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Prospects and Challenges of Islamic Microfinance in Turkey Prospects and Challenges of Islamic Microfinance in Turkey

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Abstract

This paper examines the importance of the Islamic microfinance (MF) in poverty reduction and identifies challenges facing implementation of Islamic microfinance industry in Turkey. In addition to, providing some suggestions to overcome these challenges. A qualitative study is prepared consisting of interviews to address the main research questions. Furthermore, highlighting some applicable studies from different countries to see the effects of the Islamic microfinance on poverty alleviation. The findings of the study including lack of human resources, inadequate funds and products, lack of advertising, unfavorable legal framework and inadequate government support which are the factors that hinders the growth of Islamic finance. This research concludes with a call for Participation Banks and Microfinance institutions in Turkey to have more awareness of the role they can play to reduce poverty if they joint to Islamic MF services.
Prospects and Challenges of Islamic Micronance in Turkey January 21, 2019
Mini-research
ECON 523 - Islamic Economics and Finance
Supervisor: Omar Kachkar
Prospects and Challenges of Islamic Microfinance in Turkey
Douaa Abbara, Qazije Shehi, Baba Osman Bukari
Abstract:
This paper examines the importance of the Islamic microfinance (MF) in poverty reduction and
identifies challenges facing implementation of Islamic microfinance industry in Turkey. In
addition to providing some suggestions to overcome these challenges. A qualitative study is
prepared consisting of interviews to address the main research questions. Furthermore,
highlighting some applicable studies from different countries to see the effects of the Islamic
microfinance on poverty alleviation. The findings of the study including lack of human resources,
inadequate funds and products, lack of advertising, unfavorable legal framework and inadequate
government support which are the factors that hinders the growth of Islamic finance. This
research concludes with a call for Participation Banks and Microfinance institutions in Turkey to
have more awareness of the role they can play to reduce poverty if they joint to Islamic MF
services.
Key Words: Microfinance, Islamic finance, Poverty, government, Challenges, Shariah
compliments, prospects, Turkey.
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Prospects and Challenges of Islamic Micronance in Turkey January 21, 2019
1. Introduction
Islamic economy aims to achieve economic welfare and to enhance people by equal
distribution of tangible resources and by creation of social justice. Therefore, Islamic
economy relies on the Shariah boards, which is used to decide whether the trade is halal, or
not. These boards aim to ensure Shariah compliance of operations. In Islamic Economics,
there is no interest paid trade but there is commodity. “The importance of Islamic economy
arises from not only the rise of “Islamic finance” that showed better resilience after the 2008
crisis compared to conventional financial institutions, but from its potential to provide
countless prosperity to the World” (Islamic Economics & Finance at a Glance, 2011). In
Turkey, Islamic economics are done through participation banks. Participation banks in
Turkey create around 5% of the financial market. “The sector’s market share in the banking
sector’s total assets, which was 4.0% in 2009, reached to 5.2% by the end of 2014, with 25%
average annual growth in its assets between 2009-2014”(Participation Banks Association Of
Turkey,2015, p. 18).
One type of Islamic finance is Islamic microfinance. In fact, Islamic microfinance is made to
help families who do not have any assets to enter the market and it has been identified as a
significant policy means that enable poor people who are excluded from formal system to
access to financial services and to become self-sufficient. Ahmed, A.M & Ammar, A. (2015)
argue that Islamic Microfinance is very efficient and fundamental to create hope for the poor
people and for those who are above the poverty line as shown by the traditional microfinance.
