Turkish Participation Banking Strategy Document 2015-2025

PARTICIPATION BANKING IN TURKEY: Turkish Participation Banking Strategy Document 2015-2025

Aydın YABANLI Deputy Manager Corporate Communications and R&D Department (PMO-Project Management Office)

OIC-COMCEC Workshop; Ankara, March 17, 2016

AGENDA

• Definition and Historical Background • Facts and Figures • Strategic Plan • Conclusion

2 Definition

PARTICIPATION BANKING is; Turkish Banking TRY 109 bio Development assets; . Not an alternative, but an integral and System Investment 4,5% share component of Turkish Banking Sector. Banks . A third type of banking, together with Deposit Banks and Development and Participation Investment Banks. Banks TRY 122 bio PARTICIPATION BANKS (PBs) are; assets; 5,1% share Deposit Banks . Functionally similar to Deposit Banks. TRY 2.165 bio They are also bridges between savers assets; and investors as seen in Deposit Banks. 90,4% share But funds raising and financing methods are different. savers / . Raising funds through profit and loss investors partnership, financing through mainly Main savers / Banking enterpreneurs trading (Murabaha), leasing (Ijara) and investors Function / investors, profit and loss partnership (Mudaraba individuals and Musharaka). savers / investors

3 Historical Background

Turkiye Finans acquired SFH under Banking Law by National Commerce Kuveyt Turk established Bank -Anadolu Finans and -First Sovereign Sukuk Family Finans merged issued by TREASURY as Türkiye Finans -Stock Exchange Government Decree for İhlas Finans -SFH Renamed PBs Investment Fund Based SFH established -5411 Nr. Banking Act on Participation Index. -Security Fund has - been transferred to SDIF

2015- 1983 1985 1989 1991 1995 1996 1999 2001 2005 2008 2010 2012 16

Albaraka Turk and Asya Finans Global Islamic Faisal Finans established BRSA -TKBB First Corporate Finance established established established Sukuk issued Development -SDIF by Kuveyt Türk Center established Six participation banks Anadolu Finans -Faisal Finans became are in service established Family Finans - AlBaraka Türk - Bank Asya -Ihlas Finans left the - Kuveyt Türk market -Turkiye Finans --Ziraat Katılım --Vakıf Katılım Contracts-Products-Services

PARTICIPATION BANKS (PBs) (which are . Credits as cash payments through defined as Islamic Banks in the World) the Customers are prohibited. have exclusive and mandatory areas: . Realized debts, wherein the sale contracts have been finished through . Shariah Scholars’ approval on invoices, consignment,.. etc., are products and operations is a must for impossible to be financed by PBs. PBs as lived in official legislation. . Payments are compulsorily made . Products should be based on directly to the Sellers of the goods, contracts which are approved by home, car,.. etc. through Murabaha financing which is a Sale Contract. Scholars. . New contract models can be . Sale Contract (Murabaha, Salam,…) developed as per Islamic finance . Ijara (Leasing,..) principles. According to Islamic . Wakala finance principles, more than one . Kafalah contract can be integrated in a . Hawalah product as compound contracts . Partnership (Mudaraba, Musharakah,…) where an example is seen in Sale and . Wadiah Lease Back product. So, products are . Sarf also open to be developed as the contracts. . Qard (Qard-ı Hasan,..) 5

Contracts-Products-Services

• Interest is prohibited in all participation • In Assets side of the balance sheet banking transactions. So, in basic or risky and unlimited derivatives are compound contracts interest is not allowed even if under the descriptions not allowed. Simultaneously, in the as ‘commissions’ or else ‘expenses’. In liability side deposits work without cases the main purposes of the commitment on return of the operations are precisely traced by investment. Scholars. • Uncertainty, speculation and excessive • PBs do not call the financing until risks are prohibited to protect assets the maturity concurrently with not from toxic structures. raising the rates until maturity. • Risk sharing is essential. So, this area is • Participation Banking model helps so problematic to work on as being lived in the Islamic banks in global. the government in struggling against • Some goods and materials assumed unregistered economy with its harmful to the people, such as alcohol, invoice or certificate essentiality in weapon, tobacco, gamble, lottery,..etc. banking operations. are not allowed in Islamic principles. • Dependence on real economic activities is essential. This provides resilience against crises.

