Islamic finance has emerged as a rapidly growing industry with an increasingly global presence. It continues to be the topic of choice at prestigious finance conferences in Europe, Asia Pacific and in the United States.

The Islamic financial services industry currently represents approximately 1% of global assets, however, it has been growing by more than 12% annually over the last 10 years.1 This makes Islamic finance the fastest growing sector in the global financial industry.

More significantly, it is estimated that by 2019, collective profits would reach US$37 billion as the industry continues its double digit annual growth.2 On this basis, it is now more common to read about Islamic finance on a daily basis and hear the announcements of financial centres in an attempt to gain some market share.


Islamic finance has emerged as one of the fastest growing components of the financial market over the last decade and has gained further momentum in the wake of the financial crisis.3 This has led investors to perceive Islamic finance as a safe haven during global economic downturns.

Islamic finance refers to the provision of financial services in accordance with Islamic law which is based on sharia rules (The Islamic Law) 4 The basic principle of conventional instruments such as bonds, commercial paper and medium term notes is that, they all have a fundamental interest. On the other hand, Sharia law dictates that money should not be viewed as commodities, but rather as means of exchange.

Within this context, the Islamic finance framework is based on certain prohibitions. For example, Sharia law does not permit "riba" interest, gambling "maysir" and short sales or financing activities.5 It aims to create a society where prosperity is more broadly and equally distributed, instead of becoming concentrated in the hands of a few. Furthermore, because it has, at its core, both parties to a transaction explicitly sharing the risk, the argument has been made that Islamic finance is, in fact, more sustainable than its western counterpart.6


The practice of Islamic finance in the banking sector first gained legitimacy in Turkey in 1983 when 'special finance houses' were introduced. Shifts in government's priorities allowed Islamic finance to gradually acquire legitimacy in Turkey.

Particularly in the last decade, Turkey reaffirmed its commitment by stepping up to play a pivotal role in the world of Islamic finance. Recent developments also reveal that the future looks promising in this field. For example, in 2013 The World Bank Global Islamic finance Development Centre was launched.

Last year, largest state-owned bank T.C. Ziraat Bankası A.Ş., also received approval to proceed in establishing a Turkish Islamic Bank.7 This was followed by another state-owned lender, Vakıfbank, to receive approval in establishing participation banking division.

More recently, one of Turkey's largest state-owned banks, Türkiye Halk Bankası A.Ş. (also known as Halkbank)8, announced that it has now received approval from the Turkish Banking Regulatory and Supervisory Authority to launch an Islamic bank division in Turkey with a share capital of TRY 1 billion.

Finally, investors will also recall that in July 2015, Turkish lender Kuveyt Turk said that it would launch Germany's first full-fledged Islamic bank, a first step intended at offering sharia-compliant retail banking services across the continent.9


Islamic finance have developed different structures that aim to encourage investors to participate in the financial transactions in various methods, such as: leasing (ljarah), Islamic bonds (sukuk), trade with mark or cost-plus sale (murabahah), profit-sharing agreement (mudarabah), and equity participation (musharakah).

  1. Leasing (Ijarah)

    In Islamic jurisprudence, this method of financing involves leasing an asset and receiving rentals; so long as the asset is on lease, the lessor owns the asset and the risk and reward of its ownership.10 The rental payments can be either fixed or calculated with reference to a market rate. The subject of the lease must be valuable and identifiable, so aircraft, buildings, vessels and power station turbines are ideal subjects for Ijarah financings.
  2. Islamic Bonds (Sukuk)

    This innovative instrument of Islamic finance attracted wide applications outside the Muslim countries. Sukuk, also referred as an 'Islamic Bond', defined by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) as: 'certificates of equal value representing undivided shares in the ownership of tangible assets, usufructs and services or (in the ownership of) the assets of particular projects or special investment activity'11

    According to Islamic finance, the charging or receiving of interest (riba) is prohibited. An investor should realise no profit or gain and the return to an investor must be linked to the profits of an enterprise (subject to the usual commercial risks).

    In addition, Sukuk must be backed by real underlying assets12 and assets must be Sharia compliant. The assets or businesses underlying the sukuk cannot be related, for instance, to gambling or to the production or sale of alcohol or pork and there must be full transparency as to the rights and obligations of all parties.

    It is also important to note that there are different types of sukuk that aim to satisfy both lenders and entrepreneurs. The most significant and common among those are provided below:

    1. Trade with mark or cost-plus sale (Murabahah Sukuk)

      One of the more common instruments of Islamic finance is known as 'murabahah', is based on the traditional method of debt financing. The parties incorporate a mutually agreed contract (murabahah contract) for resale of the asset to the client and a mutually negotiated (murabahah) margin. Repayments for the asset may be in full or by instalments with a certain period of time.13
    2. Profit-sharing agreement (Mudarabah Sukuk)

      This method of financing can be described as contractual relationship between two parties both of whom are governed by the principles of Sharia (the Islamic Law). Mudarabah is an Islamic contract in which one party supplies the money and the other provides management expertise to carry out a specific trade.14
    3. Equity participation (Musharakah Sukuk)

      Another structure that gained popularity as an alternative financing principle is musharakah. It involves an investor and entrepreneur both contributing capital and sharing the risk and reward together. At first instance the arrangement appears to be identical to conventional joint venture. However, the difference between Musharakah arrangements and conventional banking is that, with Musharakah, you can set any kind of profit sharing ratio, but losses must be proportionate to the amount invested.15


The scope of Turkey's Islamic finance market is widening and the growing presence of Islamic banking needs to be accompanied by the development of effective regulation and supervision.