However, the Islamic microfinance, based on a mutual help. Hence, Islamic microfinance by
allowing poor to access to financial services, it help them to enjoy better self-sufficiency and
sustainability. Karatas. A & Helvacioglu, D.A. (2008) also stated that ”Microcredit is
regarded as an instrument to increase the employment and to enhance the income in the socio-
economically depressed areas, by providing financial support to the micro and small
enterprises, mostly founded and run by families”. Thus, Islamic microfinance can offer
people cash or commodity to support their business. However, the concept of Islamic
microfinance is not common in many countries. “The total number of Islamic microfinance
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Prospects and Challenges of Islamic Micronance in Turkey January 21, 2019
accounts and clients in 2007 was 380,000, which made up only 0.5% of the microfinance
industry’s total outreach”. (Hurlburt, 2012). Karim et al (2008) points out that the supply of
Islamic microfinance is centered in some countries, such as Indonesia, Bangladesh, and
Afghanistan with 80 percent of global outreach.
In Turkey, Islamic microfinance is a new concept but so far not applied. Therefore, people are
not familiar with the concept of microfinance and in general most of Islamic microfinance
managed by participation banks. However, the perception of participation banks in Turkey is
not such big according to the number of the Muslims in the country. According to COMCEC
Coordination Office (2016), “Turkey established Interest-Free Finance Coordination Board in
December 2015 to further develop interest free finance in the country. Ziraat Participation
Bank, the first state owned participation bank, has started its operations in May 2015. Vakif
Participation Bank is the latest participation bank, which started its operations in February
2016”. Özdemir,M. & Aslan, H. (2017) stated that the reason why only 5% of the financial
market is participation banks in a 90% Muslim populated Turkey is that the community is not
convinced enough. In Turkey, microfinance’s instruments are not used properly instead, the
banks are using small-medium enterprise and credit. That is why; Islamic microfinance is
facing many challenges that prevent it from prosperity.
2. Literature review
2.1 Microfinance
“Microfinance is platform where funds are effectively mobilized to outreach a wider range of
poor people who normally do not have access to those funds”. (Abunnaj, 2016). Özdemir, M.
& Savaşan, F. (2017) admitted that in order to decrease the poverty, microfinance is one of
the most important way and when we mention microfinance, firstly Bangladesh comes to
mind. The reason for that is Professor Muhammad Yunus who increased the popularity of
microfinance by opening Grameen Bank and winning 2006 Nobel Prize. Obaidullah, M.
(2008) argues, “Access and not cost of microfinance should be the main focus in designing
and implementing a microfinance program for poverty alleviation”. Abdelkader, I. B. &
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Prospects and Challenges of Islamic Micronance in Turkey January 21, 2019
Salem, A.B. (2013) point out that Participating of poor people in the development process is
not possible because they are removed from the financial system. “The main point of
departure of microfinance from mainstream finance systems is its alternative approach to
collateral that comes from the concept of joint liability”. (Obaidullah, 2008)
“Microfinance clients are often just below or above the poverty line, commonly defined as
earnings of US$1.25 a day, and women constitute a majority of borrowers".( Findev Gateway,
2018). “For the 2.5 billion people who live on less than $2 per day, shocks such as illness,
crop failures, livestock deaths, farming-equipment breakdowns and even wedding or funeral
expenses can be enough to tip them, their families, or even an entire community below the
poverty line”(Karlan et al, 2016). They added that “Recent evidence suggests that relatively
simple tweaks to microcredit products—including flexible repayment periods, grace periods,
individual-liability contracts, or the use of technology—may change their impact on poverty
and financial institutions’ bottom line”.(Karlan et al, 2016)
Hurlburt, K. (2012) argues that Microfinance has been offered by non-governmental
institutions, but the attraction of microfinance attracts more players to the table. Overtime
Microfinance industries have expanded into active subsectors of the financial services activity
because many countries has experienced the success in transforming the credit-led into
licensed banking and specialized commercial banks into the industry of micro lending
organizations, and saving collecting. Hence, microfinance industry has been succeed in
covering the business cost and producing profit to finance growth and to provide services for
a larger number of customers. (Burritt, 2OO3)
In Turkey demanding microfinance services known as a micro and small businesses that
consider as a visual and profitable factor of the Turkish economy where SMEs are between 95
and 99% of all enterprises. On the other hand, Non-agricultural SMEs use more than 40% of
the labor force and make 30-40% of exports. (Burritt, 2OO3, p.22). “Microfinance services
are mainly provided by two state banks — Halk Bank and Ziraat Bank — and two NGOs: —
Turkish Grameen Microfinance Program (TGMP) and Maya Enterprise for Microfinance
(Maya)”. (Abunnaj, 2016). “Halk Bank provides loans to about 130,000 micro and small
enterprises registered through TESK… Maya provides loans to 200 women micro
entrepreneurs operating in the informal sector… Ziraat bank serves nearly 2 million clients in
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Prospects and Challenges of Islamic Micronance in Turkey January 21, 2019
the agricultural sector, although more than 50% of these loans are non-performing or
restructured”. (Karatas & Helvacioglu, 2008). However, Karatas, A., Helvacioglu, A. D.,
(2008) stated, ”In traditional banking microcredit is often perceived as a high risk and low
return activity due to the important failure rate and the high handling cost for microloans.