Main Figures of PBs

2014 2015/September

16.249 Personnel (QTY) 16.623

990 Branches (QTY) 1.052

9.610 Equity (mio TRY) 10.684

65.405 Deposits (mio TRY) 75.584

69.622 Financing (mio TRY) 79.188

104.163 Assets (mio TRY) 122.196

473 Profit* (mio TRY) 520 *Profit amount is compared to the same period of 2014. 0 20.000 40.000 60.000 80.000 100.000 120.000 140.0007 Assets and Tendency (mio TRY, %)

Assets of PBs Share in the Banking Sector . 2005 conditions and 140.000 6,00% developments affected PBs. 5,55% positively. CAGR 5,21% 5,13% 5,10% 120.000 PBs : 28,5% . Toxic assets, speculative assets, 5,00% B.S. : 19,4% 4,61% derivatives without any asset 4,31% based or asset backed securities 100.000 4,03% are not allowed in participation 4,00% 3,52% banking. 3,35% 80.000 . Securities in PBs which mainly

2,75% 3,00% sourced from Sukuk certificates 2,44% have the amount of TRY 7.552 60.000 million as per Q3 of 2015. The

2,00% securities over assets rate is 6,2% 40.000 while the ratio is 13,3% with TRY 318.688 million amount. 1,00%

20.000 . PBs sukuk issuances reached TRY

14,8 billion while sovereign sukuk

came through TRY 18,1 billion

104.073 122.196

96.022 9.945 13.730 19.435 25.769 33.628 43.339 56.077 70.245 0 0,00% amount.

Deposits and Tendency (mio TRY, %)

. SPECIAL CURRENT ACCOUNTS: The fund is Deposits of PBs Share in the Banking Sector drawn partially or completely at any call; no 80.000 7,00% 6,48% earnings paid to invested fund, liability covers CAGR 6,32% PBs : 24,6% 6,14% only the principal amount. 70.000 5,93% 6,00% B.S. : 17,5% 5,64% . PARTICIPATION ACCOUNTS: Profit or loss (P/L) 5,36% 5,22% is shared after the running of invested funds; 60.000 5,00% not any pre-determined earning is paid; not any guarantee in revenue or repayment of 50.000 4,02% 4,06% 4,00% principal amount. Revenue is paid according to 3,47% the pre-agreed P/L sharing rates. The simple 40.000 3,19% rates are 20 % for PBs, and 80 % for the 3,00% Customers. P/L Sharing rates may change 30.000 according to the currency, amount and 2,00% maturity. 20.000 . 74,1% of the deposits are participation

1,00% accounts. And 93,3% of the participation

10.000

accounts have short term maturity classified in

39.869 11.237 14.943 19.210 26.841 33.828 49.151 63.210 66.788 75.584 8.369 till 6 months periods. 0 0,00% . The gold accounts reached 2,9% of PBs deposits while the sector is 0,9% with TRY9 10.941 million.

Financing and Tendency (mio TRY, %)

Financing of PBs Share in the Banking Sector . Murabaha financing is the main product depending on instalment sale 90.000 7,00% contract. 93% of the operations are 6,24% Murabaha while 5,5% are in Leasing 80.000 5,95% 6,02% 5,79% 5,80% 6,00% (Ijara) and 1,5% Musharaka, 5,46% Mudaraba, and others. 70.000 5,22% 5,18% 5,13% . Financial Leasing is TRY 4.104 million in 5,00% 4,63% 4,60% Q3 of 2015. 60.000 . 84,6% of the financing are allocated 4,00% through the corporations. So, 50.000 CAGR participation banking has been known PBs : 26,7% 40.000 as “real sector” or “SME” banking B.S. : 24,6% 3,00% model. This corporate allocation ratio is 73,2% in whole Banking Sector. 30.000 2,00% . Risks for the PBs’ credit portfolio takes

20.000 its root from participation accounts which stand on P/L sharing accounts.

1,00% So, risk sharing protects the assets and

10.000

financing risk decreases automatically

41.103 10.492 15.332 19.733 24.911 32.085 49.980 67.416 69.965 79.188 7.407 liability sources. 0 0,00%

Selected Ratios

2015/Q3 PBs Banking . Legally 8% CAR is a must for all of the Sector bank models in the Banking Sector. But 12% CAR is currently applied by BRSA Capital Adequacy Ratio 14,3% 14,7% as another checkpoint. (CAR) . In recent years Banking Sector net Return on Average 5,2% 8,2% profits are more negatively affected by “new branch duties”, narrowed Equity (ROAE) interest rate margins, comparatively Return on Average 0,5% 0,9% narrowed PBs’ profit rates. Assets (ROAA) . State owned institutions and high volumed corporations’ accounts which Non-Performing Loans 5,7% 2,9% are mainly in conventional banks affect over cash loans (NPL) the “over 1 mio accounts”. Deposits Equal and 36,7% 53,2% . For the reason that PBs can not use Above TRY 1 mio interest and for PBs timed sale in instalments is mandatory, PBs use fees Fees, Commission and 14,1% 12,8% and commissions much more than Banking Services conventional ones. Income/Total Income . Economies of scale affect the deposits over branches. PBs have more Deposits/ Number of 73,7 103,4 obstacles in this area that they are so Branches (TRY million) young in the whole sector. 11