Islamic finance products such as sukuk (Islamic bonds), and takaful (insurance) are offered by financial institutions (participation banks) whose activities are in compliance with the Islamic rules. These institutions are governed by the same legislation as conventional banks and their activities are overseen by the same authority (Banking Regulation & Supervision Agency and the Savings Deposit Insurance Fund).

In this context, Turkish Banking Law No. 5411 (the "Banking Law") is the main legislation. This legislation established the "Participation Banks Association of Turkey" (TKBB)16 and enabled participation banks to have the same privileges and status as conventional banks.17

Another substantial development on the regulatory front includes "Communiqué Serial III no: 43 on Principals regarding Lease Certificates and Asset Leasing Companies." This was the first regulation concerning the lease certificates which essentially aimed to introduce the principle of sukuk to the Turkish financial market.18

Government's more recent attempt came with the introduction of the "Communiqué Serial III-61.1 No. 28670 on lease certificates" which regulates the matters such as the guidelines for determining the lease certificate classes and allows companies to raise funds from the capital markets by issuing lease certificates.19

With that in mind, existing conventional banks are in the process of establishing their Islamic finance divisions in order to align many of their managerial and financial procedures to Sharia rules. Evidence for this can be found in the figures provided by the Participation Banks Association of Turkey (TKBB) which strongly indicate that in general, participation banks increased their asset growth, raised funds, allocated funds, shareholders equity, number of total branches and personnel as they did in previous years.20


Islamic finance is making great strides from London to Hong Kong. The UK issued £200 million Islamic bond, or sukuk, making it the first non-Muslim country to step into Islamic financing. The UK government also reaffirmed its commitment to Islamic finance in March 2015 by announcing the issuance of Emirates sukuk. These announcements demonstrate the UK's desire to capture a share of the growing Islamic finance market.

Islamic finance also piqued the interest of other non-Muslim countries such as Hong Kong, South Africa and Luxemburg. For example, Hong Kong's 1 Billion issuing attracted $4.7 billion in orders. These investors did not sink their money into sukuk for religious purposes: they did it because Hong Kong's product was a five-year dollar-denominated asset at 2.005%21 or 23 basis points above five year US Treasuries.

Changing dynamics in world trade and capital flows also signify an important opportunity for Islamic banks that have global presence. For example, Société Générale and Bank of Tokyo-Mitsubishi UFJ, General Electric and Goldman Sachs issued sukuk to investors worldwide.22 These deals indicate that Islamic finance service and products are becoming more attractive globally.

That said, despite strong recent growth, there are potential pitfalls. Goldman Sachs' previous attempt foundered amid claims its proposed sukuk was not sharia-compliant. Government of Indonesia has also scaled back its issuance due to similar complaints. These notable experiments signal the need for a greater international standardisation of Islamic finance.


With a history dating back to 1983, Islamic finance has grown remarkably in Turkey and many different factors have been attributed to this growth. In particular, developments within the legal and regulatory framework, by and large, demonstrate Turkey's commitment to Islamic finance which will undoubtedly have a positive impact upon the upcoming transactions in this sector.

In that respect, to further enhance financial stability and promote sustainable growth in this area, there is a need for strengthening the sector with the appropriate legal and regulatory framework. Recent progress in this field clearly demonstrates that the government is taking major steps towards developing the instruments of Islamic finance.

Developments in other jurisdictions also indicate that the Islamic finance products have seen significant expansion throughout the world and thus they have become appealing not only to devout Muslims who are seeking sharia compliant products, but to all investors as a pure value proposition. It is, therefore, crucial for companies to be aware of what is new, how they should take action and by when in order to comply with the new and upcoming regulations.