Additionally, there is a market gap based on information asymmetry”.
2.2 Islamic Microfinance
Obaidullah, M. (2008) stated that Microfinance and Islamic finance have much similarity.
Both emphasize the good of society, encourage entrepreneurship, risk sharing, believe that the
poor people can participate in such activities, and focus on improvement and social goals. In
addition, they encourage financial inclusion, and concern participation by the poor. Islamic
microfinance serves as a new trend for microfinance. Obaidullah, M. (2008) added, “The
Islamic approach to poverty alleviation is more inclusive than the conventional one. It
provides for the basic conditions of sustainable and successful microfinance, blending wealth
creation with empathy for the poorest of the poor”. According to article published in Micro
World platform (2013), 72% of the community are living in particularly Muslim countries
cannot use financial services, because they do not support the principles of Islam. Even
Muslims who use conventional financial products, if they had the option, they would use
financial products that based on sharia-compliant. Saad, N. M. (2012) showed that “the three
main services of microfinance institutions are microcredit or micro financing, micro leasing,
and micro-
Insurance. Islamic microfinance institutions can also offer similar type of services based on
Islamic mode of financing”. Hussaini, M. (2017) stated that the funds of Islamic
Microfinance might collect from religious contributions such as Waqif, Zakat, and other
charities. In addition, he mentioned that Islamic microfinance implies three approaches:
positive measures by increasing income growth for poor when micro-business is developing,
preventive measures by emphasis functional re-distribution among factors of productions, and
corrective measures by joining Zakat and Waqf institutions. Ahmed, H. (2002) noted that
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Prospects and Challenges of Islamic Micronance in Turkey January 21, 2019
IMFIs is not just about interest-free. It would differ from conventional MFIs in different
important ways. On the liability part, the sources of finances of conventional MFIs are
foreign donors, government and the central bank while IMFIs take funds from religious
institutions such as waqf that was originated during the time of the Prophet (p.b.u.h.) and
other different charities. However, Ahmad et al. (2016) argued that although Muslims are very
concerned in receiving interest-free MF loan. However, Islamic MFs is still have a few
numbers of clients. Özdemir, M. & Aslan, H. (2017) argued that at the end of 2016 Islamic
banking had 75%, sukuk had 15%, investment funds had 4%, and takaful and microfinance
had 1% shares in the total market.
“In Turkey there are no Islamic microfinance institutions. However, there is only one
conventional microfinance institution”. (Sezgin & Şahin, 2016) “The name of thıs institution
is Turkey Grameen Bank Microcredit Program”. (Tokmakçıoğlu, 2017). Karatas, A. &
Helvacioglu, D.A. (2008) claimed that providing of microfinance services in Turkey is very
little in term of the numbers of people benefitted and the domain of services given. Moreover,
many barriers preventing Turkish banks from rising their borrowing to micro enterprise such
as increasing standard of informality and semi-formality in the micro-section of the Turkish
MSME sector. Therefore, the banks could not completely meet their actual needs for loan
funds, and semi-formal businesses could not provide enough debit collateral. (Tomilova,
2015). Furthermore, Tokmakçıoğlu, K. (2017) infers that microfinance service that
conventional banks provide is equivalent to micro-murabaha, which participation banks are
planning to adapt. For this plan, Kuveyt Turk participation bank data was used as a financial
analysis and as a result, it was argued that micro-murabaha would be productive and
profitable for participation banks.
