Digitalization highlights in the Turkish participation banking sector

Despite some significant headwinds, the global Islamic finance sector increased its asset size by 11% year-on-year to US$4.5 trillion. Over the last decade, the sector has grown globally by 163%. The sector is expected to continue to grow and assets are projected to reach US$6.7 trillion by 2027.

In Türkiye, the share of participation banking in general banking is around 8.6% as of November 2023 and has been increasing continuously compared to previous years. This rate was around 5% in 2017. While the development of assets was in this direction, market share of funds collected decreased from 10.07% to 9.99%, but the volume increased from TRY907 billion to TRY1.4 trillion.

On the other hand, while the share of funds disbursed in the sector remained the same (~7.62%), volume of utilized funds increased from TRY537 million in the previous year to TRY838 million.

With the increasing penetration of technology into all areas of our lives, we see that internet and mobile channels are being used much more intensively by the consumers. In particular, mobile banking is becoming the primary channel not only in conventional but also in participation banking. 

As of September 2023, the number of active digital customers in the industry reached 5.2 million customers, the total size of transactions reached TRY4.4 trillion and the total number of transactions reached 118.8 million in the same period. While 88.86% of customers use only mobile banking, only 3.73% use only internet banking. The share of those using both channels is 7.41%.

Increasing investments in technological infrastructure to enable customers to access financial services through digital channels has become a common goal of institutions. The technological and legal infrastructure for customer acquisition through remote access using up-to-date technologies has been prepared and put into operation by banks, providing a significant impetus to the development of their customer portfolios and service efficiency.

Participation banks, with their digital equipment and organizational preparations, have considered the possibility of acquiring customers remotely as a very productive initiative and have managed to continuously increase the number of customers they have registered through this channel since the implementation of the practice. In the last year, 700 thousand customers were acquired through this channel with approximately 1.7 million new applications.

In March 2023, two digital banks, T.O.M Bank and Hayat Finans, joined the participation banking sector under the Regulation on the Operating Principles of Digital Banks and Service Model Banking issued by the Banking Regulation and Supervision Agency (BRSA).

 With the inclusion of new participation banks in the system, the market share of participation banks in the Turkish banking sector is expected to increase.  On the other hand, this development is expected to increase the diversity of products and services as well as financial inclusion for customers and distribution channels.

In 2023, Dubai Islamic Bank entered Turkish Participation Banking and financial technology sector with an equity investment and  became a minority shareholder in the T.O.M Group of Companies, which includes T.O.M Digital Participation Bank. The T.O.M Group consists of subsidiaries

T.O.M Participation Bank, T.O.M Pay Electronic Money and Payment Services and T.O.M Financing. The company's valuation is estimated to be approximately 600 million dollars. Dubai Islamic Bank owns 20% of T.O.M Group of Companies and plans to increase its stake to 25% within 12 months.

Participation banks are utilizing digital opportunities effectively and the widespread use of open banking applications are also important factors in the development of the sector. Three of the 16 AISP (Account Information Service Provider) banks currently in production on the Open Banking national platform are three participation banks, namely Albaraka Türk Participation Bank, Kuveyt Türk Participation Bank and Ziraat Participation Bank. On the other hand, two of the 15 banks with authorized payment system (PISP – Payment Initiation Service Provider) status are Albaraka Türk Participation Bank and Kuveyt Türk Participation Bank.

The fintech ecosystem in Türkiye is growing every year as ever-evolving financial technologies and emerging innovative business models encourage the increase and proliferation of financial startups in Türkiye. As of December 2023, the total number of fintech startups reached 803, of which 262 were operating in the payments sector.

The number of licensed payment and electronic money institutions reached 79, with new entrants entering the market after obtaining an operating license from the Central Bank of Republic of Türkiye (CBRT).

To sum up, the Islamic finance ecosystem in Türkiye is gradually growing, diversifying and expanding with different business models thanks to the entry of new players and initiatives in different verticals and global initiatives.