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The Islamic asset management industry in Türkiye has undergone a remarkable transformation over the past decade, fueled by increasing investor awareness, regulatory support, and product innovation. HAMIT KÜTÜK analyzes.

The sector, which once had limited offerings dominated by participation accounts and Sukuk, now boasts a diversified range of investment funds, catering to both individual and institutional investors. At the end of 2024, assets under management (AUM) in Türkiye’s Islamic asset management industry exceeded US$28 billion, a sharp rise from just US$5 billion five years ago.

Source: Kuveyt Türk Asset Managment

Key drivers of growth

One of the most significant factors behind this growth is the increasing demand for Shariah compliant investment products. With inflationary pressures, investors have become more conscious of how they manage their savings, seeking interest-free investment alternatives. This shift in investor sentiment has accelerated the expansion of participation-based funds.

Another key driver is the “window asset management” model, which allows conventional asset managers to launch participation-based funds as long as they receive Shariah compliance certification. Currently, 16 asset managers in Türkiye offer Islamic equity funds, yet only two of them are fully Shariah compliant. While this model helps expand the market, it also highlights the growing need for dedicated Islamic asset managers who can ensure strict adherence to Shariah principles.

Furthermore, Türkiye’s government-backed pension system has significantly contributed to the sector’s growth. The system offers a 30% state contribution, meaning that for every TRY100 (US$2.74) invested, the government adds TRY30 (US$0.82), providing an instant return on savings. This incentive has led to the rapid expansion of participation-based pension funds.

Product innovation and diversification

Islamic asset management in Türkiye is no longer limited to only traditional fixed-income instruments. Over the past seven years, industry has witnessed a surge in product diversification, enabling investors to build well-balanced portfolios. Today, the market offers:

Fixed-income funds: Including both short-term money market funds and long-term Sukuk funds.
Equity funds: Encompassing not just domestic equities but also growth-oriented strategies and dividend-paying mutual funds.
Precious metals funds: Allowing investors to gain exposure to gold and silver, which serve as a hedge against inflation.
Multi-asset funds: Actively managed portfolios that adjust allocations between equities, Sukuk, and other asset classes based on market conditions.
Venture capital and private equity funds: Focusing on high-growth startups and export-oriented companies with strong EBITDA growth.
Real estate funds: Focusing not only on residential assets but also include investments in logistics warehouses and data centers.

The rise in foreign equity funds is also notable. With technological advancements shaping global markets, Turkish investors are increasingly seeking exposure to international equities. Kuveyt Türk Asset Management has already launched technology, sustainability, and energy-focused funds that invest in US stocks, providing investors with access to high-growth industries.

Challenges

Despite its impressive growth, the Islamic asset management sector in Türkiye faces several challenges. One of the most pressing issues is liquidity constraints, particularly in the secondary market for Sukuk. Compared to conventional bonds, sukuk markets remain less liquid, making it more difficult for portfolio managers to rebalance their portfolios efficiently.

Another issue is limited financial literacy among retail investors. While participation-based investments are growing rapidly, many potential investors still lack awareness of Shariah compliant investments. This highlights the need for education initiatives and general investment guidance to bridge the knowledge gap.

Future outlook

Looking ahead, the Islamic asset management industry in Türkiye is expected to continue its rapid expansion, driven by product innovation, increased investor awareness, and global market integration.

Alternative investments will likely gain greater traction, particularly in private equity, as long-term investors seek assets with superior risk-adjusted returns. Market data consistently shows that private equity investments enhance portfolio performance over a 10-year horizon, making them an attractive option for institutional and high-net-worth investors.

Additionally, discretionary portfolio management (DPM) services are expected to grow. Robo-advisory platforms will play a key role in democratizing investment services, providing automated portfolio recommendations tailored to individual risk profiles.

The integration of artificial intelligence (AI) in asset management is another exciting trend. As AI-driven analytics improve investment decision-making and operational efficiency, Islamic asset managers are expected to leverage these technologies to enhance portfolio performance and client engagement.

Conclusion

Türkiye’s Islamic asset management sector is experiencing unprecedented growth, outpacing its conventional counterparts. With an expanding range of investment products, strong government incentives, and growing investor interest, the industry is well-positioned for sustained long-term success. However, addressing liquidity constraints and financial literacy gaps will be crucial to unlocking its full potential.

As participation-based finance becomes more mainstream, Türkiye has the opportunity to establish itself as a regional hub for Islamic asset management, offering innovative, Shariah compliant investment solutions to both domestic and international investors.

Hamit Kütük is the general manager of Kuveyt Türk Portfolio