PARTICIPATION BANKING IN TURKEY: Turkish Participation Banking - PowerPoint PPT Presentation

PARTICIPATION BANKING IN TURKEY: Turkish Participation Banking Strategy Document 2015-2025 Aydın YABANLI Deputy Manager Corporate Communications and R&D Department (PMO-Project Management Office) OIC-COMCEC Workshop; Ankara, March 17, 2016

AGENDA • Definition and Historical Background • Facts and Figures • Strategic Plan • Conclusion 2

Definition Turkish PARTICIPATION BANKING is; Banking TRY 109 bio  Not an alternative, but an integral Development assets; System and component of Turkish Banking Sector. 4,5% share Investment Banks  A third type of banking, together with Deposit Banks and Development and Investment Banks. Participation Banks TRY 122 bio assets; PARTICIPATION BANKS (PBs) are ; 5,1% share Deposit Banks  Functionally similar to Deposit Banks. TRY 2.165 bio They are also bridges between savers assets; and investors as seen in Deposit Banks. 90,4% share But funds raising and financing methods are different. savers / investors  Raising funds through profit and loss partnership, financing through mainly Main enterpreneurs Banking savers / trading (Murabaha), leasing (Ijara) and investors / investors, Function profit and loss partnership (Mudaraba individuals and Musharaka). savers / investors 3

Historical Background Turkiye Finans acquired by National Commerce SFH under Banking Law Bank Kuveyt Turk established -First Sovereign Sukuk -Anadolu Finans and issued by TREASURY Family Finans merged -Stock Exchange as Türkiye Finans Investment Fund Based Government Decree for İhlas Finan s -SFH Renamed PBs on Participation Index. SFH established -5411 Nr. Banking Act - -Security Fund has been transferred to SDIF 2015- 1983 1985 1989 1991 1995 1996 1999 2001 2005 2008 2010 2012 16 Global Islamic Albaraka Turk and Asya Finans -TKBB Finance BRSA First Corporate Faisal Finans established Development established established Sukuk issued established -SDIF Center by Kuveyt Türk established Six participation banks are in service Anadolu Finans -Faisal Finans became - AlBaraka Türk established Family Finans - Bank Asya -Ihlas Finans left the - Kuveyt Türk market -Turkiye Finans -- Ziraat Katılım -- Vakıf Katılım

Contracts-Products-Services  Credits as cash payments through PARTICIPATION BANKS (PBs) (which are the Customers are prohibited. defined as Islamic Banks in the World)  Realized debts, wherein the sale have exclusive and mandatory areas: contracts have been finished through  Shariah Scholars’ approval on invoices, consignment,.. etc., are products and operations is a must for impossible to be financed by PBs. PBs as lived in official legislation.  Payments are compulsorily made  directly to the Sellers of the goods, Products should be based on home, car,.. etc. through Murabaha contracts which are approved by financing which is a Sale Contract. Scholars.  New contract models can be  Sale Contract (Murabaha , Salam,…) developed as per Islamic finance  Ijara (Leasing,..) principles. According to Islamic  Wakala finance principles, more than one  Kafalah contract can be integrated in a  product as compound contracts Hawalah where an example is seen in Sale and  Partnership (Mudaraba, Musharakah ,…) Lease Back product. So, products are  Wadiah also open to be developed as the  Sarf contracts.  Qard (Qard- ı Hasan,..) 5

Contracts-Products-Services • Interest is prohibited in all participation • In Assets side of the balance sheet banking transactions. So, in basic or risky and unlimited derivatives are compound contracts interest is not not allowed. Simultaneously, in the allowed even if under the descriptions as ‘commissions’ or else ‘expenses’. In liability side deposits work without cases the main purposes of the commitment on return of the operations are precisely traced by investment. Scholars. • PBs do not call the financing until • Uncertainty, speculation and excessive the maturity concurrently with not risks are prohibited to protect assets from toxic structures. raising the rates until maturity. • Risk sharing is essential. So, this area is • Participation Banking model helps so problematic to work on as being the government in struggling against lived in the Islamic banks in global. unregistered economy with its • Some goods and materials assumed invoice or certificate essentiality in harmful to the people, such as alcohol, weapon, tobacco, gamble, lottery,..etc. banking operations. are not allowed in Islamic principles. • Dependence on real economic activities is essential. This provides resilience against crises. 6

Main Figures of PBs 2014 2015/September 16.249 Personnel (QTY) 16.623 990 Branches (QTY) 1.052 9.610 Equity (mio TRY) 10.684 65.405 Deposits (mio TRY) 75.584 69.622 Financing (mio TRY) 79.188 104.163 Assets (mio TRY) 122.196 473 Profit* (mio TRY) 520 *Profit amount is compared to the same period of 2014. 0 20.000 40.000 60.000 80.000 100.000 120.000 140.000 7

