Aydın YABANLI Deputy Manager

Corporate Communications and R&D Department (PMO-Project Management Office)

OIC-COMCEC Workshop; Ankara, March 17, 2016

PARTICIPATION BANKING IN TURKEY: Turkish Participation Banking

Strategy Document 2015-2025

• Definition and Historical Background

• Facts and Figures

• Strategic Plan

• Conclusion

AGENDA

2

PARTICIPATION BANKING is; Not an alternative, but an integral

component of Turkish Banking Sector. A third type of banking, together with

Deposit Banks and Development and Investment Banks.

PARTICIPATION BANKS (PBs) are; Functionally similar to Deposit Banks.

They are also bridges between savers and investors as seen in Deposit Banks. But funds raising and financing methods are different.

Raising funds through profit and loss partnership, financing through mainly trading (Murabaha), leasing (Ijara) and profit and loss partnership (Mudaraba and Musharaka).

Definition

Deposit Banks

Participation Banks

Development and

Investment Banks

Main Banking Function

savers / investors

savers / investors

savers / investors

enterpreneurs / investors, individuals

3

Turkish Banking System

TRY 122 bio assets; 5,1% share

TRY 109 bio assets; 4,5% share

TRY 2.165 bio assets; 90,4% share

1983 1985 1989 1991 1995 1996 1999 2001 2005 2008 2010 2012 2015-

16

Government Decree for SFH

Albaraka Turk and Faisal Finans established

Kuveyt Turk established

SFH under Banking Law

Asya Finans established

İhlas Finans established

Anadolu Finans established

-Faisal Finans became Family Finans

-Ihlas Finans left the market

-Anadolu Finans and Family Finans merged

as Türkiye Finans -SFH Renamed PBs

-5411 Nr. Banking Act -Security Fund has been transferred to

SDIF

-TKBB established

-SDIF established

Turkiye Finans acquired by National Commerce

Bank

First Corporate Sukuk issued

by Kuveyt Türk

Six participation banks are in service

- AlBaraka Türk - Bank Asya

- Kuveyt Türk -Turkiye Finans --Ziraat Katılım --Vakıf Katılım

Historical Background

-First Sovereign Sukuk issued by TREASURY

-Stock Exchange Investment Fund Based on Participation Index.

-

BRSA established

Global Islamic Finance

Development Center

PARTICIPATION BANKS (PBs) (which are defined as Islamic Banks in the World) have exclusive and mandatory areas:

Shariah Scholars’ approval on products and operations is a must for PBs as lived in official legislation.

Products should be based on contracts which are approved by Scholars. Sale Contract (Murabaha, Salam,…)

Ijara (Leasing,..)

Wakala

Kafalah

Hawalah

Partnership (Mudaraba, Musharakah,…)

Wadiah

Sarf

Qard (Qard-ı Hasan,..)

Contracts-Products-Services

5

Credits as cash payments through the Customers are prohibited.

Realized debts, wherein the sale contracts have been finished through invoices, consignment,.. etc., are impossible to be financed by PBs.

Payments are compulsorily made directly to the Sellers of the goods, home, car,.. etc. through Murabaha financing which is a Sale Contract.

New contract models can be developed as per Islamic finance principles. According to Islamic finance principles, more than one contract can be integrated in a product as compound contracts where an example is seen in Sale and Lease Back product. So, products are also open to be developed as the contracts.

• Interest is prohibited in all participation banking transactions. So, in basic or compound contracts interest is not allowed even if under the descriptions as ‘commissions’ or else ‘expenses’. In cases the main purposes of the operations are precisely traced by Scholars.

• Uncertainty, speculation and excessive risks are prohibited to protect assets from toxic structures.

• Risk sharing is essential. So, this area is so problematic to work on as being lived in the Islamic banks in global.

• Some goods and materials assumed harmful to the people, such as alcohol, weapon, tobacco, gamble, lottery,..etc. are not allowed in Islamic principles.

• Dependence on real economic activities is essential. This provides resilience against crises.

Contracts-Products-Services

6

• In Assets side of the balance sheet risky and unlimited derivatives are not allowed. Simultaneously, in the liability side deposits work without commitment on return of the investment.

