Diversification of Islamic Financial Instruments
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3.5 CASE STUDY: TURKEY
3.5.1 SUMMARY
The introduction of Islamic Finance in Turkey goes back to 1984. The Special Finance Houses
had been permitted to start their operations first, which were transformed into the
Participation Banks (PBs) by the new banking law in 2005. Recent economic development and
changes in regulations have contributed significantly to the growth of Islamic Finance in
Turkey over the past 10 years. Sovereign Sukuk and participation banks’ Sukuk have been
issued and Islamic private pension companies have also been established. Not only has the
growth in Islamic Finance been at a faster pace than the growth of conventional finance, these
banks have succeeded in doubling their market share of total banking assets, reaching 5% in
201575. The Sukuk market has also made noteworthy progress in recent years. The Turkish
Treasury has been able to make eight sovereign issuances with an approximate value of
US$7.71 billion and other corporate private issuances worth US$4.071 billion between 2011
and 2015 (Dey, 2016). The progress is a reflection of strong intent on the part of the
government to promote and develop Islamic Finance in recent years, and the important
tangible steps that have been taken, demonstrate their commitment in this regard.
First, state-owned banks, Ziraat Katılım and Vakif Katılım have been operating since May 2015
and February 2016 respectively. According to a recent S&P report, the emergence of these
state-owned banks as new Turkish Islamic Lenders can be a game-changer 76. Second, the
Istanbul International Financial Center (IIFC) project as part of the 10th development plan
covering 2014-2018 aims at making Istanbul among the top 25 centers in the Global Financial
Center Index ranking. One of the important components of the IIFC project is to develop
participation banking and Islamic Finance in Turkey (Borsa Istanbul, 2017). Third, an
important legislation had been passed by the Parliament in June 2012 that has allowed public
sector to issue Sovereign Sukuk. Fourth, the World Bank Global Finance Development Center
branch was opened in Istanbul in November 2013. This will complement efforts in further
reforming the regulatory and legal framework of the financial industry, including Islamic
Finance. Fifth, Participation Banks Association of Turkey (PBAT), which is an official private
professional body, has prepared a detailed strategy document, “Vision 2025”, to help raise the
market share of participation banks and in promoting new Shariah compliant financial
products and services. (PBAT 2015). Finally, the ‘Vision 2023’ of the ruling party, sets an
ambitious plan to make Turkey world’s 10 largest economies by the end of 2023. According to
one of the international reports (Thomson Reuters, 2014)77 , PBAT has set a target of a 15%
share of total financial assets of PB’s by 2025 with expected total assets of over $100 billion.
Another international study published by Ernst & Young has also endorsed similar vision of
the Turkish Government (PBAT 2014). The vision aims at accessing a wider pool of investors
in the global financial market through issuance of Sukuk by the corporate, banks and as well as
Treasury (Nevzat Devranoglu, 2013).
Although there has been noteworthy growth in the Islamic Finance (IF) since 2005, after the
enactment of various legal reforms in the country, the share of IF has been on the lower side
75 PBAT (2014)
76 Osman Orsal (2016),
77 Some of the strategic partners in the report include, Turkye Finans, IRTI, and Al Baraka.