3. Methodology
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Prospects and Challenges of Islamic Micronance in Turkey January 21, 2019
A qualitative technique is employed to investigate the primary questions of this study. The
researcher conducts face-to-face interviews with contributors, engages in focus group interviews
with six interviewees. Those interviews contain unstructured and commonly open-ended
questions which few in range can be and meant to elicit perspectives and evaluations from the
participants. (Creswell, 2014).
The authors interviewed six people in total. Two regional bank managers of participation banks,
an expert in Islamic finance, Small and Medium scale Enterprises Loans Manager and two area
managers. Thus, Researchers made interviews with people who are specified in the field of
Islamic banking (Participation Banks) in Turkey, by focusing more on their microfinancing
politics. These interviews were made in Turkish language and in the place work of the managers
of the banks. The time of each interview was approximately 30 minutes to an hour. For easy
transcription, the researchers aside taken notes, also audiotaped the interview, and later
transcribed and translated it to English language. After that, the results from was developed to the
(comments of the interviewees) are categorized and arranged for analysis.
Data is qualitative and has been taken from publication articles, masters and bachelor’s theses,
and essays. In addition, some information is been taken from interviews about the challenges of
Islamic microfinance.
The objective of the study is to explain the importance of growing Islamic microfinance system
in turkey in order to reduce the number of poverty and unemployment. Starting with highlighting
the number of Islamic banks and institutions using this system and providing the obstacles to
improve IMF in Turkey. Moreover, providing a clear idea about the mechanism of Islamic
microfinance in order to understand the reasons beyond choosing IMF instead of interest-based
microfinance.
4. Result and discussion
Data for this study was composed of six individual interviews from Islamic Banks and others
general financial managers. The results were written through the study’s research questions and
sub-questions, several applicable studies in the literature review. The findings have been provided
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Prospects and Challenges of Islamic Micronance in Turkey January 21, 2019
can be summarized on three major themes, which are Islamic MF Prospects, Challenges of
Islamic Microfinance in Turkey, and Suggestions.
4.1 Islamic MF Prospects
Islamic microfinance plays a key role in developing human resources and helps of poverty
alleviation and shortages the gap between the rich and the poor. One of the respondents
commented:
…Islamic microfinance potential areas in Turkey are both poor and Islamic. Just as
microfinance, practices in other parts of the world. Women entrepreneurs constitute the biggest
potential in Turkey…
However, when Islamic microfinance has started, it faced many criticisms, which focused more
on interest charge. the industry suffered a great deal of criticism from both Islamic and
conventional scholars. The debates were mostly centered on interest charge, saying that if the
interest was removed, there would be nothing to balance out demand and supply in the
economies”. (Mirghani et al, 2011). Ahmed.H, (2002) claimed that IMFIs method has certain
features regarding liabilities. The mutual help created by Islamic teachings encourage members
of a group or the center to help in paying the liabilities. Some of the respondents commented:
…Micro loans issued by participation banks are generally loans to small-scale companies
formed by individual firms whose turnover is below a certain amount. However, these loans are
given in the literature as in micro-credits; the power to seek poverty is not sought…
Therefore, it is important to know the difference between Islamic microfinance and conventional
microfinance in order to understand how the Islamic MF will be more beneficial than
conventional one. The comparison between the conventional MF and Islamic MF is shown in
Table 1
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Prospects and Challenges of Islamic Micronance in Turkey January 21, 2019
Table 1. Differences between Conventional and Islamic MFIs
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Prospects and Challenges of Islamic Micronance in Turkey January 21, 2019
4.2 Challenges of Islamic Microfinance in Turkey
4.2.1 Shortage of human resource and appetite
One of the difficulties of Islamic microfinance in Turkey is the lack of human resources.
