Looking towards the future of participation banking

Conventional financial institutions dominate Turkey’s banking landscape despite its majority Muslim population. In recent years, though, Sharia-compliant participation banks have come to represent a growing portion of the sector


The first private financial institution to provide Islamic banking services in Turkey was established in 1984, and began its activities the following year. By 1999, the number of Islamic finance institutions had grown substantially and were included in the scope of the country’s Banking Law. In 2005, these institutions took their current name of ‘participation banks’.

At the time of writing, there are 53 banks active in Turkey: six participation banks, 34 conventional banks, and 13 development and investment banks. Ziraat Participation Bank, the first public participation bank, started operating in 2015.

At Ziraat Participation Bank, known in Turkey as Ziraat Katlim Bank, our mission is to become a participation bank that understands the expectations and needs of our customers in the best way possible, offering reliable solutions and value propositions through the most appropriate channels. We also believe in the importance of carrying out our activities with world-class levels of sustainable profitability and efficiency – showing an awareness of the ethics and principles of participation banking – while facilitating access to financial services focused on customer satisfaction.

Our vision is to become a global, reputable and leading participation bank that strengthens participation banking not only in Turkey, but also in the wider region, consistently generating value and offering customers more at every stage of their financial journey.


A partner in business
The banking system is built on two basic functional pillars: accepting deposits and lending funds. Participation banks and conventional banks diverge in their methods of performing these two basic functions. Participation banks base their deposit collections on a partnership, lending the funds collected from their customers to other customers who need financing within the framework of the participation banking principles. The profit generated from these loans is then distributed to the fundholders based on the terms and conditions of partnership agreed to while making a deposit.

Because the profit generated isn’t known at the outset, fundholders aren’t guaranteed any profit margin. In the conventional banking system, however, there is a set interest yield for the deposits collected from customers at the beginning of their transactions. Conventional banks use other financial instruments with interest yields to utilise these funds and guarantee that they will provide the determined interest yield to their customers at the end of maturity.

As for loan operations, consider them under two headings: cash loans and non-cash loans. Cash loan transactions in participation banks are based on the financing of their customers’ purchases of tradable goods or services, or are carried out based on a joint undertaking of the related purchase. The key point here is that the customer is not provided with non-tradable finance.

In the financing provided to the customer, the financing rate for the repayment maturity determined at the beginning of the transaction constitutes the profit amount to be generated by the participation bank over the relevant maturity period. In addition, in profit-loss partnership transactions, the profit obtained within the framework of the partnership is also shared and added to the bank’s profit. Cash loan transactions in conventional banks are based on the issuance of a certain interest rate according to customer needs. The loan does not have to be for the purposes of purchasing tradable goods or services – it is collected together with the related loan interest over the predefined maturity.

With non-cash loans, participation banks can perform all non-cash financing transactions in accordance with the principles of Islamic banking. The only difference from conventional banks is that participation banks do not carry out any transactions that violate those principles.

As is the case for conventional banks, participation banks in Turkey are subject to the Banking Law. Moreover, participation banks carry out all of their banking activities in line with the principles of Islamic banking while complying with the national Sharia board. While each participation bank has its own advisory board, the Participation Banks Association of Turkey operates a Central Advisory Board, which acts as a supreme board. These structural and procedural differences in banking transactions are what distinguish participation banks from conventional banks.


Raising the flag
With a history dating back 35 years, participation banking in Turkey has played an increasingly important role in the finance industry in recent years. The share of participation banks in terms of total banking assets grew eight percent year on year in 2018, and 19 percent in 2019. Ziraat Participation Bank’s share in the market also grows day by day: as of year-end 2019, our total assets grew 64 percent, cash loans grew 63 percent and total funds grew 68 percent from the previous year.

The upward trend of participation banking is expected to continue in parallel with the potential clients we reach. And with recent advances in technology driving improvements in communications tools and information sharing, Ziraat Participation Bank can now reach a wider audience, demonstrate the benefits of participation banking over conventional banking and promote our activities more effectively.

One of our key missions at Ziraat Participation Bank is to listen to the needs of our clients and develop appropriate solutions based on the principles of participation banking. In this context, we have introduced various firsts to the participation banking industry in Turkey. Through the joint investments model, we launched a capital-partnership-based financial product – the first of its kind in the sector – and introduced the first project-based partnership model outside the construction sector.

We have developed mobile applications that enable participation banking customers to digitally manage their financing facilities. We have also taken a more active role in fundraising activities by enabling the involvement of participation accounts with maturities shorter than one month with the investment wakala product. With these and similar solutions, we have brought a wave of innovation to the sector, encouraging other players to develop pioneering products tailored to the needs of their clients.

Driven by Ziraat Participation Bank’s approach of playing an effective role in the development of the sector, we aim to enhance client satisfaction through the financial services we provide and, as a result, make a considerable contribution to the market share of participation banking.


The road ahead
According to 2019 year-end data, the share of participation banking in the larger banking industry in Turkey grew by 25 percent to reach 8.4 percent in total funds, by eight percent to reach 5.5 percent in fund facilities, and by 19 percent to hit 6.3 percent in assets. While motivating, these figures also show that we have a long way to go. Participation banking’s goal is to reach an asset size market share of 15 percent by 2025.

We have numerous leverages that stand to provide an advantage if managed properly, including increasing awareness of participation banking, clients’ preference for interest-free banking products, the presence of a large, previously untapped base of banking clients, the existing potential of non-participation banking clients in Turkey, the growing prevalence of participation banking in parallel with increasing trade with other Islamic states and the associated demand for Islamic banking products, and the potential for participation banking to develop alternative products tailored to the market’s needs. All of these factors are expected to play a crucial role in increasing the efficiency of the sector.

Operating in a sector of continuously increasing competition necessitates keeping up with changes and predicting developments. It’s a time-consuming endeavour to adapt traditional practices to today’s needs. As such, having good human capital that is open to development is crucial. It’s also essential that human resources investments continue to ensure sustainable development.

Another important aspect is to adapt technological advancements for use in the sector. This shows the significance of the in-house development of globally feasible technology applications. Utilising an artificial-intelligence-based system to catalogue customer feedback, identify priority needs, and develop and launch products to meet those needs would provide a remarkable contribution to our development as a bank.

Participation banks more broadly will continue to lay the foundations of systems that will facilitate clients’ access to banking services, meeting their needs in the most rapid, lean manner and enhancing service quality in general. Turkey benefits from a significant population of well-educated young people, which will be its greatest asset in overcoming any challenges.

As a member of the Ziraat Finance Group – one of Turkey’s oldest financial institutions, with 156 years of experience – Ziraat Participation Bank will continue to leverage its rich history, drawing strength from the past even as we look forward to greater success in the future. We strive to continually expand the reach of our value proposition, first across Turkey and the wider region, and then the entire world.