Updated version presentation prepared for Islamic Finance Conference https://www.google.com.tr/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact=8&ved=0ahUKEwjrqerv3vfLAhUBLZoKHamNCesQFgghMAE&url=http%3A%2F%2Fwww.borsaistanbul.com%2Fdocs%2Fdefault-source%2Fduyuru-dosyalari%2Fttp022-may-june-2014-islamic-finance-48-53.pdf%3Fsfvrsn%3D2&usg=AFQjCNGZTX5iVaIC5XSB0eoCSLNVZnC7Dg&sig2=fRsFOA58DCbPBYr70N74GQ

1. Leveling the Playing Field in
Liquidity Management
Solutions For
Participation Banks
Erkan Kilimci
Executive Director for Markets Department

2. 2
Outline
 Liquidity and Central Bank
 Mandates of Central Bank
 Balancing banking liquidity
 Participation Banks at a glance
 Liquidity outlook of participation banks compared to conventional ones
 Diagnosis & Remedies
 Securities market
 Interbank market
 Regulatory environment
 CBRT’s involvement

3. 3
Central Bank has many tasks for liquidity management.
• Ensuring smooth functioning of payment systems.
• Having an operational structure with sufficient flexibility against
unexpected developments in the markets.
• Maintaining the level of short term interest rates within interest rate
corridor and around the level determined by the Committee.
• Ensuring that instruments in use to support the efficiency of the
monetary policy.
• Ensuring efficient and stable operation of money markets in accordance
with the liquidity management strategy.

4. 4
Net liquidity deficit in the banking system is a dynamic process.
Funding Need of the System
(FNS)
Changes in Base Money
(volume of currency issued +
TL Deposits of
Banks)
CBRT operations
Treasury transactions against
TL

5. 5
Net liquidity shortage has increased over 2013
Source: CBRT
Funding Need of Banking System
0
20
40
60
80
100
120
012013 072013 012014 072014 012015 072015 012016
Bn

6. 6
Rising TL funding need is a challenge for banks.
Increase in TL Funding
Need
(2015)
- 53 Bio TRY
Bank
A
CBRT
FX Sale
(2015)
25 Bio TRY
Bank
C
Bank
B

7. 7
Participation Banks are not immune to the funding need.
ASSETS LIABILITIES
Cash & Central Bank(RR) 500 Deposit 4000
Securities 1000 Funding 1000
Loans 5000 Capital 1500
6500 6500
Central
Bank
Participation
Bank
Bank
C
Bank
C
B/S of a Participation Bank
280 TL
100 USD
560 TL
200 USD
840 TL
300 USD

8. 8
Central bank is the lender of last resort if there is a shortage of
liquidity.
ASSETS LIABILITIES
Cash & Central Bank (RR) 500 Deposit 4000
Securities 1000 Funding 1000
Loans 5000 Capital 1500
6500 6500
ASSETS LIABILITIES
Cash & Central Bank(RR) 500 Deposit 3160
Securities 1000 Funding 1840
Loans 5000 Capital 1500
6500 6500

9. 9
Outline
 Liquidity and Central Bank
 Mandates of Central Bank
 Balancing banking liquidity
 Participation Banks at a glance
 Liquidity outlook of participation banks compared to conventional ones
 Diagnosis & Remedies
 Securities market
 Interbank market
 Regulatory environment
 CBRT’s involvement

10. 10
Asset growth of PBs is slightly higher while the liquid asset growth
rate of CBs is negative
TRY Asset Growth
Source:TBB,TKBB

11. 11
FX Asset growth of PBs is quite faster compared to that of CBs
Source:,TBB,TKBB
FX Asset Growth
Source:TBB,TKBB

12. Participation banks’ TRY liquidity ratio is quite lower compared to
that of conventional banks.
12
TRY Balance Sheet Liquidity
Source:TBB,TKBB
0
5
10
15
20
25
30
35
40
45
50
2010 2011 2012 2013 2014 2015
%
Participation Conventional
Liquidity Ratio: (Cash&Reserves at CBRT+Securities*)/Total Assets
*Securities are overwhelmingly sovereign securities.A small proportion of private securities is ignored

13. Participation banks’ FX liquidity ratio is higher compared to that of
conventional banks.
13
FX Balance Sheet Liquidity
Source:TBB,TKBB
Liquidity Ratio: (Cash&Reserves at CBRT+Securities*)/Total Assets
*Securities are overwhelmingly sovereign securities.A small proportion of private securities is ignored
0
10
20
30
40
50
60
70
80
90
2010 2011 2012 2013 2014 2015
%
Participation Conventional

14. Participation banks’ overall liquidity ratio is lower compared to that
of conventional banks.
14
Composite Balance Sheet Liquidity
Source:TBB,TKBB
Liquidity Ratio: (Cash&Reserves at CBRT+Securities*)/Total Assets
*Securities are overwhelmingly sovereign securities.A small proportion of private securities is ignored
0
5
10
15
20
25
30
35
40
45
2010 2011 2012 2013 2014 2015
%
Participation Conventional