Although participation banks, which obviously will lead this kind of Islamic finance, have the
capital to allocate to this field, no voluntary work has been conducted in this area until today. In
addition, the lake of the training of the way to practice Islamic finance including Islamic
microfinance in Islamic banks lead to non-proliferation of Islamic microfinance in Turkey.
According to Elisa, H. & Mehrotra, A. (2018) “the human resources issues as an obstacle which
limits Islamic banking growth due to the insufficient training of Islamic banks’ personnel to
understand Islamic banking”. Some of the respondents commented:
…...One of the reasons for not having IMFS in Turkey is the need for an organizational unit in
this area and the fact that participation banks are still in the development stage. One of their
greatest needs is lack-qualified human resources and the appetite for channeling resources to
different areas, and this system requires an intensive training and follow-up process….
4.2.2 The provision of financial resources
Providing funds for Islamic finance system is a major challenge. In fact, it requires a huge
amount of cash, but donors and developing organizations often give a little attention on funding
Islamic microfinance institutions. Therefore, IMFIs is restricting to reach for the rural people.
One of the respondents said:
...It would not be wrong to foresee that the financial support for Islamic microcredit will be
predominantly interest sensitivity capital-holders. In this domain, there should be no obstacle to
shift zakat, donations, charity the owners of capital who are members of religious communities in
Turkey in other directions ….
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Prospects and Challenges of Islamic Micronance in Turkey January 21, 2019
4.2.3 Inadequate Government support
Government can play an important role in enhancing Islamic microfinance where government’s
support can raise the perception of reducing the poverty through Islamic microfinance. According
to survey conduct by Meraj, M. (2016), “A vast majority (70 percent) have agreed that
government can play a vital role in poverty alleviation efforts through Islamic microfinance. It
can provide subsidiaries and soft loans that can be channelized through Islamic microfinance”.
However, In Turkey government until now is not providing enough funds and support for Islamic
microfinance. This is strongly portrayed in the following comment:
…. As the microfinance is directed to the lower income group, the minimum cost is presented, so
it will be very difficult especially in our country without government incentives…
Besides that, another respondent emphasized on the role that the government could play in
enhancing Islamic financial system. The respondents commented:
….Participation Banks has become more popular with the coming of the Justice and
Development Party (AK partı). The emphasized again that the role of the state is very important
in this new financial system….
4.2.4 Lack of Shariah laws
“The Shariah emphasizes two main restrictions on all financial matters. The first one, interest
(Riba) is forbidden in all transactions because of its exploitative nature, and the second, all
transactions involving risk and uncertainty (Gharar) are prohibited such as gambling and
speculation”. (Meraj, 2016). Therefore, it is vital to have Shariah laws in order to growth Islamic
finance system and microfinance. In Turkey there was a secular republic government, which
governed the country for a long time. Therefore, we could not find shariah governance-based
state until this moment. “Sharia governance is a necessary for the proper growth of Islamic
finance… however, scholars agree this is a key component that should not be forgotten”
(Developing Islamic Finance Strategies in the OIC Member Countries, 2016). In fact, when the
country has a Shariah governance, people will be familiar with the Islamic finance services’
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Prospects and Challenges of Islamic Micronance in Turkey January 21, 2019
concept and they will start to be more excited to learn about the products that Islamic finance
provide. One respondent had the following to say:
…. One of the reasons why Islamic microfinance is not developed in Turkey is because of the
secular state. Shariah laws should be available. We should not separate the state from religion
because this brings the lack of development in the Islamic finance….
