International Islamic Finance And The Sme Ecosystem

Societies shape their future with the clarity of their vision and their determination to realize the goals they set before them. In the Participation Banking Strategy Update Report (2021-2025), 23 actions and 10 strategies were determined depending on six primary strategic goals, and it is a significant finding that one of these goals is to create an ecosystem. As it is known, the first alternative theoretical views to conventional banking based on interest in the dimension of thought began to come to the fore at the beginning of the 20th century; the conventional banking system was questioned since the 1950s. Thus, the first theoretical framework for Islamic banking and finance began to take shape. From the mid-1960s, with the establishments of Mit Ghamr Savings Bank in Egypt, Tabung Haji in Malaysia, and the Organization of the Islamic Conference, the first experiments in interest-free banking and finance were made. From the 1970s to the 1990s, there were extraordinary developments  in the interest-free finance and banking worldwide, and Islamic Banks and financial institutions were established. In addition to Muslim-majority countries such as Turkey, Pakistan, Arab countries and Iran, there were severe developments regarding Islamic financial instruments in the field of banking and fund management, from many European countries such as England to the United States and from there to Southeast Asia. In a way, the 1990s witnessed the participation of global actors in the field and the rise of Islamic capital markets, and Islamic Financial Institutions came into existence. The 2000s have been a turning point in the conventional banking and finance world, especially against the financial crises experienced in 2008, the solidity of the connection between the interest-free banking system. The real economy sector has shown that it is more resistant to crises, and thus the conventional system that operates with interest has become the focus of attention. Since the 2010s, an international interest-free banking that has crossed borders, and finance efforts continue to appear and actively accelerate its activities.

In addition, Islamic financial technology (fintech) studies have been emphasized since 2015, and Turkey's interest- free banking penetration rate had grown by 7.1% as of October 2020. On the other hand, the Global Interest-Free Finance Sector grew by 11.4% as of 2019 and reached US$ 2.44 trillion. Global interest-free banking assets, which have grown by an average of 7% annually, are also expected to steadily maintain their growth in the coming years. In addition, it is aimed that the market share of the Turkish participation banking sector in the total banking sector will reach 15% by 2025.

International interest-free banking and finance activities continue to appear and actively accelerate their activities

With the increasing interest in microfinance in the world in the 2000s, interest in SMEs has increased in Turkey, and serious structuring has been made in this field. When we look at the developments, it will be seen that microfinance institutions worldwide are in a growth parallel to participation banking. When SME is mentioned in Turkey, the Small and Medium Enterprises Development and Support Administration (KOSGEB), which operates as the Ministry of  Science, Industry and Technology, comes to mind first. It can be said that SMEs are one of the crucial dynamics of the economy, even the backbone, in Turkey as well as in the rest of the world. According to the 2019 data of the Turkish Statistical Institute (TUIK): SMEs seem to account for 99.8% of the total number of enterprises, 72.4% of employment, 51.8% of personnel costs, 50.4% of turnover, 44.1% of production value, and 44% of the value added factor cost. At the same time, the total share of SMEs in total cash loans extended by participation banks is 34% compared to 2017.

Along with the increasing interest in microfinance in the world, interest in SMEs has increased in Turkey, and serious structuring has been made in this field.

Microfinance is one of the most essential tools in alleviating poverty globally. As of 2018, the number of microfinance customers has reached 139.9 million, while this figure is around 5.7 million in Turkey. In addition, it is known that the number of Microfinance institutions (MFIs) operating around the world is more than 10 thousand. Although microfinance and the micro segments that banks provide services to SMEs are different from each other, it is important that this subtlety should not be overlooked in the context of creating the ecosystem.

As a result, it can be said that with the internationalization of Islamic finance, the sphere of influence of the SME ecosystem will continue to expand, and will provide a sun effect on raising awareness. Thus, the Strategic Targets of 2025 for the Turkish Participation Banking Vision will be realized through a natural process, and the successful efforts of the sector will become widespread. There is no doubt that the success of SMEs, which are the backbone of the economic welfare of the society, will be carried forward with Islamic finance studies.

Prof. Dr. Saim Kayadibi

Karabuk University, Faculty of Business Administration, Head of Finance and Banking Department, Lecturer in Participation Banking and Finance