Vakif Katilim Bank

WRITTEN BY Ali Riza Kayar in association with Himmatilla Boriev

To support charitable works based on Islamic principles, the General Directorate of Foundations (GDF) approached the Islamic Development Bank (IsDB) for assistance to launch Vakif Katilim Bank, a new Islamic bank in Turkey. As well as supporting Islamic banking, IsDB’s intervention supported waqf initiatives, helping the GDF to achieve its objectives by channeling profits from the new bank into waqf activities. After just three years of operation, Vakif Katilim Bank’s asset size represented 10.6% of the total Islamic banking assets in Turkey and in 2019, it was named the “Most Successful Participation Bank” in Turkey at the Second İstanbul Economy Summit.

Although Turkey has been using Islamic banking techniques since the early 1980s, the industry remains underdeveloped and conventional banks dominate the country’s banking sector. Banks operating on Islamic principles in Turkey, known as “participation banks”, are of limited size within the overall banking sector. This, coupled with participation banks’ inability to aggressively inject additional capital into their operations to capture a larger share of the market, has hindered their performance. 

In line with its mandate to support charitable works based on Islamic principles, GDF approached IsDB for assistance with launching a new Islamic bank in Turkey. As well as supporting Islamic banking, IsDB’s intervention would also support waqf initiatives, helping GDF to achieve its objectives by channeling profits generated from the new bank into waqf activities. The new bank would also promote financial inclusion in Turkey by meeting the needs of people who prefer to bank only with Islamic institutions.

Launching a new Islamic bank

To address any potential concerns about the source of equity for the new bank, IsDB provided a USD 300 million long-term facility to GDF, under the guarantee of the Government of Turkey, through an innovative sharia-compliant restricted mudaraba modality. IsDB was the Rab Al Maal (fund provider), providing the funds but restricting their use to a specific purpose – establishing the new Islamic bank. As the mudarib (the agent of IsDB in the transaction), and in line with the restricted mudaraba agreement, GDF invested the funds as the initial equity in its new bank, named Vakif Katilim (Vakif Participation) Bank.

The restricted mudaraba enabled IsDB to disburse the funds smoothly, making the whole amount available to GDF in 2015 in one operation. GDF then transferred the funding to the new bank as a capital injection. GDF leveraged its existing expertise in managing banking assets when setting up Vakif Katilim, drawing on its experience as a shareholder of another Islamic bank (Kuveyt Turk) and as the majority owner of a conventional bank (Vakif Bank). 

"Vakif Katilim Bank was named the “Most Successful Participation Bank” in Turkey at the Second İstanbul Economy Summit in 2019."

When Vakif Katilim begins to pay dividends to GDF, IsDB’s intervention will sustainably enhance GDF’s waqf assets and the overall scope of its operations. GDF’s non-profit activities target human and economic development and in 2018 it provided financial support to 5,000 orphans and people with disabilities, distributed food packages to 20,315 families each month and served hot food each day to 2,000 people. Furthermore, in 2018, 26,000 food packages were delivered to families in need in Northern Cyprus, Bosnia and Herzegovina, Kosovo, and North Macedonia. GDF also provided scholarships to more than 20,000 students in Turkey and internationally; 202 waqf assets were renovated or restored to preserve and maintain these scholarships. 

Fueling economic development 

Vakif Katilim Bank officially began operating in 2016. By 2019, the bank had more than 1,300 employees and over 100 branches. Its assets amounted to USD 4.8 billion and it served more than 270,000 clients. After just three years of operation, Vakif Katilim Bank’s asset size represented 10.6% of the total Islamic banking assets in Turkey in 2019. In terms of the indirect effects of IsDB’s intervention, the bank regularly issues sukuk (a sharia-compliant bond) and contributes to the depth and range of Islamic finance products in Turkey. 

Vakif Katilim Bank was named the “Most Successful Participation Bank” in Turkey at the Second İstanbul Economy Summit in 2019. In addition, it has established one of the few research and development centers in the banking sector in Turkey, with its future plans including public sector, university and industry collaboration, and support of FinTech and new technology companies. The bank has also launched a small-scale venture capital fund to support startups in Turkey, which has significant potential for spillover effects.

Compatibility in partnerships key to success 

Selecting a local partner with appropriate expertise and experience can create synergies and enhance a project’s implementation and development impact when there is a good fit with IsDB core activities. This was the case with GDF, which brought with it a core strength in waqf operations. Flexibility and innovation in financing modalities to simultaneously accommodate clients’ needs and meet IsDB’s requirements also enhanced responsiveness and ensured smooth implementation.