4.2.5 Lack of advertising, branches, and products.
Today, advertisement is considered as an effective way to attract people and efficient means to
explain the desired idea easily. However, it is argued that Islamic microfinance has a very poor
promotion and advertising among people. As a result, most of the people do not have a clear idea
about the services provided by Islamic microfinance. One of the respondents claimed:
.. The reason why Islamic microfinance is not well known among people is the lack of
advertising, and inadequate branches of participation banks….
He also explained that some of the banks are providing just some kinds of products that make
position of Islamic financial system weak. This is strongly portrayed in the following comment:
...Ziraat participation banks financially support only some specified products like housing,
vehicle, workplace, land, consumer financing, education, health and Hajj….
4.3 Suggestions
One of the biggest problems that Turkey faces regarding Islamic microfinance right now is lack
of advertising which form a statue of lake of public awareness about Islamic finance products.
“The absence of public awareness in these countries, such as Turkey, Indonesia, and Pakistan,
inhibits growth in these high-potential markets” (Developing Islamic Finance Strategies in the
OIC Member Countries, 2016). The most appropriate way to overcome this problem is to have
different avenues to educate the public about the subject. One way to do this is to organize
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Prospects and Challenges of Islamic Micronance in Turkey January 21, 2019
different Islamic financial panels and conferences by inviting experts in the field from within and
outside the country to give a lecture. Another way can be to advertise on social media, mass
media, in public transports and others. “Electronic and social media platforms have become most
effective mean of opinion formation and information dissemination and mass media campaign
which is aiming at creating awareness among public at large in addition to conducting seminars,
conferences, targeted programmers and focused discussions for business community, academia,
bankers and policy makers.” (Bajwa, 2017). By this way, knowledge of Islamic microfinance can
reach a large number of people since almost everyone uses social media, mass media or public
transport.
Furthermore, Islamic financial system should pay attention to affordable products, training
employment on different kinds of products that Islamic banks can provide and improving
operational performance and suitable management of business risk in order to have a greater
number of people and form a sustainable institution. The IMFIs can operate efficiently if the
employees are trained on a regular basis to acquire and upgrade relevant skills” (Ahmed, 2002).
Another point that needs to improve is the government support. The government can support
Islamic Microfinance instituting laws to promote legal framework and make it trustworthy for
individuals. This will increase number of people participating in Islamic microfinance institutions
and raise the funds of these institutions. Moreover, this will increase the number of borrowers
that will bring the diversity of products and make Islamic microfinance developing more. “Other
countries such as Bahrain, Bangladesh, Jordan, Pakistan, and Turkey are also contributing to the
growth of the financial sector. Much of the growth in these countries is fueled by the effort of
their respective governments to provide regulatory and infrastructure support for the growing
Islamic financial services industry” (Developing Islamic Finance Strategies in the OIC Member
Countries, 2016). Thus, government support is important to improve Islamic finance services
faster.
5. Conclusion
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Prospects and Challenges of Islamic Micronance in Turkey January 21, 2019
This research found that Islamic Microfinance in Turkey is informal in appearance of small
enterprises to be financed. Therefore, there are many challenges that Islamic microfinance has
been faced in Turkey. The major problems were lack of human resources, funds, products,
awareness, Shariah law, and government support. This research provided an evidence for having
such those challenges by providing different applicable studies from various countries which has
been showed the significant of Islamic microfinance and why people should prefer Islamic MF as
a trusted hand and a method to end the poverty in professional way based of Islamic principles. In
addition to this study, there was qualitative interviews with experts’ people in the Islamic finance
domain who explain the current situation of the Islamic microfinance and the obstacles facing its
growth. However, they mentioned that the political development in Turkey would help improving
the Islamic microfinance in the coming days. With this hope, some recommendations were
provided in that research which can change the path of the Islamic microfinance for better, thus
encouraging people to use this system with greater enthusiasm.
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Prospects and Challenges of Islamic Micronance in Turkey January 21, 2019
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Prospects and Challenges of Islamic Micronance in Turkey January 21, 2019
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