IFC-Strategy Document

Islamic finance IFC-Prior Action and PB.ing Plan Potential of Istanbul Development Finance Center Report Component IFC Actions last TBB, Deloitte added into IFC finalizing dates Vision of Plan 16/02/2015 Government

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

TKBB – Turkish IFC Act is IFC Strategy and Action Development Participation expected to Strategy Plan – High Planning Ministry-10th Banking be published Document Supreme Planning Development Strategiy Actions Last Council Decision- Plan 2014-2018 Document Finalizing Vision of 29/09/2009 GNAT Decision 2015-2025 Dates Strategy 02/07/2013 Document TKBB/BDDK – Interest Free Workshop Report Coordination on Islamic finance Council and PBing established Strategic Roadmap

• 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 • IFC Action Plan and Strategy Document started to study in details and publishment actions are compatibly performed by TKBB of a “Turkish Participation Banking Strategy and its members with stakeholders BRSA, Document”. Afterwards, Turkish Deputy CMB, CBRT, BIST, HCRA, Universities,.. and Prime Minister announced the Document to other supporters. be registered as a State Strategy. • Development Ministry is the whole governor of the Action Plans, BRSA is the • The main body Strategic Plan is to make responsible of the 7th Compound which is Istanbul as a Regional Finance Center in the under IFC Programme; TKBB and PBs are short run, then Global Finance Center in the the main “Action Responsibles” in the long run (2023 Target). So, Islamic finance actions. and participation banking identified as a potential sector to support this main goal.13 Government Role and Vision

• Government supports the sector by constituting To develop and State owned PBs. One improve product range and service state owned PB which is quality called Ziraat Katılım has been opened in May 2015, Vakıf Katılım has To improve joined the sector in corporate VISION To support all communication, efforts to make February 2016. perception and To raise the market Istanbul a leading • Ministry of Development expand reputation financial center. management. share of the supports are essential to participation banking reach the goals on time. sector to 15% by 2025 • Stakeholders supports and to deliver world and cooperatively taking class financial products positions are highly and services. required. To develop To improve legislation, training related standards and activities, human regulations related sources and to the principles of certification. Islamic banking.

14 Strategic Roadmap • The strategy is ‘to develop determined 5 important Sectoral Strategy areas.’ and • Coordination of the Actions, Coordination meetings and clarifying the outputs are significant for the goals. Corporate • Product Range Establishment of Scholar Communication, and High Council, establishment Perception, Development Recognition of the regulations of 2025 Vision Banking Advisory Boards, implementing new products and unused products, certificating the PBs related vocations, and developing participation banking expressions are all strategic Training, HR and Advisory Boards goals in this mentioned Certification path. • 17 Strategies have been determined. 15 Strategies – Main Actions

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 Sectoral Strategy-Products-Advisory Boards

•Interest-Free Finance Coordination Board • Establishment of General •TKBB Collaboration with Stakeholders Advisory Board •Reorganization of TKBB • Standardizing of Participation •Regulator Institutions departments Banks’ In-house Advisory Boards related to Islamic finance and banking • Establishment of HCRA relations •Decreasing Murabaha, Increasing • Including Academicians and Fıqh Mudharaba, and Musharaka Experts into Boards •Sukuk Diversification • Product Standardization •Wakala Regulation • Advising role •Bringing non existing products into the • Compliance to Shariah principles 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. 19

HR-Training-Corporate Communication-Perception- Recognition •Expanding the number of departments •Increasing the knowledge of philosophy on Islamic finance in universities of the model •Introducing departments and lessons •Determining the difference between under Faculty of Theology and Business, conventional banking Economics • •Offering more internship programs Raising awareness of customers • Database on academics publications •Ensuring accurate information and addressing the authors, statistical •Determining right marketing strategies data base area is another important •Carrying out marketing campaigns point •Perception management of •Increasing the number of specialized staff and developing their skills participation banking products. •Establishment of research centers •Identifiying the factors causing negative •Promotion of awareness of Islamic perception finance terminology •Developing long-distance learning and certification

Conclusion

• 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.

Thank You

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: [email protected]