The Covid-19 pandemic has led to a situation in Turkey which prompted economists and financial experts to think about the establishment of an alternative economic order to avoid the fragility of debt- and interest-based economic systems and one which would be more effective to react to such crises. They came out with the suggestion of supporting a broader reach of Islamic finance, which is based on real production and assets rather than on speculative processes and fiat money-based debt. This could be a way for Turkey to mitigate the financial impact of the virus crisis, according to Osman Akyüz, head of the Participation Banks Association of Turkey. He told Turkey’s state-run news organisation Anadolu Agency that the principle of participating in profit and loss would be much more effective in times of economic disruption and help overcome crises much faster than in interest rate-based financing systems.
The statement comes as Islamic finance in Turkey, which is there called “participation banking,” is getting more and more traction in the country after its growth has been made a priority in economic planning by the government. Currently, there are six participation banks in Turkey after the government launched three new state-owned Islamic banks in the past five years, and their combined market share in terms of assets is now 6.6%, up from less than 2% in the early 2000s. And their business is thriving: According to Akyüz, in the first four months of 2020 – right amid the pandemic – Turkish participation banks increased their assets by almost 22% from December 2019 and reached a total of $51bn. Back in 2019, the sector experienced growth in net profit of 16% over the previous year, he added. That said, there is still room for growth: Turkey’s total Islamic banking assets compare with $196bn in Malaysia, $107bn in Qatar and $97bn in Indonesia as of December 2019, according to the respective central banks of those countries.
A Fitch Ratings report issued back in March showed that growth in Turkish participation banking has already surpassed growth of conventional banks in the country in recent years. Overall, the government has set a target of 15% in market share as per total assets for 2025.
The strategy is fully backed by Turkey’s President President Recep Tayyip Erdogan who at a virtual Islamic finance conference held in June in Istanbul emphasised that the country will stick to its plan to build up a strong Islamic finance industry which would “provide a solid, sustainable and structural alternative to the existing financial system laden with crises.” He said that the importance of an interest-free, participatory and thus alternative financial system should not be underrated, and the government will support the transformation to a new system which would be “much fairer” than the current dominating global financial system. Advancing technology and fintech innovation would support this roadmap, he noted.
One major accelerator for Turkey in its endeavour to become an Islamic finance hub is the planned new Istanbul Finance Center, currently under construction and slated to open in 2022. The centre, which will focus not only, but heavily on participation banking, as well as on financial innovations and non-banking financial services, is designed to compete with other global finance centers such as London, New York and Hong Kong and seeking to “fill a gap between the economics of the West and the East,” said Serkan Yuksel, the director of the Istanbul Finance Center Department at the President’s Office.
The centre will span over 2.5mn square metres, comprising 560,000 square metres of office space, a hotel, conference and cultural exhibition premises, as well as shopping and residential space and employ some 30,000 people. It will host the headquarters of public banks, including Ziraat Bank and VakifBank with their top participation banking units, as well as Turkey’s Capital Markets Board and the Banking Regulation and Supervision Agency, and also operating units of the central bank.
It is also expected that Turkey’s four other participation banks, namely EmlakBank, Albaraka Türk, Kuveyt Türk and Turkiye Finans will set up their headquarters or at least major branches in the Istanbul Finance Center which is expected to attract “as much as possible” domestic and foreign investments, and many more companies and financial institutions and drive the growth of Islamic banking as a whole, Yuksel added.
