National and Global Islamic Financial Architecture:
Problems and Possible Solutions for the OIC Member Countries
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insurance as well as interest-free finance system in general, and to contribute to Turkey's
vision of becoming an international finance center” (Undersecretariat of Treasury, n.d).
Such proactive approach to participation banking in Turkey brought with it the formation of
two state owned participation banks. In addition to four private participation banks (Albaraka-
Turk, Kuveyt-Turk, Turkiye Finans and Bank Asya), Ziraat Participation Bank was established
by Ziraat Bank as a subsidiary in 2015 and Vakif Participation Bank, owned by the Directorate
General of Foundations (Awqaf), has recently been established in 2016 as state-owned
participation banks.
The total banking assets in the country were USD 813.4 billion, of which the participation
banking assets were USD 41.4 billion in 2015, which amounts to about 5.1% of total banking
assets (TKKB, 2015). This implies that the total assets of participation banks in the financial
system of Turkey was 5.1% in 2015 with a 28.5% CAGR (compounded annual growth rate)
from 2005 to 2015 while in the same period the CAGR of conventional banking sector was
19.4%. Despite the higher growth rate of participation banks in Turkey, their share remains
around the same figure over many years, which is much lower than the corresponding figures
in Malaysia (around 25%) and the GCC countries. However, recent reforms and developments
are expected to increase the share of participation banking in the financial system in Turkey
and increase the presence of Islamic finance including sukuk issuances. The developments in
Islamic capital markets are expected to be more positive with increasing corporate and
sovereign sukuk issuances since 2010.
4.11.1. Legal Infrastructure
Supporting Islamic Finance Laws
In examining the legal developments in relation to the Islamic banking and finance provision in
Turkey, as part of the economic and financial liberalisation policies of the early 1980s, the then
incumbent Özal government issued the Cabinet Decree of 83/7506 on 16/12/ 1983 to
establish SFHs. After the provision of the necessary by-laws, Albaraka-Turk started to operate
as the first SFH in Turkey in 1985, a number of other SFHs followed the suit.
The 1994, the currency crisis and its impact on the banking sector with bank failures implied
the necessity of more robust financial regulation. Therefore, the SFHs were brought under the
existing Banking Law No. 4389 in December 1999, which implied the extension of all the
relevant regulations for SFHs. In responding to the failure of Ihlas SFH in 2001 as a
consequence of the financial crisis, and its impact on the depositors, SFHs became subject to
‘guarantee scheme’, as applied to conventional banks, with the amendment made to the
Banking Law No. 4389 in May 2001 SFH Assurance Fund” was established within SFH
Association (which is now known as PBAT). This implied that “special current accounts and
profit/loss participation accounts of natural persons … defined as deposits to be insured”
(Okumus, 2005: 56).
The existential development took place in 2005 with the new Banking Act No. 5411 issued on
01/11/2005, which ended the duality in the banking sector in Turkey by changing the status of
SFHs to ‘Participation Bank’. Together with conventional banks, participation banks have been
provided a new ‘guarantee scheme’ under the re-organised SDIF (Savings Deposit Insurance
Fund), which annulled the previous regulation. With Banking Act no.5411 of 2005, “SFH