 12, 2021. In this context, by the end of 2021, preparing an independent Participation Finance Law, establishing a Central Advisory Board at international standards, establishing a participation finance rating mechanism and implementing a Participation Finance Arbitration mechanism at international standards is planned. The studies in all these topics continue while taking the international experience into account within the framework of the fundamental principles of the participation finance strategy. In addition to strategy studies, substantial efforts are carried out on subjects such as green financing, crowdfunding and infrastructure financing, as well as continuing projects with various universities/organisations in Turkey and abroad.
Finally, I would like to share a few thoughts on the vision and future of the participation finance sector. The unsustainable structure of the current global financial architecture, which puts human and human values in the background, supplies income and wealth inequalities, and leads to artificial growth without production, is also expressed by the main actors of the current system. In the upcoming period, the actors of the existing system will conceivably take tangible steps towards the formation of a new global financial architecture. However, for a new financial architecture proposal to find a social response worldwide, it must be in a structure that puts morality and people at the centre and highlights sustainability and social responsibility issues. Therefore, participation finance, which emphasises participation, production, moral values and risk sharing, has a significant potential that can appeal to all humanity.
Unlike many countries that claim to be a global Islamic financial centre, Turkey has crucial historical, cultural, geopolitical and economic advantages. By using these advantages and implementing the right strategies, participation finance can provide the opportunity to reach the 2025 targets efficiently and exceed these targets by combining them with areas such as sustainable finance, impact investments, green finance and financial technologies.
On the demand side, our studies and analyses prove that trust is the central dynamic of commitment towards participation and finance. As long as people trust the system, they can waive on issues such as cost and access. It is estimated that the 2025 targets can be outperformed if the sectors establish the appropriate institutional capacity and human resources by implementing the infrastructure and supporting mechanisms to work in line with the essence of the participation finance system.
Head of Participation Finance Department of the Finance Office of the Presidency of the Republic of Turkey Tarık Akın