Background and Challenge
While Turkey has been using Islamic banking techniques since the early 1980’s, the industry is still in its infancy. Banks that operated in this sector were commonly referred as Special Finance Houses. The term evolved over time and today Islamic banks in Turkey are known as “Participation Banks”.
Banking sector is still dominated by conventional banks in Turkey. The limited size of the existing Islamic (participation) banks within the overall banking sector and their inability to aggressively inject additional capital into their operations to capture a larger share of the banking sector, has resulted in underperformance of participation banks.
General Directorate of Foundations (GDF), Vakıflar Genel Müdürlüğü in Turkish, was established through a special law in 1924 to take over the responsibility of managing and running 52,000 waqf, most of which date back to the times of the Ottoman Empire. GDF basically manages these foundations and waqf to support charitable works as envisioned by the founders and creators of these foundations and waqf. The properties managed include iconic structures such as Blue Mosque and Grand Bazar of Istanbul.
In line with its mandate to support charitable works based on Islamic principles, GDF approached IsDB to launch a new Islamic bank in Turkey to be owned by GDF. This initiative was also seconded by the Government of Turkey who paved the way to allow state owned banks to enter the participation banking industry in an effort to spur the development and set a target to enhance Islamic banking from the 5-6% level to 15% market share within the overall banking sector by 2025. Besides supporting Islamic banking, IsDB’s intervention would support waqf initiatives in Turkey, assisting GDF to achieve its desired human and economic development objectives by channeling profits to be generated from this new bank into waqf activities. The new Islamic bank would also promote financial inclusion in Turkey by providing services to meet the needs of people who prefer to bank only with Islamic institutions.
Solution and transformation
In order to address any potential concerns on the source of equity of the new bank, IsDB provided a USD 300 million long term facility to GDF under the sovereign guarantee of Turkey through an innovative Shariah compliant restricted mudaraba modality. IsDB financing was used in establishing the new Islamic bank, namely Vakıf Katılım (Vakıf Participation) Bank by GDF. As the Mudarib (agent of IsDB in the transaction), GDF invested the proceeds in Vakıf Katılım Bank as the initial equity in line with the restricted mudaraba agreement. IsDB was the Rab Al Maal (fund provider), who provided the funds but restricted the use to a specific use, i.e., for establishing Vakıf Katılım Bank.
Restricted mudaraba also enabled IsDB to disburse the funds smoothly. IsDB made whole Facility amount available to GDF in 2015 in one operation, which transferred the disbursed amount to the new bank as capital injection. The structure utilized for the Facility is depicted below:
GDF’s experience as a shareholder of another Islamic bank (Kuveyt Turk) facilitated the implementation of this intervention. GDF also had close oversight of a conventional bank called Vakıf Bank by virtue of their board seats and majority ownership at that time. GDF’s existing expertise on managing their banking assets was leveraged in setting up the new participation bank, which enhanced the success of this facility.
The IsDB intervention will enhance the waqf assets and overall scope of the operations of GDF in a sustainable manner when Vakıf Katılım reaches the required level to start paying dividends to GDF. GDF operations are all non-profit activities targeting human and economic development. In 2018 only, GDF provided scholarships to more than 20,000 students including international ones. Financial support was provided to 5,000 orphans and handicapped people. Food packages were distributed to 20,315 families each month in Turkey. Also in 2018, a total of 26,000 parcels of food packages were delivered to families in need in the Turkish Republic of Northern Cyprus, the Republic of Bosnia and Herzegovina, the Republic of Kosovo and the Republic of North Macedonia. Hot food was served to 2,000 people each day from Eyüp İmaret in İstanbul. In addition, 202 waqf assets were renovated or restored to preserve and maintain them.
Impact and Result
Vakıf Katılım Bank officially started its operations in 2016 successfully. In 2019, Vakıf Katılım had more than 1,300 employees and exceeded 100 branches in a short period of time. Its asset size reached USD 4.8 billion and number of clients served surpassed 270,000. More importantly, Vakıf Katılım Bank’s asset size reached 10.6% of the total Islamic banking assets in 2019 only after 3 years of operations. In terms of indirect effects of the intervention, the Bank issues Sukuk regularly and contributes to the depth and range of Islamic finance products in Turkey. According to TKBB (Participation Banks Association of Turkey), Vakıf Katılım Bank was the leader and issued the highest amount of Sukuk in Turkish Lira (TRY 9,01 billion) among participation banks in 2019. Mr. Ikram Göktaş, CEO of Vakıf Katılım made a statement on Sukuk issuances and vision of the bank as follows: “Our objective is to not only achieve a bigger market share in the participation banking sector but also grow the overall sector and economy. We have been exerting a great effort to attract more investors from the home country and abroad thereby including them in our participation finance system, diversify our funding sources and channel the collected funds to more people.” Vakıf Katılım Bank was awarded the “Most Successful Participation Bank” prize in Turkey during the Second İstanbul Economy Summit organized in 2019.
In addition, Vakif Katilim achieved to establish one of the few R&D Centers in banking sector in Turkey. R&D Center’s future plans include public sector, university and industry collaboration; and support of FinTech and new technology companies. The Bank also launched a small-scale venture capital fund to support startups in Turkey with significant potential spillover effects.
Key Success Factors
Working with a local partner like GDF who had the technical expertise and experince in the country enhanced project implementation and development impact.
Selecting a local partner based on its core strength created synergies and multiplied the development impact when there is a good fit with IsDB core activities, which was the case for GDF inheriting a core strength in waqf operations.
Flexibility and innovation in financing modalities that accommodated clients’ request and met IsDB’s requirements at the same time enhanced responsiveness and smooth implementation.