1. Islamic Finance and Sustainable Development Goals (SDGs): The Case of Turkey
Dr. Cem Tintin SESRIC

2. Outline of the Paper
1. Introduction 2. The Role of Islamic Finance in Sustainable Development 3. History of Islamic Finance in Turkey 4. Why Islamic Finance Stayed under its Potential in Turkey? 5. Prospects for Islamic Finance in Turkey and SDGs 6. Concluding Remarks

3. 1. Introduction
The paper looks at interlinkages between Islamic finance and sustainable development goals (SDGs) by focusing on the case of Turkey.
In particular, the paper explores why Islamic finance could not reach its potential and stayed out of the policy toolkit in Turkey through reviewing the existing literature including scholarly articles and analytical reports.

4. 1. Introduction
The paper not only provides a historical overview but also looks at several factors that affected the growth of Islamic finance industry in Turkey from policy and market- practice perspectices.
Moreover, the paper identifies prospects in the Islamic finance industry that can help Turkey to achieve SDGs.

5. 2. The Role of Islamic Finance in Sustainable Development
As the economic growth literature and macroeconomic performance of countries have shown, countries with limited savings tend to grow to a lesser extent.
In particular, developing countries are in need of additional financial sources to reach their developmental goals.
They need to mobilize their idle savings (cash, gold, silver kept by housedholds and business persons).

6. 2. The Role of Islamic Finance in Sustainable Development
The Sustainable Development Goals (SDGs) agenda seeks to achieve 17 goals and 169 targets that require mobilization new resources to support and finance their implementation.
Providing a conducive environment for alternative financing structures, such as Islamic banking increases financial depth and inclusion in national economies.

7. 2. The Role of Islamic Finance in Sustainable Development
Islamic Banks not only help increase available funds for financing but also provide alternative tools for financing both for individuals and businesses.
Islamic finance also helps to improve resilience to economic shocks through diversification of investments and risk-sharing features.
A strong Islamic banking system and producing shari’ah-complaint instruments provide a higher motivation for saving both for households and businesses (IDB and IICPSD, 2017).

8. 2. The Role of Islamic Finance in Sustainable Development
Governments are able to finance public investments through alternative mechanisms such as by issuing Su’kuk.
Alternative and less costly (due to lack of interest rate margin) public funding opportunities that become available through Islamic banking and finance stimulate public investment into infrastructure (water, energy, sanitation, transport etc.) and human capital (education and health).

9. 2. The Role of Islamic Finance in Sustainable Development
In summary, Islamic Finance supports sustainable development by reaching out all economic agents:
Households (Zakat, Waqf, Sadaqah)
Private sector (risk-sharing, profit-sharing, capital mobilization, microfinance)
Public sector (additonal source of income for public investments)

10. 2. The Role of Islamic Finance in Sustainable Development
In this context, Turkey is not an exceptional developing country.
Turkey is in need of additonal savings and investments.
Turkey is in need of alternative financial instruments (such as to increase financial inclusion).
Turkey is a Muslim majority country and a member of the Organisation of Islamic Cooperation.
Given the potentials of Turkey, Islamic financial services could be instrumental to achieve several targets under SDGs.

11. 3. History of Islamic Finance in Turkey
It started with Special Finance Houses (SFH) stemming from growing demand from the Turkish society for interest-free banking, investment, and lending requirements.
A decree was published in the Official Gazette on December 16, 1983, which came into force on February 19, Until 1999, the SFHs were regulated by this decree.
is a period where there is no a significant progress.
The Islamic finance in Turkey has first become operational in 1985 with the launch of Bahrain based Al Baraka Turk and Saudi based Faisal Finans (Moore, 1990).

12. 3. History of Islamic Finance in Turkey
In 1999, the parliament enacted a new law in order to discipline and rehabilitate the overall banking system (Banking Act Nr. 4389). With the new law, SFHs became subject to the same umbrella of regulations with conventional banks.
In 2001 and 2005 further changes were made in the banking regulation.
The SFHs were renamed as “Participation Banks”, which allowed them to integrate fully into the financial system with the bank statue.

13. 3. History of Islamic Finance in Turkey
According to Fırat (2014), during the period Participation (Islamic) Banks had grown faster than other conventional banks.
Despite witnessing all these developments, Islamic banking assets in Turkey could only represent 3.2 per cent of the global Islamic banking assets (IFSB, 2016).

14. 3. History of Islamic Finance in Turkey
In summary:
The Islamic banking in Turkey started a long time ago, however, during the 1980s and 1990s the banks remained under their potential such as due to the lack of the effective regulatory reforms and limited awareness in the society.
The 2000s witnessed several reforms in Islamic banking in Turkey. However, these reforms were not strong enough to unleash the full potential of the Islamic banking industry as their total financial assets could only represent less than 5 per cent in the entire banking system in Turkey.

15. 4. Why Islamic Finance Stayed under its Potential in Turkey?
Hosting more than 80 million Muslims with a dual banking system, Islamic financial institutions and instruments continue to stay underdeveloped and are far from reflecting their full potential in Turkey as of 2018.
Islamic financial institutions and instruments made only a limited contribution to sustainable development in Turkey.

16. 4. Why Islamic Finance Stayed under its Potential in Turkey?
It is mainly because of:
Bottom to the top approach in policy-making
Underdeveloped institutional arrangements
Inadequate legal protection against default risk in Islamic financial institutions
Strong conventional banking system
Limited awareness on Islamic financial instruments
Negative perceptions and failed Islamic financial institutions
High chronic inflation and real interest rate
Lack of a Islamic financial centre in Turkey
Lack of a Islamic finance window in the Central Bank of Turkey

17. 5. Prospects for Islamic Finance in Turkey and SDGs
Growing interest on alternative financial instruments
High profits and performance of Islamic (participation) banks in Turkey
Policy shift in the management of economy towards Islamic finance
Strong customer satisfaction in participation banks
Changing dynamics at the Central Bank of Turkey
Establishment of the interest-free coordination board
Islamic finance is now perceived as a real alternative financing mechanism rather than an exotic instrument.

18. 6.Concluding Remarks
The history of Islamic banking in Turkey dates back to mid-80’s as Special Finance Houses.
Special Finance Houses were transformed into “participation banks” in 2005 upon enactment of the new Banking Law, which allowed them to integrate fully into the financial system.
The Participation Banks Association of Turkey (PBAT) published the “Turkish Participation on Banking Strategy Document” in March The vision of the strategy is “to raise the market share of participation banking sector to 15 percent by 2025.

19. 6.Concluding Remarks
In order to reach such ambitious targets it is essential to make some additonal structural reforms.
In particular, the Central Bank of Turkey needs to change its approach towards Islamic banks in order to address their liquidity needs.
Participation Banks should reduce the share of bad loans (i.e. non-performing) to reach a healthy financial structure and offer more specialized services and products.
As long as, the strong political willingness and commitment stay, with the involvement of all stakeholders, Islamic banks in Turkey could overcome challenges elaborated in this paper and faciliate Turkey’s achievement of SDGs.

20. THANK YOU
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