Development and Future of Islamic Banking in Turkey

Abdullah Çelik

CEO, Bank Asya

Agenda

• Islamic Finance in the World– Global Existence– Development of Industry– Interest-Free Banking in the World

• Islamic Finance in Turkey– Interest-Free Banking: Turkish Experience– Milestones in Turkey– Volume of Turkish Banking Sector– Participation Banks’ Market Share

Global Existence• Increasing market presence

– Growing at 15 to 20% per annum– Size estimated over USD 1 trillion globally– New markets welcoming Islamic banks and products

• Market-driven proposition– Retail demand has historically the backbone of the industry– Sensitivities to principles more visible on retail deposit– But corporates and even sovereigns showed appetite for the products– Market-driven product development proved to be successful– Self-regulating organizations accompanied global Islamic banking boom

• Global scale– More than 250 Islamic banks worldwide operating in over 75 countries– A wide range of interest varying from U.K. to Singapore– Widening customer base including sovereigns to top global corporates to tap

Islamic finance markets

Development of industry• Development of theoretical framework• First attempts to structure Islamic banking products

• First institutions emerged to test the market

• Islamic Development Bank (1974) and DIB• One country-one bank setup

• Advancement of Islamic products• Turkish market to welcome Islamic banking• Full “Islamization” of banking in some countries (Pakistan, Sudan

etc.)

• Entry of global institutions & Islamic windows• increasing global coverage of Islamic banking

• Islamic banks achieving strong and stable growth globally,• New products in international markets• Sukuk market to boom

Interest-free Banking in the World

Asset size of Interest-free Banking system (billion USD) 2010

Source: The Banker, IIFM, Ernst & Young & Zawya

Interest Free Banking: Turkish Experience• Although interest-free banking was introduced as integral part of the Turkish financial

system, it was in 1999, and after the new Banking Act no. 4491, that Special Finance Institutions were officially integrated into the Banking Law. Under the Banking Law, these institutions were brought under the same umbrella of regulations covering conventional banks.

• The Banking Act 4491 had taken Special Finance Institutions under the state guarantee scheme with the so-called guarantee fund, alongside conventional banks, where ‘current’ and ‘profit/loss sharing’ participation accounts (local and foreign currency denominated) of up to TL50,000 and held by individual customers were brought under state guarantee.

• The regulatory framework for Special Finance Institutions was strengthened in the following years. When the new Banking Law (no. 5411) came into effect in November 2005, the Special Finance Institutions’ guarantee fund, (established in 2001) was merged into the Savings Deposits Insurance Fund (SDIF). Of equal importance, ‘Special Finance Institutions’ were renamed ‘Participation Banks’, with a more concrete definition of their interest-free characteristics with the introduction of new Banking Law.

• Currently 4 participation banks are operating in Turkey: Albaraka Türk, Bank Asya, Kuveyt Türk and Türkiye Finans

Milestones in Turkey

7

Regulation with decree in force of law 83/7506. (Establishment of Special Finance Houses )

Inclusion within the Banking Law

1983 1999 2001

-Establishment of Special Finance House Association

-Special Finance House Security Fund came into effect

Transformation to Participation Banks from Special Finance Houses

Transfer of Special Finance House Security Fund to Saving Deposit and Insurance Fund

2005

Volume of Turkish Banking Sector

December 2011 Participation Banks

Deposit Banks

Development & Investment

Banks Total

# of Institutions 4 31 13 48

Assets bn TRY 56.1 1,119.90 41.6 1,217.70

(%) 4.6 92 3.4 100

Deposits bn TRY 39.2 656 - 684

(%) 5.6 94.4 - 100

Loans bn TRY 41,0 635,5 23,6 661

(%) 5.8 90.8 3.4 100

8

Source: BRSA reports

Growth Comparison (2005-2011)

Participation Banks

CAGR % Participation Banks

Assets 33.5

Deposits 29.6

Credits 33.0

Banking Sector

CAGR % Banking Sector

Assets 20.1

Deposits 18.6

Credits 27.1

9

Source: BRSA

Credit-to-Deposit Ratio (%)

Participation Banks’ Market Share

Total Assets - Market Share (%)

Participation Banks’ Market Share

Funds Collected (Deposit) Market Share (%)

Credit Market Share (%)

Branch and Staff Size

13

Source: The Participation Banks Association of Turkey

2023 Vision

Turkish State 2023 Plan

• GDP of 2 trillion USD• Among most developed top

ten countries of the world• Istanbul as a financial

center

Participation Banking

• Istanbul as an Islamic Financial Center

Action Plan

Shariah-compliant Banks and Assets in Muslim Countries - 2011

(in billions of USD 2011)

2023 Market Potential for Islamic Finance - $8.602 billion USD

What if countries with large populations achieve the average use ofIslamic finance represented by Malaysia?

Participation Banking in 2023

Milyar USD

Summary

• Globally, the Islamic Banking sector is expanding fast. Although the Middle East and Malaysia remain by far the biggest markets in the world, other regions and countries are starting to look at introducing this fast-growing asset class to their economies.

• Turkish participation banks has a proven track record, with new products and markets the pace of growth will increase.

• The key to success is “legislation”