PARTICIPATION BANKING IN TURKEY: Turkish Participation Banking - - PowerPoint PPT Presentation

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

• n 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

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• 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

• perations 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

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• 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 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

9.945 13.730 19.435 25.769 33.628 43.339 56.077 70.245 96.022 104.073 122.196 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% 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, %)

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• SPECIAL CURRENT ACCOUNTS: The fund is

drawn partially or completely at any call; no earnings paid to invested fund, liability covers

• nly 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.

8.369 11.237 14.943 19.210 26.841 33.828 39.869 49.151 63.210 66.788 75.584 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% 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, %)

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7.407 10.492 15.332 19.733 24.911 32.085 41.103 49.980 67.416 69.965 79.188 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% 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

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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

• ver 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
• ver branches. PBs have more
• bstacles 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

• n 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

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• 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

• f 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

• ther 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

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• 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

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• The strategy is ‘to develop

determined 5 important areas.’

• Coordination of the Actions,

meetings and clarifying the

• utputs are significant for

the goals.

• Establishment of Scholar

High Council, establishment

• f 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

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Strategies – Main Actions

• 13. Promotion of awareness of participation banking

terminology

• 14. Increasing the level of knowledge concerning the philosophy
• f 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

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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

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HR-Training-Corporate Communication-Perception- Recognition

• Expanding the number of departments
• n 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
• f 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

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• 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