With more than 600 institutions worldwide and with estimated $ 1.4 trillion Sharia-compliant assets in 2014, Islamic Finance (“participation banking”) market in Turkey keeps growing and such growth is likely to continue in the future. Despite the size and the potential of the Islamic finance market, in 2014, Turkey has only four private participation banks. It is likely that this situation will not remain the same as the Turkish government is preparing the regulatory framework in order to introduce three state-owned banks in participation banking market.
The first participation bank in Turkey; AlBaraka Türk completed its establishment in 1985. Four years later the second participation bank Kuveyt Türk was established. These were followed by Bank Asya in 1996 and Türkiye Finans in 2005.
In 2012, first islamic bond (“sukuk”) issuance of $1.5 billion was announced by the government and the regulatory requirements have increased significantly.
But the most important changes in the regulatory framework were made in 2013 whereby new instruments were introduced. Today, participation banks’ market share stands at 5% of the total banking sector. However, the government targeting a %15 share of the total financial assets by 2023 and sector assets are expected to triple within the next 5 years pursuant to recent reports .
In 2013, Deputy Prime Minister of Turkey, Ali Babacan announced that two state-owned banks will enter the participation banking market. Today with recent developments, this has increased to three; Ziraat Bank, Halkbank and VakıfBank.
The first state-owned and the biggest bank which established a participation banking unit is Ziraat Bank. In October 2014, Ziraat Bank obtained permission from the Banking Regulation and Supervision Agency to set up a participation bank with $300 million capital.
However, the government did not stop and only five days after the announcement of the creation of Ziraat Bank’s Islamic finance unit, a bill envisaging changes to banking legislation was sent to the Parliament. Most importantly, this provided Vakıfbank’s shares to be transferred to the Undersecreteriat of Treasury and the creation of a participation banking unit.
Finally, the third state owned bank; HalkBank is reportedly seeking regulatory approval for the establishment of the Islamic finance unit after the authorization granted in October 30, 2014 by the bank’s board of directors. After this announcement, all three state-owned banks are set to establish participation banking units. However, uncertainty still remains on whether these units will be established as separate entities.
Even if no further details were communicated, recent activities demonstrate the intention of the government in this area. The initiative of the government to promote the participation banking sector will be a major step towards the development of the sector in Turkey and in Turkey becoming a new center of attraction for the investors located in South Asia and the Gulf.