IFN Turkey Report 2018

Turkey: Uncertainties threaten development

Turkey’s participatory banking landscape has witnessed considerable growth in the past few years, enough to be ahead of its geographical peers. But as political and economic problems brew in the horizon, will the Shariah banking industry suffer? DURGAHYENI MOHGANA SELVAM provides an overview of what has happened in Turkey’s participatory banking industry in the past 12 months.

Regulatory landscape

In Turkey, Islamic banking is more widely known as participation banking and is regulated by the Banking Regulation and Supervision Agency under a single Banking Law and associated regulations. While there is no separate legislation for participation banking, the law, however, takes into account the uniqueness of Shariah compliant transactions.

Deputy Prime Minister Mehmet Simsek in 2016 did, however, say that the government is preparing a draft law to harmonize the taxation of Islamic financial contracts. Earlier this year, the possibility of establishing a central Islamic advisory board was discussed by the Turkish Treasury. But no news has materialized on both fronts.

With regards to Sukuk or trust certificates, the first regulation was introduced in 2010 by the Capital Markets Board of Turkey and tax neutrality was adopted in February. In June 2012, Public Finance Law No 4749 was amended to facilitate sovereign Sukuk issuances and at the end of 2012, a new Capital Markets Law (Law No 6362) was implemented, laying the groundwork for private lease certificates and asset-leasing companies. In April 2013, the government introduced changes to the legislation, allowing for new lease certificates to be structured on the Shariah principles of Istisnah, Murabahah, Mudarabah, Musharakah and Wakalah, with other structures permitted subject to regulatory approval.

In 2015, the country set up a dedicated Islamic finance coordination committee to propel the development of the industry.

Banking and finance

There are 51 banks in Turkey out of which five are participation banks: Bank Asya, once the biggest Islamic bank in the country, was shut down in July 2016 by the regulator as part of a post-coup purge due to its strong links to the Gulenist movement.

As of March 2018, the five existing participation banks (Ziraat, Vakifb ank, AlBaraka Turk, Kuveyt Turk and Turkiye Finans) collectively registered a surge in assets to TRY112.02 billion (US$24.58 million) from TRY90.15 billion (US$19.78 billion) a year before, according to the Banking and Regulatory Supervision Agency. The industry took up 4.81% of the overall banking asset market share in May 2017 (latest data) — the Republic intends to triple the number to 15% by 2025.

Halkbank, a national bank, is expected to open a participation window soon. Th e country is also working with the IDB and Indonesia to establish an Islamic megabank, which is expected to be launched this year.

For the past two years, mergers and acquisitions activity has also increased in the local Islamic banking landscape. Th e Turkish Treasury announced that it would be taking over a 58.45% stake in Vakifbank, currently held by the General Directorate of Foundations, under the Prime Minister’s Office, whereas UAE-based Emirates NBD’s discussions with Russia’s Sberbank to acquire the latter’s stake in Turkey’s DenizBank are currently at an advanced stage.


Sukuk or lease certificates were first introduced in Turkey in 2010 when Kuveyt Turk Katilim Bankasi raised US$100 million through the Islamic capital markets. Th e government in September 2012 made its US$1.5 billion sovereign Sukuk debut. In April this year, it raised raised TRY389.47 million (US$85.45 million) through an auction of gold-based Sukuk, the highest amount raised this year. Since 2017, the government has collected TRY2.43 billion (US$533.16 million)-worth of gold through this Sukuk so far.

This year, the Turkish Treasury issued lease certificates maturing in 2020 and has plans to auction a two-year lease certificate in June, September and November. Halk REIT issued an 87-day lease certificate, touted as the first Sukuk issuance in Turkey’s real estate investment sector, whereas while Kuveyt Turk and Vakifbank have received regulatory approval to off er Sukuk facilities.

Asset management

The local Shariah asset management industry is nascent. It is challenging to ascertain the exact number of Islamic funds as Shariah terms are avoided in describing Shariah compliant financial products. Unlike the banking industry, conventional asset managers are

allowed to off er Shariah compliant products on a window basis and need not apply for separate Shariah approvals; there are three fullyfl edged Islamic asset managers.

Last year, Mufakat Portfoy, a Shariah compliant asset management company, launched two venture capital funds and one REIT fund. KT Portfoy and Green Power in May 2017 signed an MoU to set up the first Islamic private equity investment fund in Turkey. The vehicle, managed by KT Portfoy, will primarily invest in the energy industry with a focus on renewables.


The Turkish participatory banking system is growing at a rapid pace to compete with its peers in the global landscape. The progress, if groomed well, could bring in more investors and in turn could help the nation fix its deteriorating inflation and the volatility of its exchange rate.

But internal problems, such as major political shift s and security threats, pose obstacles to the growth of the industry. The once-fastest developing economy in the world has been downgraded to junk this year to ‘BB-/B’ on the back of rising imbalances in its economy, widening debt-financed current account deficit and high inflation — factors which may impact the performance and development of its Islamic finance sector. 

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