• PBs do not call the financing until the maturity concurrently with not raising the rates until maturity.

• Participation Banking model helps the government in struggling against unregistered economy with its invoice or certificate essentiality in banking operations.

520

122.196

79.188

75.584

10.684

1.052

16.623

473

104.163

69.622

65.405

9.610

990

16.249

0 20.000 40.000 60.000 80.000 100.000 120.000 140.000

Profit* (mio TRY)

Assets (mio TRY)

Financing (mio TRY)

Deposits (mio TRY)

Equity (mio TRY)

Branches (QTY)

Personnel (QTY)

2014 2015/September

*Profit amount is compared to the same period of 2014.

Main Figures of PBs

7

Assets and Tendency (mio TRY, %)

8

9.9

45

13

.73

0

19

.43

5

25

.76

9

33

.62

8

43

.33

9

56

.07

7

70

.24

5

96

.02

2

10

4.0

73

12

2.1

96

2,44%

2,75%

3,35% 3,52%

4,03%

4,31%

4,61%

5,13%

5,55%

5,21% 5,10%

0,00%

1,00%

2,00%

3,00%

4,00%

5,00%

6,00%

0

20.000

40.000

60.000

80.000

100.000

120.000

140.000

Assets of PBs Share in the Banking Sector 2005 conditions and developments affected PBs. positively.

Toxic assets, speculative assets, derivatives without any asset based or asset backed securities are not allowed in participation banking.

Securities in PBs which mainly sourced from Sukuk certificates have the amount of TRY 7.552 million as per Q3 of 2015. The securities over assets rate is 6,2% while the ratio is 13,3% with TRY 318.688 million amount.

PBs sukuk issuances reached TRY 14,8 billion while sovereign sukuk came through TRY 18,1 billion amount.

CAGR PBs : 28,5% B.S. : 19,4%

Deposits and Tendency (mio TRY, %)

9

SPECIAL CURRENT ACCOUNTS: The fund is

drawn partially or completely at any call; no

earnings paid to invested fund, liability covers

only the principal amount.

PARTICIPATION ACCOUNTS: Profit or loss (P/L)

is shared after the running of invested funds;

not any pre-determined earning is paid; not

any guarantee in revenue or repayment of

principal amount. Revenue is paid according to

the pre-agreed P/L sharing rates. The simple

rates are 20 % for PBs, and 80 % for the

Customers. P/L Sharing rates may change

according to the currency, amount and

maturity.

74,1% of the deposits are participation

accounts. And 93,3% of the participation

accounts have short term maturity classified in

till 6 months periods.

The gold accounts reached 2,9% of PBs

deposits while the sector is 0,9% with TRY

10.941 million.

8.3

69

11

.23

7

14

.94

3

19

.21

0

26

.84

1

33

.82

8

39

.86

9

49

.15

1

63

.21

0

66

.78

8

75

.58

4

3,19%

3,47%

4,02% 4,06%

5,22% 5,36%

5,64%

6,14%

6,48% 6,32%

5,93%

0,00%

1,00%

2,00%

3,00%

4,00%

5,00%

6,00%

7,00%

0

10.000

20.000

30.000

40.000

50.000

60.000

70.000

80.000

Deposits of PBs Share in the Banking Sector

CAGR PBs : 24,6% B.S. : 17,5%

Financing and Tendency (mio TRY, %)

10

7.4

07

10

.49

2

15

.33

2

19

.73

3

24

.91

1

32

.08

5

41

.10

3

49

.98

0

67

.41

6

69

.96

5

79

.18

8

4,63% 4,60%

5,22% 5,13%

5,95% 5,79% 5,80%

6,02% 6,24%

5,46%

5,18%

0,00%

1,00%

2,00%

3,00%

4,00%

5,00%

6,00%

7,00%

0

10.000

20.000

30.000

40.000

50.000

60.000

70.000

80.000

90.000

Financing of PBs Share in the Banking Sector

CAGR PBs : 26,7% B.S. : 24,6%

Murabaha financing is the main product depending on instalment sale contract. 93% of the operations are Murabaha while 5,5% are in Leasing (Ijara) and 1,5% Musharaka, Mudaraba, and others.

Financial Leasing is TRY 4.104 million in Q3 of 2015.

