The world economy has entered into the process of drawing a roadmap after the COVID-19 pandemic. What 2020 and 2021 taught us should guide authorities, economic players and individuals in determining the plans and goals of the future. Although there are difficulties, the effect of many factors limiting economic activity will decrease, and Turkey will continue to progress by using its driving forces. The participation banking sector, which adopts the mission of supporting the real sector, will continue its healthy progress while contributing to economic activities with its philosophical approach and discipline that prioritize inclusive and social impact.
Review of 2021
The financial performance of the participation banking sector is gradually increasing and keeping its succesful momentum. The asset size of the sector reached TRY504.3 billion (US$36.74 billion) by June 2021, which corresponds to a 7.5% share in the total banking sector.
The development of participation banking in Turkey has gained significant momentum in the last 10 years. The entry of public capital into the sector, the establishment of a central advisory board structure and the diversification of banking products and capital market instruments and regulations in all these areas have contributed significantly to the development of the sector.
The total funds provided by participation banks amounted to TRY280 billion (US$20.4 billion), with TRY77 billion (US$5.61 billion) provided to SMEs, representing 31% of the total funds which is over the banking sector rate of 23.1%.
The collected funds of participation banks amounted to TRY373.4 billion (US$27.2 billion) as of June 2021. The market share of funds collected by participation banks stood at 9.7% which explicitly reflects the trust of society for Islamic banking services especially during times of crises.
The total equity of the participation sector reached TRY32 billion (US$2.33 billion). The number of branches was 1,296 and the number of employees was 17,273, contributing to the labor market of the economy.
The target of reaching a 15% market share in 2025, which was published in the 10-year strategy report prepared for the Turkish participation banking sector in 2015, was also repeated in the updated Turkish Participation Banking Strategy Document (2021–2025). Notably, the role and investments undertaken to develop the interest-free financial system as a state policy and the project of making Istanbul a financial center are factors of great importance in achieving this goal. The updated strategy report determined 10 strategies under six primary strategic objectives: communication; ecosystem; product diversity; standards and governance; digital; and competency-building. All the mentioned strategic objectives are strictly followed by the Project Management Office Team in the the Participation Banks Association of Turkey (TKBB).
In terms of sovereign and corporate Sukuk issuances, Turkey plays a very active and pioneering role in the global Islamic finance industry. During the last quarter of 2021, the Turkish Islamic capital markets experienced innovative Sukuk transactions. Kuveyt Turk issued the world’s first Tier 2 sustainable Sukuk facility, which is a global landmark transaction. The Development and Investment Bank of Turkey issued Turkey’s first social Sukuk worth TRY50 million (US$3.64 million) to be utilized in the agricultural sector. Structured Sukuk models with income referenced to the participation pool and Sukuk based on partnership through the private fund pool issued by Emlak Katilim, one of the youngest members of the participation banking sector, are important as they are the first in the world and make a valuable contribution to Turkey being a Sukuk innovation center.
Since 2010, total funds collected through Sukuk issuances by participation banks have reached TRY196.7 billion (US$14.33 billion), US$4.1 billion and RM2 billion (US$472.53 million). The total volume of Sukuk issued by participation banks from January to August 2021 was around TRY67 billion (US$4.88 billion). The diversity in the fundraising tools of participation banks also attracted the attention of their customers.
Preview of 2022
In 2022, digitalization and sustainability will be on the agenda of participation banking in Turkey, as in the rest of the world. With the Paris Climate Agreement ratified by the parliament on the 7th October 2021, activities in both public and private sectors have gained momentum.
Within the scope of the Green Reconciliation Action Plan, it is expected that the Sustainable Banking Strategy Document will be published by the Banking Regulation and Supervision Authority (BRSA) by the end of 2021, and a roadmap will be determined for the banking sector’s compliance with green reconciliation.
The Draft Regulation on Operation Principles of Digital Banks and Service Model Banking (Draft Regulation) was published for public opinion on the 19th August 2021. The Draft Regulation is planned to enter into force as of the 1st January 2022.
In order to encourage financial innovation in the banking sector, increase financial inclusion and facilitate access to banking services, the Draft Regulation prepared by the BRSA is organized separately under two main subjects, namely digital banks and the service model banking business model.
Participation banks, which prioritize innovation and product diversity in their financial solutions, will gain momentum in such activities in the coming period with the contribution of the regulatory authority ecosystem.
In addition, the digital roadmap report prepared by the TKBB and expected to be published by the end of 2021 is intended to shed light on the digitalization efforts of the participation banking industry.
Considering that the actions related to participation finance in the Economic Reform Package are dated the 31st December 2021, regulations and studies such as the National Participation Finance Strategy and the Participation Finance Law will make strategic contributions to complement Turkey’s participation finance architecture.
In addition, the Participation Banking Strategy Report activities carried out by the TKBB will also enhance Turkey’s effectiveness in local and international platforms by displaying its achievements.
Participation finance, which stands out in the ‘Istanbul Finance Center’ vision, will be host to essential experiences to make Turkey an Islamic finance center when its financial and architectural activities are completed in 2022 with public and private institutions.