Assets and Tendency (mio TRY, %)  2005 conditions and Assets of PBs Share in the Banking Sector developments affected PBs. 140.000 6,00% 5,55% positively. CAGR 5,21% 5,10% 5,13%  Toxic assets, speculative assets, PBs : 28,5% 120.000 5,00% derivatives without any asset B.S. : 19,4% 4,61% based or asset backed securities 4,31% 100.000 4,03% are not allowed in participation 4,00% banking. 3,52% 3,35%  Securities in PBs which mainly 80.000 sourced from Sukuk certificates 2,75% 3,00% have the amount of TRY 7.552 2,44% 60.000 million as per Q3 of 2015. The securities over assets rate is 6,2% 2,00% while the ratio is 13,3% with TRY 40.000 318.688 million amount.  PBs sukuk issuances reached TRY 1,00% 20.000 14,8 billion while sovereign sukuk 104.073 122.196 13.730 19.435 25.769 33.628 43.339 56.077 70.245 96.022 9.945 came through TRY 18,1 billion amount. 0 0,00% 8

Deposits and Tendency (mio TRY, %)  SPECIAL CURRENT ACCOUNTS: The fund is Deposits of PBs Share in the Banking Sector drawn partially or completely at any call; no 80.000 7,00% CAGR earnings paid to invested fund, liability covers 6,48% 6,32% PBs : 24,6% 6,14% only the principal amount. 5,93% 70.000 6,00% B.S. : 17,5%  5,64% PARTICIPATION ACCOUNTS: Profit or loss (P/L) 5,22% 5,36% is shared after the running of invested funds; 60.000 not any pre-determined earning is paid; not 5,00% any guarantee in revenue or repayment of 50.000 4,02% 4,06% principal amount. Revenue is paid according to 4,00% the pre-agreed P/L sharing rates. The simple 3,47% 40.000 3,19% rates are 20 % for PBs, and 80 % for the 3,00% Customers. P/L Sharing rates may change 30.000 according to the currency, amount and maturity. 2,00% 20.000  74,1% of the deposits are participation accounts. And 93,3% of the participation 1,00% 10.000 accounts have short term maturity classified in 11.237 14.943 19.210 26.841 33.828 39.869 49.151 63.210 66.788 75.584 8.369 till 6 months periods. 0 0,00%  The gold accounts reached 2,9% of PBs deposits while the sector is 0,9% with TRY 9 10.941 million.

Financing and Tendency (mio TRY, %)  Murabaha financing is the main Financing of PBs Share in the Banking Sector product depending on instalment sale 90.000 7,00% contract. 93% of the operations are 6,24% Murabaha while 5,5% are in Leasing 6,02% 80.000 5,95% 5,79% 5,80% (Ijara) and 1,5% Musharaka, 6,00% Mudaraba, and others. 5,46% 5,22% 5,13% 5,18% 70.000  Financial Leasing is TRY 4.104 million in 5,00% Q3 of 2015. 4,63% 4,60% 60.000  84,6% of the financing are allocated through the corporations. So, 4,00% CAGR 50.000 participation banking has been known PBs : 26,7% as “real sector” or “SME” banking 40.000 B.S. : 24,6% 3,00% model. This corporate allocation ratio is 73,2% in whole Banking Sector. 30.000  Risks for the PBs’ credit portfolio takes 2,00% its root from participation accounts 20.000 which stand on P/L sharing accounts. So, risk sharing protects the assets and 1,00% 10.000 10.492 15.332 19.733 24.911 32.085 41.103 49.980 67.416 69.965 79.188 financing risk decreases automatically 7.407 liability sources. 0 0,00% 10

Selected Ratios  Legally 8% CAR is a must for all of the 2015/Q3 PBs Banking bank models in the Banking Sector. But Sector 12% CAR is currently applied by BRSA Capital Adequacy Ratio 14,3% 14,7% as another checkpoint. (CAR)  In recent years Banking Sector net profits are more negatively affected by Return on Average 5,2% 8,2% “new branch duties”, narrow ed Equity (ROAE) interest rate margins, comparatively narrowed PBs’ profit rates. Return on Average 0,5% 0,9%  State owned institutions and high Assets (ROAA) volumed corporations ’ accounts which Non-Performing Loans 5,7% 2,9% are mainly in conventional banks affect over cash loans (NPL) the “ over 1 mio accounts ” .  For the reason that PBs can not use Deposits Equal and 36,7% 53,2% interest and for PBs timed sale in Above TRY 1 mio instalments is mandatory, PBs use fees Fees, Commission and 14,1% 12,8% and commissions much more than conventional ones. Banking Services  Economies of scale affect the deposits Income/Total Income over branches. PBs have more Deposits/ Number of 73,7 103,4 obstacles in this area that they are so Branches (TRY million) young in the whole sector. 11