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Islamic Finance for Development;

Present status and future prospects

Vice President – Investment Banking
Kuwait Turkish Participation Bank

İstanbul - November 2010

1. What does “Islamic banking” stand for?

2. Islamic banking in the modern financial system & current trends and
areas of growth

3. Turkish experience and expectations

4. KTPB experience
Global Existence

 Increasing market presence

− Growing at 15 to 20% per annum
− Size estimated at USD 900 billion globally
− New markets welcoming Islamic banks and products

 Market-driven proposition
− Retail demand has historically the backbone of the industry
− Sensitivities to principles more visible on retail deposit
− But corporates and even sovereigns showed appetite for the products
− Market-driven product development proved to be successful
− Self-regulating organisations accompanied global Islamic banking boom

 Global scale
− More than 250 Islamic banks worldwide operating in over 75 countries
− A wide range of interest varying from U.K. to Singapore
− Widening customer base including sovereigns to top global corporates
to tap Islamic finance markets
Industry has developed a comprehensive product
offering over its young history
Development of industry Evolving richness in products

− Development of theoretical framework

1950s − First attempts to structure Islamic banking
structured commercial
− First institutions emerged to test the market products banking
− Islamic Development Bank (1974) and DIB
70s − One country-one bank setup
2000s 1970s
− Advancement of Islamic products
80s − Turkish market to welcome Islamic banking private
− Full “Islamization” of banking in some equity 1990s 1980s
countries (Pakistan, Sudan etc.) syndications
− Entry of global institutions & Islamic windows
90s − İncreasing global coverage of Islamic banking
finance structured
− Islamic banks achieving strong and stable equity and trade finance
growth globally,
2000s − New products in international markets
− Sukuk market to boom

Industry has near like-for-like parity with conventional offering

Global Deployment of Islamic Products

Mainstream relevance Niche presence Engaging with regulators Conceptual exploration

Breakdown of Islamic Banking

Principles Compliant Assets
Islamic Islamic Takaful
Breakdown of Islamic
Banking Principles

Worldwide (2003)

Sukuk equity mutual

Compliant Assets


Worldwide (2008)
funds funds
2.5% 3.5%


Source: KFHR Global Islamic Finance Directory 2008

Why Islamic financing is flourishing
Strong growth of
GCC economies
Innovative product
Development of development
Islamic capital markets
RAPID GROWTH Market developments
OF ISLAMIC FINANCE urging countries and customers
Liberalisation of to diversification
capital markets

- Improved regulatory environment: stronger regulatory framework improved public’s

- Increasing demand for interest-free products and services
- Successful product differentiation and product mix;
- Improvement of overall financing system and put the participation banks into a stable
growth phase
- Better customer focus;
- Wider branch network and customer reach;
- Growing foreign trade with the Islamic countries
- Growing customer/participant awareness of the system
- Expansion of product mix with more customer-focused strategies
- Experience in lending
- Aggressive growth strategies

Industry is driven by fundamental factors

An alternative banking model in development

Suppliers of capital
Profit, not interest,
Debt financing
becomes the basis for
financial intermediation
ijarah, murabaha, Productive
salam, istisna‘ economic actors
Liabilities Assets with capital
Equity financing needs

mudaraba & musharaka

Islamic banking, a booming $US1 trillion global industry that prohibits speculation
and high levels of debt, has been relatively unscathed by the credit crunch.
Islamic banking model’s basic principles of
financing “real” trade and economic activities,
no financing of speculation
No engagement in debt trading
Asset backed and project-financing approach to help hedging risks
As a result, the lessons from the crisis;
Islamic banking is inherently stable
Islamic banks outperformed the conventional financial institutions
Interest-free Banking: Turkish Experience

Although interest-free banking was introduced as integral part of the Turkish financial system, it was
in 1999, and after the new Banking Act no. 4491, that Special Finance Institutions were officially
integrated into the Banking Law. Under the Banking Law, these institutions were brought under the
same umbrella of regulations covering conventional banks.

The Banking Act 4491 had taken Special Finance Institutions under the state guarantee scheme with
the so-called guarantee fund, alongside conventional banks, where ‘current’ and ‘profit/loss sharing’
participation accounts (local and foreign currency denominated) of up to TL50,000 and held by
individual customers were brought under state guarantee.

The regulatory framework for Special Finance Institutions was strengthened in the following years.
When the new Banking Law (no. 5411) came into effect in November 2005, the Special Finance
Institutions’ guarantee fund, (established in 2001) was merged into the Savings Deposits Insurance
Fund (SDIF). Of equal importance, ‘Special Finance Institutions’ were renamed ‘Participation
Banks’, with a more concrete definition of their interest-free characteristics with the introduction of
new Banking Law.
Participation Banking

Participation Banks’ Asset Size (TL billion) and Market

Ample Room for Growth
Share Development in Turkey
• Prior to 2005, Banks operating under interest-free (Islamic) banking
principles were named “Special Finance Houses”. In November CAGR: 35.7%
2005, the Banking Law No.5411 was put in place and “Special
Finance Houses” label has been transformed into “Participation
Banks”, gaining the “bank” status

• Today, Participation banks are subject to Banking Law of Turkey and

supervised by Banking Regulation and Supervision Agency (“BRSA”)
like any other conventional banks in Turkey

• Market share of participation banks in Turkey has been constantly


• As of today, there are only four participation banks operating in

Turkey – one being Kuveyt Turk
Total Participation Banks Loans (TL billion) Total Participation Banks Deposits (TL billion)

CAGR: 35.4%
CAGR: 42.4%

Source: PBAT – The Participation Banks Association of
Kuwait Turk experience: New markets
including Dubai, Germany and Kazakhstan

Kuwait Turk experience: New products including

first Islamic ETF and Sukuk issuance
-Globally, the Islamic Banking sector is expanding fast. Altough
the Middle East and Malaysia remain by far the biggest markets
in the world, other regions and countries are starting to look at
introducing this fast-growing asset class to their economies.

- Turkish participation banks has a proven track record, with new

products and markets the pace of growth will increase.

-The key to success is “legislation”

Thank you