Diversification of Islamic Financial Insturments
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and to-date developments in Islamic product diversifications have been limited. Despite the
viability and eminence of Turkish Sukuk market, there have been limited domestic corporate
Sukuk issuances other than the issuances of PBs. There have been no international corporate
Sukuk issuances that have originated Turkey other than the banks (Dey 2016). Some of the
factors attributed to the lack of product diversification include:
First, PBs using ‘Murabahah’ financing in 90 per cent of its transactions and 70 per cent of
deposits collected by PBs has three months maturity (Taner 2011). Second, there is no
exclusive Shariah board or body to regulate the development(s) of product diversification and
innovations. BRSA is the main primary body regulating the affairs of the baking sector, both
conventional and PBs (Aslan and Ozdemir 2015). Third, there is lack of public awareness
about Islamic banking in the country, particularly in the rural sector.
Turkey, however, has great prospects and potential for the future of Islamic Finance. The
development strategy prepared by the Participation Bank Association of Turkey (PBAT), a
professional private body, in collaboration with other stakeholders to help promote and
develop the sector is promising. The determined resolve and commitment on the part of the
government in implementing wide range of policies, makes Turkey an important and
interesting case to study.
3.5.2 INTRODUCTION
Turkey is a Eurasian country, a gateway between Europe and Asia, bordered by the Black Sea,
the Marmara Sea, the Aegean Sea and Mediterranean Sea. Its land borders extend more than
2.6 thousand kilometers, Greece and Bulgaria in the northwest, Iran in the east, Iraq and Syria
in the couth and Armenia, Georgia and Azerbaijan in the northeast. Turkey has more than 78
million population, 99% of them are Muslims, endowed with the largest youth population in
the EU countries. Turkey with its growing young skilled labor force, with its endowments of
natural resources, vibrant R&D program and its geographical location, can play an important
and central role in promoting and developing Islamic Finance both among OIC member
countries and world at large.
After a long history of being a centralized economy, Turkey started implementing series of
structural reforms including liberalizing the financial markets in the 1980s. This also
prompted the opening of Special Finance Houses (SFH) in 1984 through a cabinet decree
legalizing interest-free banking operations in Turkey (Hardy, 2012). However, these
institutions could not make any serious penetration into the market due to the weak legislative
framework and lack of strong political will to promote Islamic Finance. With various legal
reforms, that started in 1999, paved the way to bring these SFH into mainstream banking in
the country. In 2005, new banking law officially replaced the term “Special Financing Houses”
with “participation banking” and the Union of Private Finance Houses became “Participation
Banks Association of Turkey” (PBAT). Further changes in the legislation allowed the deposits
of participatory banks to get protection under the Turkey’s bankruptcy laws. The introduction
of these banking reforms brought PBs into the mainstream banking and contributed
significantly to their overall growth. During 2002-2015, the overall growth in the asset size of
PBs was around 29% while it was 18.5% for the overall banking sector in Turkey (Sakarya,
2016).