84,6% of the financing are allocated through the corporations. So, participation banking has been known as “real sector” or “SME” banking model. This corporate allocation ratio is 73,2% in whole Banking Sector.

Risks for the PBs’ credit portfolio takes its root from participation accounts which stand on P/L sharing accounts. So, risk sharing protects the assets and financing risk decreases automatically liability sources.

Selected Ratios

11

2015/Q3 PBs Banking Sector

Capital Adequacy Ratio (CAR)

14,3% 14,7%

Return on Average Equity (ROAE)

5,2% 8,2%

Return on Average Assets (ROAA)

0,5% 0,9%

Non-Performing Loans over cash loans (NPL)

5,7% 2,9%

Deposits Equal and Above TRY 1 mio

36,7% 53,2%

Fees, Commission and Banking Services Income/Total Income

14,1% 12,8%

Deposits/ Number of Branches (TRY million)

73,7 103,4

Legally 8% CAR is a must for all of the bank models in the Banking Sector. But 12% CAR is currently applied by BRSA as another checkpoint.

In recent years Banking Sector net profits are more negatively affected by “new branch duties”, narrowed interest rate margins, comparatively narrowed PBs’ profit rates.

State owned institutions and high volumed corporations’ accounts which are mainly in conventional banks affect the “over 1 mio accounts”.

For the reason that PBs can not use interest and for PBs timed sale in instalments is mandatory, PBs use fees and commissions much more than conventional ones.

Economies of scale affect the deposits over branches. PBs have more obstacles in this area that they are so young in the whole sector.

2007 2009 2013 2014 2015 2016 2018 2021/6 2023 2025

Potential of Istanbul Finance Center Report

TBB, Deloitte

IFC Strategy and Action Plan – High Planning

Supreme Planning Council Decision-

29/09/2009

Development Ministry-10th Development

Plan 2014-2018 GNAT Decision

02/07/2013

Islamic finance and PB.ing

Development Component

added into IFC Plan 16/02/2015

TKBB/BDDK –Workshop Report on Islamic finance

and PBing

IFC Act is expected to be published

TKBB – Turkish

Participation Banking Strategiy

Document 2015-2025

Vision of Strategy

Document

IFC-Strategy Document

Vision of Government

IFC-Prior Action Plan

Interest Free Coordination

Council established

IFC Actions last finalizing dates

Strategy Document

Actions Last Finalizing

Dates

Strategic Roadmap

13

• In recent years, the attraction about Islamic finance and participation banking has started by the Ministry of Development – Istanbul International Financial Center (IFC) Program Action Plan wherein the feasibility studies began to work in 2007s. After meetings in 2013 and a following workshop together with TKBB-BRSA, the outputs were used in IFC 7th Compound Actions which was named “Developing Interest-free finance and Participation Banking”. Before these actions publishment, PBs has long started to study in details and publishment of a “Turkish Participation Banking Strategy Document”. Afterwards, Turkish Deputy Prime Minister announced the Document to be registered as a State Strategy.

• The main body Strategic Plan is to make Istanbul as a Regional Finance Center in the short run, then Global Finance Center in the long run (2023 Target). So, Islamic finance and participation banking identified as a potential sector to support this main goal.

• IFC Action Plan and Strategy Document actions are compatibly performed by TKBB and its members with stakeholders BRSA, CMB, CBRT, BIST, HCRA, Universities,.. and other supporters.

• Development Ministry is the whole governor of the Action Plans, BRSA is the responsible of the 7th Compound which is under IFC Programme; TKBB and PBs are the main “Action Responsibles” in the actions.

Government Role and Vision

14

• Government supports the sector by constituting State owned PBs. One state owned PB which is called Ziraat Katılım has been opened in May 2015, Vakıf Katılım has joined the sector in February 2016.

• Ministry of Development supports are essential to reach the goals on time.

• Stakeholders supports and cooperatively taking positions are highly required.

VISION

To raise the market share of the

participation banking sector to 15% by 2025 and to deliver world

class financial products and services.

To develop and improve product range and service

quality

To support all efforts to make

Istanbul a leading financial center.

To develop legislation,

standards and regulations related to the principles of

Islamic banking.

To improve training related

activities, human sources and certification.

