Participation Banking in Turkey

Fahrettin YAHŞİGeneral ManagerAlbaraka Türk

• Based on interest-free banking, also known as participation banking in Turkey

• Similar to the conventional banking sector, Islamic banking also started to grow in countries i.e. Malaysia, Indonesia, Bangladesh, Jordan and Turkey during 1980’s.

• Today, Islamic banking is present in 75 countries with more than 300 institutions.

• Besides the Islamic Banks there is an increasing trend among conventional banks to open Islamic Banking Window (HSBC, Citi, Deutsche…)

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Participation Banking

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Interest-free Banking in the World

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

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

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Interest-free Banking in the World (2010)

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

billion USD

Participation Banking in Turkey “milestones”…

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

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Firstly introduced under the name of Special Finance Houses in

1985.

They were brought under same regulation between 1999 and

2001. In 2005 their names were converted to Participation Banks

and they were subject to same regulations as conventional banks

Currently 4 participation banks are operating in Turkey: Albaraka

Türk, Bank Asya, Kuveyt Türk and Türkiye Finans

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Participation Banks

• Not an alternative, but an integral component of Turkish Banking Sector.

• A third type of banking, together with Deposit Banks and Development&Investment Banks.

• Participation Banks are functionally similar to Deposit Banks. But collecting and utilization methods of funds are different.

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Participation Banks

• PARTICIPATION BANKS (PBs), a component of the banking system in Turkey, have brought the idle funds into the system.

• These banks have provided alternative financial opportunities to manufacturers and businessmen using funds.

• Working in principle of profit/loss sharing base, the PBs are less affected by the financial and economic crises lived in 2001 as an ordinary result of this system and healthy lending processes.

• PBs have been able to distribute satisfactory returns to their depositors (investors).

• PBs have been able to fund commercial and industrial sectors with competitive costs.

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Participation Banks

• PBs can play an important role in drawing the excess capital observed in the Gulf region to Turkey. It is possible to attract a considerable amount of capital to our country having a capital gap from the Gulf by issuing Sukuk by Turkish Treasury.

• In addition, PBs have taken a serious role in murabaha financing gathered in the form of Syndicated Loans from Gulf Region and became widespread. Up to now, more than USD 1 billion has been provided in this model.

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Participation Banking

No guaranteed a fixed return to deposit customers No investment in interest bearing assets (i.e. bonds) No exposure to direct interest rate risk No direct lending to credit customers, payments are made to

sellers Not exposed to currency risk Speculative transactions are not allowed Transactions of goods and services which are not

compatible with Islamic rules are not allowed Efficient allocation of funds: Investments in more productive

projects.

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Distinguishing Features of Participation Banking

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Participation Banks

Strong Sides of Participation Banks• More than 25 years experience in interest-free banking• Completed legal structure • Qualified and skilled staff

Opportunities for Participation Banks• Increasing investment level in line with the recent reel economic

growth of Turkey• Development in the financial investment area such as private pension

and life insurance thanks to the increasing level of income in Turkey

and the great potential in this areas in terms of interest free funding• Improved economic and legal conditions helped participation banks

grow

Sector # of Institutions Asset Size

bn TRYShare (%)

1 CENTRAL BANK 1 150.7 10.2

2 BANKS 48 1,146.0 76.2

3 LEASING 33 17.0 1.2

4 FACTORING 74 15.1 1.0

5 CONSUMER FINANCING 11 7.2 0.5

6 INSURANCE 57 36.6 2.6

7 SECURITIES INTERMEDIARY* 103 8.9 0.5

8 SECURITIES INVESTMENT TRUSTS* 31 0.7 0.1

9 MUTUAL FUNDS* - 30.9 2.4

10 REITs* 21 17.2 1.0

11 VENTURE-CAPITAL TRUST* 2 0.2 0.0

12 ASSET MANAGEMENT 8 0.7 0.1

13 PENSION TRUSTS - 12.6 0.9

14 PORTFOLIO MANAGEMENT* 28 48.0 3.5

Total 1,483.2 %100

Turkish Financial Sector (June 2011)

* March 2011 data

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Financial System in Turkey

Penetration of the Banking System

% Assets/GDP Loans/GDP Deposits/GDP

Turkey 85 39 52

Euro Zone 337 139 119

Non-Euro Zone 87 45 44

Germany 310 131 127

France 401 112 94

United Kingdom 548 216 278

Russia 79 43 35

* Source: European Banking Federation, year-end 2009 figures

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Turkish Banking System: Key Figures as % of GDP

Assets, deposits and loans % of GDP increasing, upward trend to continue

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Banks# of

Institutions

Assets Deposits Loans

bn TRY (%) bn TRY (%) bn TRY (%)

Participation Banks

4 53.6 4.4 36.9 5.4 36.2 5.5

Deposit Banks 31 1,122.2 92.5 646.8 94.6 604.5 91.4

Development & Investment Banks

13 37.9 3.1 - - 20.6 3.1

Total 48 1,213.7 100 683.7 100 661.3 100

Volume of Turkish Banking Sector (September 2011)

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Source: BRSA reports

Participation Banks

Banking Sector

Assets 34.2 19.9

Deposits 34.1 27.8

Credits 31.8 18.8

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Participation Banks - Banking Sector(CAGR %, 2005 - 2010 )

Source: BRSA

Participation Banks (Asset Growth)

