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Islamic Finance

The consequences of the COVID-19 pandemic on the Turkish economy

This article is a chapter out of the e-book, "Impacts of the COVID-19 outbreak on Islamic finance in the OIC countries" that is available as a pdf download from HERE. Read the article in the e-book for the complete set of tables, charts and references. 


The first reported case of COVID-19 in Turkey was March 11, 2020, some two and a half months since the first reported incident on December 31, 2019 out of Wuhan in China. Between those two milestones, the outbreak became a crisis affecting the world economy.

Crises in economies generally arise from either supply-side or demand-side reasons1 but in the case of the COVID-19, the world economy is experiencing both at the same time.

Governments, Turkey’s included, are taking various measures to contain the spread of COVID-19 within borders. As a result the first negative impact is on employment in the service sector due to lockdown measures that have closed commercial interests including tourism sites, entertainment venues, and shopping malls. Other disruptions will also manifest themselves on macroeconomic indicators such as growth, interest rates, inflation and public finance.

In Turkey, administrative, legal and political measures have been taken to mitigate the impact of the crisis, with economic stability packages at the top of the list. Despite these, there will be short, medium and long-term negative effects on Turkey’s economy.

Turkey has a liberal economy, offering a combination of both the conventional and Islamic banking system. Islamic banks are referred to as participation banks in the country. The overall share of participation banking in the banking system is about 5%. Because of this composition, the general economic outlook in the evaluation of the impact of the COVID-19 outbreak in the context of Turkey’s economy must also be addressed.

If the stock market BIST100 Index, which is one of the leading indices in Istanbul is examined, between December 31, 2019, the date China officially announced the outbreak and March 11, 2020, the first case seen in Turkey, we can make two inferences. First, Turkey’s financial markets did not immediately react to the announcement of the first outbreak. Financial markets were able to react as a result of the transmission of COVID-19 virus to other countries after a 20-day delay.

The second important point is that on January 22, 2020 (Index value: 123180), the BIST100 Index reached its highest value. Following this, the markets dipped until March 12. After this date, the markets fluctuated but largely saw a horizontal trend. For this reason, it can be said that the financial markets in Turkey responded seriously to the epidemic in the short-term. In addition, we can expect the markets to fluctuate and remain unstable in the short-term following to the course of the COVID-19 outbreak.

Turkey has six participation banks, of which only Al Baraka Turk is traded on Borsa Istanbul. Therefore, inferences made regarding Turkey’s economy are also true for the price of this participation bank. Overall, the effects of the COVID-19 outbreak will be felt in both the conventional and Islamic banking sectors.

Turkey’s Islamic finance sector in recent years has sustained growth through state-supported initiatives. The market share of Islamic funds collected was 8.38% in 2019; 5.46% for funds used; 6.33% for total asset size; 4.42% for total equity and 3.05% for total net profit. In addition, the sector’s 5.1% NPL (Non-Performing Loan) ratio is lower than the overall banking sector avarage, which is good news for the participation banks in Turkey.

There is no sufficient data published for a fundamental analysis to examine the impact of the COVID-19 outbreak on the participation banks in Turkey. The most up-to-date data of official databases is January 2020. The effects of the COVID-19 outbreak were not felt more severely this month (January). Therefore, within the framework of the indicators given in Table 1 and Table 2 (download e-book to see full article with tables and charts), the negative effects of the COVID-19 outbreak on participation banks were very limited as of January 2020.

We anticipate that if the COVID-19 pandemic continues, there will be devastating effects on the economy. We see the overall effects of the COVID-19 outbreak in the current situation as follows:

  1. The devastating effect of COVID-19 outbreak on supply and demand structures in the global economy is felt.
  2. The measures of the central banks are insufficient in solving the economic problems coming from both supply-side and demand-side shocks.
  3. As a general rule, the longer the COVID-19 outbreak lasts, the more drawn-out will be the recession.
  4. Although quarantine practices are yielding positive results in terms of health, they have negative results for the economy.
  5. The difficulties seen in the production and supply chain processes for enterprises are causing liquidity problems in a short time.
  6. It is essential that the unemployed be funded by unemployment insurance fund or an alternative source.
  7. Many small and medium-sized enterprises (SMEs), especially service companies, have started to experience liquidity problems.
  8. It is essential that future supportive measures taken by the government and the banks should continue to support the economy.
  9. COVID-19 did not only affect the world banking system, it negatively affected the Turkish banking system, which is integrated into this system. In the Turkish banking system, there were problems before COVID-19 such as macroeconomic pressures on asset quality, losses from lowering interest rates, unfavorable policies on fees and commissions charged for banking services. The possible initial effects of the COVID-19 outbreak on the Turkish banking system will address the liquidity problems of businesses and households.
  10. There will be an increase in cost of capital on the funds provided in international capital markets due mainly to the low rate of savings in Turkey.
  11. Turkey can borrow from international markets in the current crisis in at least three ways. The first is to get a share of $1 trillion of funds created by the IMF. Due to the negative perception of the IMF in Turkish society, it is very difficult to use this alternative. IMF’s suggestions for the solution of economic problems during the last standby agreement are the main reasons behind this negative perception. The second possibility is the DOLLAR-TL SWAP agreements which could be made with the U.S. Federal Reserve Bank. This is also difficult due to the recent polical sparrings between USA and Turkey. There are many disagreements between the U.S. and Turkey with regards Mediterranean and Middle East policy. These include the political situation in Syria and Libya, taking the S-400 defense systems from Russia, and seeking natural gas in the Mediterranean. The third alternative is the EURO-TL SWAP agreement with the Central Bank of the European Union. This alternative is more attractive and plausible.