To improve corporate

communication, perception and

expand reputation management.

Strategic Roadmap

15

• The strategy is ‘to develop determined 5 important areas.’

• Coordination of the Actions, meetings and clarifying the outputs are significant for the goals.

• Establishment of Scholar High Council, establishment of the regulations of Banking Advisory Boards, implementing new products and unused products, certificating the PBs related vocations, and developing participation banking expressions are all strategic goals in this mentioned path.

• 17 Strategies have been determined.

Sectoral Strategy and

Coordination

Product Range and

Development

Advisory Boards Training, HR and

Certification

Corporate Communication,

Perception, Recognition

2025 Vision

1. Determination of the duties and responsibilities of stakeholders in line with sector strategies

2. Increasing the effectiveness of the products currently in use

3. Diversification of the product portfolio of participation banking system

4. Implementation of products used in countries where Islamic banking is developed and the products used in Turkey in the past, but whic h are not currently in use by participation banks

5. Increase fund range of participation banks

6. Development of policies for the participation banking system in public institutions and establishment of an organizational structure to follow the implementation of these policies

16

Strategies – Main Actions

7. Establishment of General Advisory Board for the participation banks

8. Standardizing advisory boards of participation banks

9. Development of distance-learning, undergraduate and graduate programs regarding participation banking, improvement activities to address the shortage of teaching staff

10. Creation of an authors database for stakeholders related to participation banking and removing the lack of lesson books

11. Increasing the number of specialized employees and the development of employee competencies in participation banking

12. Establishment of an institute or research center for participation banking 17

Strategies – Main Actions

13. Promotion of awareness of participation banking terminology

14. Increasing the level of knowledge concerning the philosophy of the system / conventional banking, and to explain the differences

15. Establishment of the right marketing strategies

16. Ensuring uniformity in participation banking operational principles

17. Attempts to increase the recognition of the system

18

Strategies – Main Actions

19

Sectoral Strategy-Products-Advisory Boards

•Interest-Free Finance Coordination Board

•TKBB Collaboration with Stakeholders

•Reorganization of TKBB

•Regulator Institutions departments related to Islamic finance and banking

•Decreasing Murabaha, Increasing Mudharaba, and Musharaka

•Sukuk Diversification

•Wakala Regulation

•Bringing non existing products into the market

•Increasing Ijara - Leasing and Solving Unfair Competition - taxes

•Application in BIST on Sukuk by Teverruk

•Increasing ‘Gold banking’ with activating inactive precious metals in Turkey.

• Establishment of General Advisory Board

• Standardizing of Participation Banks’ In-house Advisory Boards

• Establishment of HCRA relations

• Including Academicians and Fıqh Experts into Boards

• Product Standardization

• Advising role

• Compliance to Shariah principles

20

HR-Training-Corporate Communication-Perception-Recognition

•Expanding the number of departments on Islamic finance in universities

•Introducing departments and lessons under Faculty of Theology and Business, Economics

•Offering more internship programs

• Database on academics publications and addressing the authors, statistical data base area is another important point

•Increasing the number of specialized staff and developing their skills

•Establishment of research centers

•Promotion of awareness of Islamic finance terminology

•Developing long-distance learning and certification

•Increasing the knowledge of philosophy of the model

•Determining the difference between conventional banking

•Raising awareness of customers

•Ensuring accurate information

•Determining right marketing strategies

•Carrying out marketing campaigns

•Perception management of participation banking products.

•Identifiying the factors causing negative perception

Conclusion

21

• Turkey is a leading Country in its region with great potentials and eager in Islamic finance and banking with its stakeholders, as corporate and state partners.

• “Sharing” is the base of this model for it is highly needed for a stable prosperity development.

• If the cake expands, we will face much more prosperity to share.

• Islamic Banking model, which relies on risk sharing, is helping not only to these goals but to the labour and capital relations peace also.

• These banking model is “Shariah compliant banking model” and the difference is the point that all the stakeholders must supervise and protect.

Aydın YABANLI Deputy Manager

Corporate Communications and R&D Department (PMO-Project Management Office)

Office: : +90216 651 94 35 Mobile: +90505 723 23 89

E-mail: aydinyabanli@tkbb.org.tr

Thank You