[1] Wyman, O. (2009). The Next Chapter in Islamic Finance: Higher Rewards but Higher Risks. Zaher, T., & Hassan, M. K. (2001). A Comparative Literature Survey of Islamic Finance and Banking. Financial Markets, Institutions and Instruments, 10, 155-199 in Newaz, Farhana. Raman, Revti. Fam, Kim-Shyan, Aiken, Carolina. "Understanding the Nature and Market for Islamic Financial Products." Asian Journal of Business Research. DOI 10.14707/ajbr.150002 (2015): 21-22. Print

[2] EY (Ernst & Young). World Islamic Competitiveness Report 2014-15 Accessed 02 Sept. 2015. If it interests the reader the full text is accessible at: http://www.ey.com/Publication/vwLUAssets/EY-world-islamic-banking-competitiveness-report-2014-15/$FILE/EY-world-islamic-banking-competitiveness-report-2014-15.pdf

[3] Di Mauro, Filippo. Caristi, Pierluigi. Couderc, Stéphane. Di Maria, Angela. Ho, Lauren. Grewal, Baljeet, Kaur. Masciantonio, Sergio. Ongena, Steven and Zaher, Sajjad. (2013), "Islamic Finance in Europe," Occasional Paper Series, European Central Bank, June 2013, no 146 (Frankfurt am Main, Germany)

[4] Kammer, A., M. Norat, M. Pinon, A. Prasad, C. Towe, Z. Zeidane, and and IMF Staff Team (2015), "Islamic Finance: Opportunities, Challenges, and Policy Options," IMF Staff Discussion Note 15/05, (Washington: International Monetary Fund).

[5] Islamic Finance and the role of the IMF. March 2015, International Monetary Fund Forum. Retrieved from http://www.imf.org/external/themes/islamicfinance/index.htm

[6] Spangler, Timothy. (2013, October 18). Could principles of Islamic finance feed into a sustainable economic system? The Guardian. Retrieved from http://www.theguardian.com/sustainable-business/islamic-finance-sustainable-economic-system

[7] Vizcaino, Bernardo, and Shri Navaratnam. "UPDATE 1-Turkey's Ziraat Bank Gets Fast-track Approval for Islamic Unit." Reuters. Thomson Reuters, 15 Oct. 2014. Web. 4 Sept. 2015.

[8] Vizcaino, Bernardo. "Kuveyt Turk Preps July Launch of Germany's First Islamic Bank." Reuters. Ed. Eric Meijer. Thomson Reuters, 22 Mar. 2015. Web. 4 Sept. 2015.

[9] Vizcaino, Bernardo. "Kuveyt Turk Preps July Launch of Germany's First Islamic Bank." Reuters. Ed. Eric Meijer. Thomson Reuters, 22 Mar. 2015. Web. 4 Sept. 2015.

[10] Ayub, Muhammad. Understanding Islamic Finance. 2007. John Wiley & Sons Ltd, West Sussex, England. Google books. N. pag. Web. 07 Sept 2015.

[11] Definition in paragraph 2 of page 307 of Sharia Standards for Financial Institutions 2008, published by Accounting and Auditing Organisation for Islamic Financial Institutions.

[12] Umar, Abu. Umar. Ahmad, Faruq. Theory and Practice of Modern Islamic Finance: The Case Analysis from Australia. First Edition, 2010. Brown Walker Press, Florida, USA. p. 319

[13] Ismal, Rifki: Islamic Banking in Indonesia: New Perspectives on Monetary and Financial Issues. June 2013. Google books. N. pag. Web. 03 Sept 2015.

[14] Iqbal, Munawar, Llewelly T. David. Islamic Banking and Finance: New Perspectives on Profit Sharing and Risk. 29 Jan. 2002. Edward Elgar Publishing Limited, United Kingdom. p. 57-59.

[15] Kettell, Brian. The Islamic Banking and Finance Workbook. Step-by-Step Exercises on Fundamentals of Islamic Finance. First Edition, 2011. John Wiley & Sons Ltd, West Sussex, England. p. 75

[16] Hardy, Liam. "The Evolution of Participation Banking in Turkey." Online Journal of Southwest Asia and Islamic Civilisation. (Winter 2012): p. 4-5 Web. 02 September 2015.

[17] Ustaoglu, Murat. Incekara, Ahmet. Islamic Finance Alternatives for Emerging Economies: Emperiacal Evidence from Turkey. 2014. Palgrave Macmillan. New York. p. 80-81

[18] Buyukatak, Aytug. Gencoglu, Burak. Turkey: A bumper Year for Islamic Finance (2011). Islamic Finance News. . Accessed September 29, 2015.Retrieved from http://islamicfinancenews.com/authors/aytug-buyukatak-and-burak-gencoglu

[19] Borsa Istanbul. Lease Certificates. Accessed September 24, 2015.Retrived from http://borsaistanbul.com/data/kilavuzlar/Lease_Certificates.pdf

[20] Zawya Islamic. (2014). Turkey Islamic Finance Report 2014: Fundamentals and the Promise of Groth. Thomson Reuters. Istanbul: Islamic Finance Gateway. Accessed September 24, 2015. http://www.irti.org/English/Research/Documents/Report-5.pdf

[21] "HKSAR Government's inaugural sukuk offering." September 11, 2014. [Press Release] Retrieved from http://www.info.gov.hk/gia/general/201409/11/P201409110077.htm

[22] Islamic Finance: Big interest, No interest (2014, September 13). The Economist. Retrieved from http://www.economist.com/news/finance-and-economics/21617014-market-islamic-financial-products-growing-fast-big-interest-no-interest

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