During the COVID-19 outbreak, an increase was observed in Dollar / TL, Euro / TL and gold prices. The Turkish Lira depreciated by about 15% against the dollar and euro during this process. In addition, gold prices also increased by approximately 15%. In this process, the most important good news for Turkey’s economy is the nearly 60% decline in oil prices. This decrease is seen as an important cost reducing factor due to the fact that Turkey is a net importer of energy.

Government and NGO responses to crisis

The government’s first economic stimulus was a $15.4 billion economic stability package on March 18, 2020. In addition, various taxes were deferred. Firms and household bank debt and tax payments were deferred for three months. A number of tax practices specific to the service sector have also been deferred.

As the effects of the COVID-19 outbreak persisted, different economic and financial aid packages were announced. One of these was to give approximately 4.3 million needy checks of 1,000 liras each. One of the most important support initiatives for businesses is to provide employment support so that companies do not lay off workers. This initiative involves two phases. In the first phase, firms can apply for support if they do not lay off workers. In the second phase, workers can apply for support if they are given a temporary leave (which is not considered a lay off). In addition, the size of the loan guarantee fund operated in bank loans used by businesses has been increased to $50 billion.

Turkey’s government launched an aid campaign across the country and was able to collect donations of about 2 billion liras. However, this figure is far below the required amount. This aid campaign is specifically designed for helping people who need support due to the COVID-19 outbreak. The government announced this campaign to everyone and institutions in Turkey. According to our estimate, there is a need of approximately $100 billion in order to compensate the negative effects of COVID-19 outbreak for a one-year period.

What’s next? Recommendations

The damage caused by the COVID-19 crisis depends to a large extent on how long the outbreak will persist. From this perspective, it is necessary to predict exactly when the COVID-19 outbreak will be brought under control. Two prominent dates are suggested in this regard.

First, China and South Korea brought their outbreaks under control in about 3 months. However, these two examples can only give an idea to other countries where the COVID-19 outbreak has occurred. China and South Korea were able to control the COVID-19 outbreak in a 3-month period using different quarantine systems. However, these countries have had previous experience dealing with similar crises such as SARS. As a result, 3 months is a very optimistic benchmark for the United States, European countries and Turkey. The end of 2020 is perhaps a more realistic expectation that the outbreak can be brought fully under control.

The impact of COVID-19 on the economy and Islamic financial markets in Turkey can only be investigated with more time span and data. In addition to this, according to Taymaz2, given the total size of the markets affected negatively in this crisis and the size of the markets affected or positively affected, it is possible to make the following conclusions:

  1. In the case of Turkey, the value added in the affected markets in the COVID-19 outbreak is approximately $204 billion. There are approximately 7.3 million jobs in this market. In the COVID-19 outbreak, the depreciation of this market is expected to be approximately $93 billion. This means a 46% shrinkage. The amount of unemployment in this market is about 3.4 million. This means a 46% shrinkage.
  2. The depreciation in markets that are not directly affected by the COVID-19 outbreak is also estimated at $107 billion in Turkey. This depreciation also brings an additional 3.3 million in unemployment in Turkey.
  3. In summary, the recession in all markets is about 17% in Turkey. The unemployment rate also rises to about 28% in Turkey.

Thanks to the economic support packages made so far as a result of the COVID-19 outbreak, the unfavorable conditions faced by the unemployed and small businesses can be partially compensated. Due to the fact that Turkey has an open economy, there should be consumption-based activities in order to facilitate a way out of the crisis.

According to simulation results made on real data of 2017, it is reported that half of damages due to the outbreak will be offset. According to our forecasts, there is a need of $100 billion aid package for the short-term. We suggest two alternatives for gathering this required funds:

  1. The EURO-TL SWAP agreement with the Central Bank of the European Union.
  2. The introduction of the “Epidemic Sukuk”. In case of increasing uncertainty, this product can be linked to gold prices.

We hope humanity will find a way to overcome this and similar outbreaks.

The full e-book, "Impacts of the COVID-19 outbreak on Islamic finance in the OIC countries" is available as a pdf download from HERE. The e-book is published by Indonesia's Islamic Finance and Economy Committee (KNEKS) in partnership with DinarStandard and Salaam Gateway. It was launched on May 27, 2020. The 12 countries covered are: Bahrain, Bangladesh, Brunei, Indonesia, Iran, Malaysia, Nigeria, Oman, Pakistan, Saudi Arabia, Turkey, and UAE. 


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Şaban Çelik and Bora Aktan