15. The share of securities within liquid assets of participation banks is
quite lower compared to conventional banks.
15
TRY Liquid Asset Composition
Source:TBB,TKBB
10 12 9 9 11 9
60 60 66 62
67 70
30 28 26 29
22 21
0
10
20
30
40
50
60
70
80
90
100
2010 2011 2012 2013 2014 2015
% Conventional Banks
HTM Securities AFS Securities
Cash and Reserves
64
45 38 34 29 24
25
42 52 54
53
51
11 14 10 12 18 25
0
10
20
30
40
50
60
70
80
90
100
2010 2011 2012 2013 2014 2015
% Participation Banks
HTM Securities AFS Securities
Cash and Reserves

16. The share of securities within liquid assets of participation banks is
quite lower compared to conventional banks.
16
FX Liquid Asset Composition
Source:TBB,TKBB
36
51
67 74 71 71
38
28
27 19 20 20
26 21
6 8 9 8
0
10
20
30
40
50
60
70
80
90
100
2010 2011 2012 2013 2014 2015
% Conventional Banks
HTM Securities AFS Securities
Cash and Reserves
99 100 96 90 90 88
0 0 4 10 10 12
0
10
20
30
40
50
60
70
80
90
100
2010 2011 2012 2013 2014 2015
% Participation Banks
HTM Securities AFS Securities
Cash and Reserves

17. Simple metrics show inadequacy of Islamic securities and lack of
essential types of securities that will facilitate a better ALM.
17
Outstanding Sovereign Securities(as of October 31,2015)vs. Banking Sector Assets
Source:TBB,TKBB, Turkish Treasury,Bloomberg
Securities Domestic Bonds Fixed-Coupon CPI-Indexed Floaters
Domestic
Sukuk(Fixed-
coupon)
Eurobond Eurosukuk
(TRY, Thousand) 432,448,687 248,718,120 99,449,858 84,280,708 6,563,083 155,086,200 10,875,000
Banking Sector
Assets
Conventional
TRY
Participation
TRY
Conventional
FX
Participation
FX
(TRY, Thousand) 1,053,234,979 73,973,333 626,715,408 45,241,143
Outstanding
Securities/Banking
Assets*(%)
41.06 8.87 24.75 24.04
Sukuk Gap** 23,765,983
*Conventional securities/Conventional Banking Assets or Islamic securities/Participation Banking Assets in related
currencies
** The amount of sukuk needed to be issued to level playing field for IFIs with conventional counterparts)

18. 18
Outline
 Liquidity and Central Bank
 Mandates of Central Bank
 Balancing banking liquidity
 Participation Banks at a glance
 Liquidity outlook of participation banks compared to conventional ones
 Diagnosis & Remedies
 Securities market
 Interbank market
 Regulatory environment
 CBRT’s involvement

19. Deepening capital markets with adequate shariah compliant
securities is needed.
19
Problem : PBs do not have sufficient securities in their liquid asset portfolio
Suggestion : A wider pool of securities tradeable in secondary market is
required
Problem : A mechanism for secondary market liquidity is missing
Suggestion : PD structure and a sukuk yield curve is needed

20. A more inclusive and efficient interbank market is a must.
20
Problem : Shariah compliant tradeable securities to be used for interbank
transactions is insufficient
Suggestion : Treasury or other public institutions (Eximbank) should issue
high quality tradeable securities (ie. Ijarah , wakalah and hybrid
sukuk) of various tenors
Problem : Lack of fund flows among conventional and participation banks
Suggestion : A robust money market platform to facilitate fund flows among
conventional and participation banks should be built.
Securities trading and shariah complaint repo like contracts
should be promoted.

21. Regulatory infrastructure for various contracts must be put in place.
21
Problem : All of required contracts cannot be effectively used.
Suggestion : Regulatory &supervisory bodies and exchange operators should
adopt various Islamic contracts to make use of different and new
shariah complaint products.
Adoption of various contracts and promoting different products will alleviate
risks stemming from lack of adequate shariah compliant liquidiy management
instruments and increase flexibility for the PBs

22. CBRT facilitates leveling playing field for the PBs to improve their
liquidity management.
22
CBRT has a funding facility for the PBs since 2011 based on buy and sell-back
of lease certificates (ijarah sukuk ) issued by Treasury with the right to forsake
the sell-back (unbinding promise by CBRT to sell back securities while the buy-
back promise of the PBs is binding)
Adoption of different repo structures like commitment based tripartite repo
under BIST and collateralized commodity murabaha is on the way (An efficient
organized commodity market under BIST is required)
The pool of eligible collaterals for CBRT funding is to be widened in time (IILM
sukuk, gold, other high quality and liquid assets)
CBRT is one of the shareholders of IILM which is mandated to introduce
shariah-compliant liquidity management instruments to the industry.

23. Available CBRT liquidity facilities and prospective steps
23
CBRT Liquidity
Channels
Conventional
Banks
Participation
Banks
Prospective steps
OMO through
CBRT Markets
Department
Yes Yes Expanding eligible
collateral base
OMO Funding
through BIST Repo
Market
Yes No Commitment
based tripartite
repo market under
BIST
Deposit Facilities Yes No Adoption of
various contracts
like commodity
murabaha

24. Thanks…
Erkan Kilimci
Executive Director for Markets Department