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Years PBSGrowth of PBS

(%)Banking Sector

Growth of Banking Sector %

Share (%) of PBs

2000 2,266,000   106,549,000 2.13%

2001 2,365,000 4.37% 168,900,000 58,51% 1.40%

2002 3,962,000 67.53% 216,637,000 -1,02% 1.83%

2003 5,112,934 29.05% 254,863,000 17,65% 2.01%

2004 7,298,601 42.75% 313,751,000 23,11% 2.33%

2005 9,945,431 36.26% 406,915,000 29,69% 2.44%

200613,729,72

038.05% 498,587,000 22,53% 2.75%

200719,435,08

241.55% 580,607,000 16,45% 3.35%

200825,769,42

732.59% 731,640,000 26,01% 3.52%

200933,628,03

830.50% 833,968,000 13,99% 4.03%

201043,338,70

028.88%

1,006,676,840 20,71% 4.31%

2011/953,573,00

023.61%

1,213,660,000 20.60% 4.41%

Source: BRSA

(000 TRY )

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Participation Banks’ Market Share (Total Assets)

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YearsPBs’ Funds Collected

Growth of Funds

Collected (%)

Bankıng Sector’s Deposits

Growth of Banking Sector’s

Deposits (%)

Share of PBs (%)

2000 1,863,000   70,305,000 2.65%

2001 1,917,000 2.90%110,298,00

0 56,88% 1.73%

2002 3,206,000 67.24%145,594,00

0 -2,57% 2.20%

2003 4,111,000 28.23%164,923,00

0 13,28% 2.49%

2004 5,992,000 45.76%203,386,00

0 23,32% 2.95%

2005 8,369,000 39.67%261,948,00

0 28,79% 3.19%

200611,237,00

034.27%

324,069,000 23,72% 3.47%

200714,943,00

032.98%

371,927,000 14,77% 4.02%

200819,210,00

028.56%

472,695,000 27,09% 4.06%

200926,841,97

039.73%

522,415,000 10,52% 5.14%

201033,089,00

023.27%

617,037,000 18,11% 5.36%

2011/936,929,00

011.61%

683,688,000 10.80% 5.40%

Source: BRSA

Participation Banks (Funds Collected Growth)

(000 TRY )

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Participation Banks’ Market Share (Funds Collected)

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Years PBS’ Credits Growth (%)Banking Sector

Credits

Growth of Banking Sector’s

Credits (%)PBs’ Share (%)

2000 1,726,000   32,939,000 5.24%

2001 1,072,000 -37.89% 33,680,0002,24%

3,18%

2002 2,101,000 95.99% 54,860,000-6,08%

3.83%

2003 3,001,000 42.84% 72,169,00031,55%

4.16%

2004 4,894,000 63.08%107,615,00

0 49,12%4.55%

2005 7,407,000 51.35%160,005,00

0 48,68%4.63%

2006 10,492,000 41.65%228,141,00

0 42,58%4.60%

2007 15,332,000 46.13%293,928,00

0 28,84%5.22%

2008 19,733,000 28.70%384,417,00

0 30,79%5.13%

2009 24,911,209 26.24%418,684,00

0 8,91%5.95%

2010 32,172,000 29.17%537,172,00

0 28.30% 5.98%

2011/9 39,029,000 21.31%679,031,00

0 26.41% 5.75%

Source: BRSA

Participation Banks (Credit Growth) (000 TRY )

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Participation Banks’ Market Share (Credits)

Credit-to-Deposit Ratio (%)

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Years PBs’ SHE Growth (%)Banking

Sector’s SHE

Growth of Banking Sector’s

SHE %Share (%)

2000 161,000   8,295,000 1.94%

2001 203,000 26.09% 14,276,000 72,10% 1.42%

2002 400,000 97.04% 26,099,000 37,34% 1.53%

2003 700,000 75.00% 36,208,000 38,73% 1.93%

2004 892,000 27.43% 46,855,000 29,41% 1.90%

2005 951,000 6.61% 54,687,000 16,72% 1.74%

2006 1,560,000 64.04% 59,538,000 8,87% 2.62%

2007 2,364,000 51.54% 75,850,000 27,40% 3.12%

2008 3,729,000 57.74% 86,425,000 13,94% 4.31%

2009 4,420,000 18.53%110,874,00

0 28,29% 3.99%

2010 5,457,080 23.46%134,552,28

0 21,36% 4.06%

2011/9 5,998,000 9.91%141,575,00

0 5.23% 4.23%

Source: BRSA

Participation Banks (Shareholders’ Equity Growth)

(000 TRY )

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Participation Banks’ Market Share (Shareholders’ Equity)

Branch and Staff Size

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Years Branches Growth (%) Staff Growth (%)

2000 110   2,182  

2003 188 71% 3,520 61%

2004 255 36% 4,789 36%

2005 290 14% 5,740 20%

2006 355 22% 7,114 24%

2007 422 19% 9,215 30%

2008 530 26% 11,022 20%

2009 560 6% 11,802 7%

2010 607 8% 12,703 8%

2011/9 663 9% 13,454 11%

Source: The Participation Banks Association of Turkey

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PBs closely monitor and adapt to CBRT’s regulations• growing fast to alleviate pressure in margins• extending maturity of deposits• accessing to alternative funding sources (syndication, sukuk)

Maintaining asset quality

Branching and acquisitions abroad

Following tax regulations related to financial leasing business

Diversifying credit portfolio: Emphasis on profitable Profit&Loss sharing projects.

“Increasing market share to 10 % in medium term.“

Assessment of 2011 for Participation Banks

Thank You

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