We Can Grow the Participation Finance System Together!

PARTICIPATION FINANCE SYSTEM 12.03.2021, 23:47
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We Can Grow the Participation Finance System Together!

Participation banking and the participation finance system is a dynamic economic structure with increasing popularity and academic studies conducted. We can see the first traces of this system, whose basic principle is to make money from trade rather than from money, in the Arab Republic of Egypt. Later in 1975, the Asian and African Development Banks and the Islamic Development Bank based in Saudi Arabia emerged as the important financial institutions of the sector.

Today, around 135 institutions operate as interest-free financial institutions, managing more than $150 billion worth of resources.

When we look at the statistical data announced each year, we see that 89 out of the biggest 1,000 banks in the world are financial institutions established in Islamic countries and operating in the interest-free finance system. As one of the most influential banks in the world, Citibank is trying to take part in this development with their close interest in the system.

The most important factor of the Western societies' interest in this system is that it is not considered appropriate for the Abrahamic religions to make money over interest.

 In our country, the participation finance system has a 35-year history that is constantly growing, developing, and renewing itself. There are currently 6 participation banks in our country; 3 of which as publicly funded and 3 as privately funded.

The share of the participation banking system, which has displayed an upward trend with the support of the public authority since 2016, has reached 6.5% within the entire banking system.

The interest-free financial institutions, which could only intermediate in financial leasing and certain other transactions due to the restricted operating authority they had in the 1980s, can now conduct all kinds of banking activities within their authority.

They gained bank status with the banking law no. 5411 published in 2005 and expanded their realm of authority.

And even though they have been increasing their share in the sector in our country, participation banks still have a long way to go to achieve their goals. The 2016 World Banking Competitiveness Report of Ernst and Young estimates that Turkey's participation banking sector will have a 15% market share by 2025.

Participation banking is, under any circumstances, not a banking system that only serves people with certain sensitivities. Rather, it is a system that is fully integrated with the international markets and prioritises service quality, always renewing itself and giving value to people regardless of their religion, language, or race. Therefore, regardless of our economic and ideological approach, we need to reach out to all sections of society in order to reach our market share goal.

So, how can we grow our market share to the levels that we desire? 

The values that participation banks add to our national economy with their activities are analysed by certain authorities of the economy such as the Central Bank and the BRSA. These analyses will reveal the value-adding aspect of participation banks that is highly needed in the national economy. Because this system has the real trade and the relevant intermediary activities at its core. And we also recommend conventional banks establish participation banking related windows within their own bodies. Just as almost all banks operating in our country have departments such as "Investment Banking" and "Foreign Trade Banking", having a "Participation Banking" department will significantly contribute to the growth of the sector, increasing its market share. 

If we could spread the participation banking system gradually within conventional banks,

we would have more positive indicators for inflation rates, foreign trade figures, and growth figures, etc.

Our society needs to be taught about the perks of this system through financial literacy. Conventional banks are larger in Turkey with significant technological infrastructure. They can have high value-added works in the participation banking industry with certain regulations. And we can increase the share of participation banking, which is around 6% today, and the economic welfare with it.

Ahmet Necip DEMİR

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