1. Development and Future of Islamic Banking in Turkey Abdullah Çelik CEO, Bank Asya

2. Agenda Islamic Finance in the World – Global Existence – Development of Industry – Interest-Free Banking in the World Islamic Finance in Turkey – Interest-Free Banking: Turkish Experience – Milestones in Turkey – Volume of Turkish Banking Sector – Participation Banks’ Market Share

3. Global Existence Increasing market presence – Growing at 15 to 20% per annum – Size estimated over USD 1 trillion 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 organizations 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

4. Development of industry Development of theoretical framework First attempts to structure Islamic banking products First institutions emerged to test the market Islamic Development Bank (1974) and DIB One country-one bank setup Advancement of Islamic products Turkish market to welcome Islamic banking Full “Islamization” of banking in some countries (Pakistan, Sudan etc.) Entry of global institutions & Islamic windows increasing global coverage of Islamic banking Islamic banks achieving strong and stable growth globally, New products in international markets Sukuk market to boom

5. Interest-free Banking in the World Asset size of Interest-free Banking system (billion USD) 2010 Source: The Banker, IIFM, Ernst & Young & Zawya

6. 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. Currently 4 participation banks are operating in Turkey: Albaraka Türk, Bank Asya, Kuveyt Türk and Türkiye Finans

7. Milestones in Turkey 7 Regulation with decree in force of law 83/7506. (Establishment of Special Finance Houses ) Inclusion within the Banking Law 1983 19992001 -Establishment of Special Finance House Association -Special Finance House Security Fund came into effect Transformation to Participation Banks from Special Finance Houses Transfer of Special Finance House Security Fund to Saving Deposit and Insurance Fund 2005

8. Volume of Turkish Banking Sector December 2011 Participation Banks Deposit Banks Development & Investment Banks Total # of Institutions4311348 Assets bn TRY56.11,119.9041.61,217.70 (%)4.6923.4100 Deposits bn TRY39.2656-684 (%)5.694.4-100 Loans bn TRY41,0635,523,6661 (%)5.890.83.4100 8 Source: BRSA reports

9. Growth Comparison (2005-2011) Participation Banks CAGR %Participation Banks Assets33.533.5 Deposits29.6 Credits33.033.0 Banking Sector CAGR %Banking Sector Assets20.1 Deposits18.6 Credits27.1 9 Source: BRSA

10. Credit-to-Deposit Ratio (%)

11. Participation Banks’ Market Share Total Assets - Market Share (%)

12. Participation Banks’ Market Share Funds Collected (Deposit) Market Share (%) Credit Market Share (%)

13. Branch and Staff Size 13 Source: The Participation Banks Association of Turkey

14. 2023 Vision Turkish State 2023 Plan GDP of 2 trillion USD Among most developed top ten countries of the world Istanbul as a financial center Participation Banking Istanbul as an Islamic Financial Center

15. Action Plan Financial Infrastructure Regulatory Framework Human Development Image

16. Shariah-compliant Banks and Assets in Muslim Countries - 2011 (in billions of USD 2011)

17. 2023 Market Potential for Islamic Finance - $8.602 billion USD What if countries with large populations achieve the average use of Islamic finance represented by Malaysia?

18. Participation Banking in 2023 Milyar USD

19. Summary Globally, the Islamic Banking sector is expanding fast. Although 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”