1. Participation Banking in Turkey Fahrettin YAHŞİ General Manager Albaraka Türk

2. Based on interest-free banking, also known as participation banking in Turkey Similar to the conventional banking sector, Islamic banking also started to grow in countries i.e. Malaysia, Indonesia, Bangladesh, Jordan and Turkey during 1980’s. Today, Islamic banking is present in 75 countries with more than 300 institutions. Besides the Islamic Banks there is an increasing trend among conventional banks to open Islamic Banking Window (HSBC, Citi, Deutsche…) 2 Participation Banking

3. 3 Interest-free Banking in the World Source: The Banker, IIFM, Ernst & Young & Zawya Asset size of Interest-free Banking system (billion USD)

4. 4 Interest-free Banking in the World (2010) Source: The Banker, IIFM, Ernst & Young & Zawya billion USD

5. Participation Banking in Turkey “milestones”… 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 5

6.  Firstly introduced under the name of Special Finance Houses in 1985.  They were brought under same regulation between 1999 and 2001. In 2005 their names were converted to Participation Banks and they were subject to same regulations as conventional banks  Currently 4 participation banks are operating in Turkey: Albaraka Türk, Bank Asya, Kuveyt Türk and Türkiye Finans 6 Participation Banks

7. Not an alternative, but an integral component of Turkish Banking Sector. A third type of banking, together with Deposit Banks and Development&Investment Banks. Participation Banks are functionally similar to Deposit Banks. But collecting and utilization methods of funds are different. 7 Participation Banks

8. PARTICIPATION BANKS (PBs), a component of the banking system in Turkey, have brought the idle funds into the system. These banks have provided alternative financial opportunities to manufacturers and businessmen using funds. Working in principle of profit/loss sharing base, the PBs are less affected by the financial and economic crises lived in 2001 as an ordinary result of this system and healthy lending processes. PBs have been able to distribute satisfactory returns to their depositors (investors). PBs have been able to fund commercial and industrial sectors with competitive costs. 8 Participation Banks

9. PBs can play an important role in drawing the excess capital observed in the Gulf region to Turkey. It is possible to attract a considerable amount of capital to our country having a capital gap from the Gulf by issuing Sukuk by Turkish Treasury. In addition, PBs have taken a serious role in murabaha financing gathered in the form of Syndicated Loans from Gulf Region and became widespread. Up to now, more than USD 1 billion has been provided in this model. 9 Participation Banking

10.  No guaranteed a fixed return to deposit customers  No investment in interest bearing assets (i.e. bonds)  No exposure to direct interest rate risk  No direct lending to credit customers, payments are made to sellers  Not exposed to currency risk  Speculative transactions are not allowed  Transactions of goods and services which are not compatible with Islamic rules are not allowed  Efficient allocation of funds: Investments in more productive projects. 10 Distinguishing Features of Participation Banking

11. 11 Participation Banks Strong Sides of Participation Banks More than 25 years experience in interest-free banking Completed legal structure Qualified and skilled staff Opportunities for Participation Banks Increasing investment level in line with the recent reel economic growth of Turkey Development in the financial investment area such as private pension and life insurance thanks to the increasing level of income in Turkey and the great potential in this areas in terms of interest free funding Improved economic and legal conditions helped participation banks grow

12. Sector# of Institutions Asset Size bn TRY Share (%) 1 CENTRAL BANK1150.710.2 2 BANKS481,146.076.2 3 LEASING3317.01.2 4 FACTORING7415.11.0 5 CONSUMER FINANCING117.20.5 6 INSURANCE5736.62.6 7 SECURITIES INTERMEDIARY*1038.90.5 8 SECURITIES INVESTMENT TRUSTS*310.70.1 9 MUTUAL FUNDS*-30.92.4 10 REITs*2117.21.0 11 VENTURE-CAPITAL TRUST*20.20.0 12 ASSET MANAGEMENT80.70.1 13 PENSION TRUSTS-12.60.9 14 PORTFOLIO MANAGEMENT*2848.03.5 Total 1,483.2%100 Turkish Financial Sector (June 2011) * March 2011 data 12

13. Financial System in Turkey Penetration of the Banking System %Assets/GDPLoans/GDPDeposits/GDP Turkey853952 Euro Zone337139119 Non-Euro Zone874544 Germany310131127 France40111294 United Kingdom548216278 Russia794335 * Source: European Banking Federation, year-end 2009 figures 13

14. Turkish Banking System: Key Figures as % of GDP Assets, deposits and loans % of GDP increasing, upward trend to continue 14

15. Banks # of Institutions AssetsDepositsLoans bn TRY(%)bn TRY(%)bn TRY (%) Participation Banks 453.64.436.95.436.25.5 Deposit Banks311,122.292.5646.894.6604.591.4 Development & Investment Banks 1337.93.1--20.63.1 Total481,213.7100683.7100661.3100 Volume of Turkish Banking Sector (September 2011) 15 Source: BRSA reports

16. Participation Banks Banking Sector Assets34.219.9 Deposits34.127.8 Credits31.818.8 16 Participation Banks - Banking Sector (CAGR %, 2005 - 2010 ) Source: BRSA

