Even though Islamic banking has a relatively modest size compared with conventional banking, it is developing both nationally and internationally, revealing its potential and taking on a structure that operates in different fields worldwide.
While it is noted that the global sector size at the end of 2021 was around US$3.4 trillion, this figure is expected to reach approximately US$5 trillion by the end of 2025. Additionally, it is stated in different sources that the number of interest-free banking institutions around the world is around 530. In the globalizing economic system, Islamic finance is gradually achieving appreciation, and most importantly, it is seen as a new investment area for the sustainable development of countries’ economies.
Interest-free banking, in accordance with Islam, which entered Turkiye’s system in the 1980s as ‘Special Finance Houses’, has shown remarkable development in 30 years. Participation banking, which has successfully increased its sectoral performance graph with this development, has succeeded in making a significant contribution to the Turkish economy and continues to work resolutely to make this success sustainable.
Review of 2022
Six banks, which are members of the Participation Banks Association of Turkiye, grew above the general sector dynamics in the past year. The year 2021, in which we celebrated the 20th anniversary of our association, was also a year in which we made special efforts to ensure that the participation finance model achieves sustainable growth and that the sector offers world-class financial products and services; our market share has reached 8.3%.
While the total assets of participation banks in Turkiye exceeded TRY716.5 billion (US$38.44 billion) in 2021, with an increase of 64% compared with the end of 2020, their equities rose to TRY36.3 billion (US$1.95 billion), with a 38% growth compared with the same period. Participation banks completed 2021 with a net profit of TRY5.7 billion (US$305.77 million) and financing support of TRY392.2 billion (US$21.04 billion) to the real sector, increasing its contribution to the Turkish economy daily.
By 2022, we saw that the total assets of six participation banks in our country exceeded TRY1 trillion (US$53.64 billion) as of August.
In 2021, participation banks reached TRY565.8 billion (US$30.35 billion) in the number of funds collected, while the size of the funds provided was TRY370.4 billion (US$19.87 billion). As of August 2022, this figure amounted to TRY556.4 billion (US$29.85 billion).
In light of this data, participation banks, which are rapidly increasing their contribution in Turkiye and the region, are creating significant opportunities for developing interest-free finance and reaching broader masses in the coming period.
Sukuk
In 2021, total global long and short-term sukuk issuances increased by 7.72%, reaching US$188.12 billion, the highest figure to date.
Our participation banks played an essential role in the allocation of Sukuk. The sum of Turkish lira-denominated Sukuk issuances by participation banks in Turkiye since 2010 was at the level of TRY278 billion (US$14.91 billion). Participation banks, which issued TRY96.9 billion (US$5.2 billion)-worth of Sukuk in 2021, also realized TRY51 billion (US$2.74 billion)-worth of Sukuk issuances in the first eight months of 2022.
In line with the principles of participation finance, Kuveyt Turk made a global sustainable Tier 2 subordinated Sukuk issuance for the first time in Turkiye and the world. In addition, Emlak Participation Bank received the ‘Best Sukuk Issuance of the Year’ award at the IFN Deals of the Year Awards, with Turkiye’s first Mudarabah green Sukuk issuance through the Special Fund Pool Participation Account. Albaraka Turk, on the other hand, became the first participation bank to be included in the Borsa Istanbul Sustainability Index and achieved one of the highest rankings in the banking sector with its efforts within the scope of the Carbon Disclosure Project.
Preview of 2023
With the coordination of the Finance Office of the Presidency of Turkiye and the active participation of all relevant stakeholders, the Participation Finance Strategy Document 2022–2025 has been a valuable step on behalf of our industry. The strategy document, which is the first national strategy document in the field of participation finance, can be considered a roadmap for positioning Turkiye as the leading country of the participation finance industry. The strategy document was prepared for participation finance, which is one of the two pillars of the Istanbul Financial Center (IFC) project, to operate in compliance with the principles to produce applicable and realistic solutions to various structural problems to reach the place it deserves in the financial system, and to support the Turkish Economy Model effectively. During the preparation process of the strategy document, strategic steps and successful practices abroad were examined in detail, and a model specific to Turkiye was generated.
The strategy document, which was prepared with the vision of creating a financial model that will play a leading role in the world and effectively support the Turkish Economy Model, is aimed to implement an inclusive, sustainable and innovative participation finance system that operates according to the principles of participation finance and takes into account goal-oriented principles.
The strategy document also aims to put forth the action items that will place the works in the field of participation finance carried out in Turkiye between 2022 and 2025 on a common ground, as well as the mechanism of the coordination committee and groups to manage the implementation, follow-up and evaluation processes of these items. In addition, many other studies and projects continue to be implemented to strengthen the participation finance system in the country.
As mentioned before, the Participation Banks Association of Turkiye, the umbrella organization of Turkish participation banking, updated the Strategic Roadmap covering the 2021–2025 period, taking into account the developing and changing conditions, in line with the consultations with its members and sector stakeholders, for participation finance to achieve the desired success both in Turkiye and on the broader geography. In the roadmap, six basic strategic goals were determined for the future: communication; ecosystem; product diversity; standards and governance; digital; and competency-building. As a result of these efforts, it will be much easier to reach a market share of 15% and an asset size of TRY1.77 trillion (US$94.95 billion), which is the target for 2025. By carrying out the Digital Research Report study last year, the actions the participation banks need to take were determined, and important steps were taken regarding digitalization.
Participation banks, which provide technology-oriented financial solutions with digitalization, have become more visible in the digital field in the banking sector. With the regulations and the transformation, the number of active digital banking customers of participation banks exceeded four million as of December 2021. In December 2020, this figure was more than three million. The combined annual growth rate in the number of active digital banking customers was 22%. In December 2021, the number of customers registered to the system on the internet or mobile banking channels was more than seven million, while the number of customers registered to the system and logged in at least once in the last year was more than five million.
In 2022, participation banks surpassed four million active digital banking customers over six months. Participation banks’ share of the total number of active digital banking customers in the sector was 5.1%.
Conclusion
Political and economic stability in certain markets; elimination of legislative gaps; capacity and competence development through growth; transition to economies of scale; increasing technological investments; and increasing the quality of operation are crucial for Islamic banking to exhibit the targeted development worldwide. In addition, examining all the instruments of Islamic banking in the world, ensuring the usability of participation banks’ products and diversifying their product structures can be counted as among the priority issues.
With Islamic banking, global risks can be protected, and by providing cheap and long-term funds to the local sector and investors, Islamic banking can contribute to the uninterrupted turning of the wheels of the economy and growth targets. In this direction, to boost the spread of interest-free financial instruments, it is critical to establish the right marketing strategies and support initiatives that will enhance the system’s reputation.
It is undeniable that Islamic economics and finance play a critical role in creating synergies between the private and real sectors and in sustainable development. In this context, finding an answer to how to use Islamic finance to reduce income and social inequality in society should be considered a priority agenda item.
Fatma Çınar is the director of the Participation Banks Association of Türkiye. She can be contacted at [email protected].