17. Participation Banks (Asset Growth) 17 YearsPBS Growth of PBS (%) Banking Sector Growth of Banking Sector % Share (%) of PBs 20002,266,000 106,549,0002.13% 20012,365,0004.37%168,900,000 58,51% 1.40% 20023,962,00067.53%216,637,000 -1,02% 1.83% 20035,112,93429.05%254,863,000 17,65% 2.01% 20047,298,60142.75%313,751,000 23,11% 2.33% 20059,945,43136.26%406,915,000 29,69% 2.44% 200613,729,72038.05%498,587,000 22,53% 2.75% 200719,435,08241.55%580,607,000 16,45% 3.35% 200825,769,42732.59%731,640,000 26,01% 3.52% 200933,628,03830.50%833,968,000 13,99% 4.03% 201043,338,70028.88%1,006,676,840 20,71% 4.31% 2011/953,573,00023.61%1,213,660,000 20.60% 4.41% Source: BRSA (000 TRY )

18. 18 Participation Banks’ Market Share (Total Assets)

19. 19 Years PBs’ Funds Collected Growth of Funds Collected (%) Bankıng Sector’s Deposits Growth of Banking Sector’s Deposits (%) Share of PBs (%) 20001,863,000 70,305,0002.65% 20011,917,0002.90%110,298,000 56,88% 1.73% 20023,206,00067.24%145,594,000 -2,57% 2.20% 20034,111,00028.23%164,923,000 13,28% 2.49% 20045,992,00045.76%203,386,000 23,32% 2.95% 20058,369,00039.67%261,948,000 28,79% 3.19% 200611,237,00034.27%324,069,000 23,72% 3.47% 200714,943,00032.98%371,927,000 14,77% 4.02% 200819,210,00028.56%472,695,000 27,09% 4.06% 200926,841,97039.73%522,415,000 10,52% 5.14% 201033,089,00023.27%617,037,000 18,11% 5.36% 2011/936,929,00011.61%683,688,000 10.80% 5.40% Source: BRSA Participation Banks (Funds Collected Growth) (000 TRY )

20. 20 Participation Banks’ Market Share (Funds Collected)

21. 21 YearsPBS’ CreditsGrowth (%) Banking Sector Credits Growth of Banking Sector’s Credits (%) PBs’ Share (%) 2000 1,726,000 32,939,0005.24% 2001 1,072,000 -37.89%33,680,000 2,24% 3,18% 2002 2,101,000 95.99%54,860,000 -6,08% 3.83% 2003 3,001,000 42.84%72,169,000 31,55% 4.16% 2004 4,894,000 63.08%107,615,000 49,12% 4.55% 2005 7,407,000 51.35%160,005,000 48,68% 4.63% 2006 10,492,000 41.65%228,141,000 42,58% 4.60% 2007 15,332,000 46.13%293,928,000 28,84% 5.22% 2008 19,733,000 28.70%384,417,000 30,79% 5.13% 2009 24,911,209 26.24%418,684,000 8,91% 5.95% 2010 32,172,000 29.17%537,172,000 28.30% 5.98% 2011/9 39,029,000 21.31%679,031,000 26.41% 5.75% Source: BRSA Participation Banks (Credit Growth) (000 TRY )

22. 22 Participation Banks’ Market Share (Credits)

23. Credit-to-Deposit Ratio (%) 23

24. 24 YearsPBs’ SHEGrowth (%) Banking Sector’s SHE Growth of Banking Sector’s SHE % Share (%) 2000161,000 8,295,0001.94% 2001203,00026.09%14,276,000 72,10% 1.42% 2002400,00097.04%26,099,000 37,34% 1.53% 2003700,00075.00%36,208,000 38,73% 1.93% 2004892,00027.43%46,855,000 29,41% 1.90% 2005951,0006.61%54,687,000 16,72% 1.74% 20061,560,00064.04%59,538,000 8,87% 2.62% 20072,364,00051.54%75,850,000 27,40% 3.12% 20083,729,00057.74%86,425,000 13,94% 4.31% 20094,420,00018.53%110,874,000 28,29% 3.99% 20105,457,08023.46%134,552,280 21,36% 4.06% 2011/95,998,0009.91%141,575,000 5.23% 4.23% Source: BRSA Participation Banks (Shareholders’ Equity Growth) (000 TRY )

25. 25 Participation Banks’ Market Share (Shareholders’ Equity)

26. Branch and Staff Size 26 YearsBranchesGrowth (%)StaffGrowth (%) 2000110 2,182 200318871%3,52061% 200425536%4,78936% 200529014%5,74020% 200635522%7,11424% 200742219%9,21530% 200853026%11,02220% 20095606%11,8027% 20106078%12,7038% 2011/96639%13,45411% Source: The Participation Banks Association of Turkey

27. 27  PBs closely monitor and adapt to CBRT’s regulations growing fast to alleviate pressure in margins extending maturity of deposits accessing to alternative funding sources (syndication, sukuk)  Maintaining asset quality  Branching and acquisitions abroad  Following tax regulations related to financial leasing business  Diversifying credit portfolio: Emphasis on profitable Profit&Loss sharing projects. “Increasing market share to 10 % in medium term.“ Assessment of 2011 for Participation Banks

28. Thank You 28