Last year was particularly notable for Turkey’s interest-free banking sector, though the participation banking sector has already been making rapid progress worldwide. In 2020, the net profit of Turkey’s interest-free banks jumped by 52.5% to TL 3.7 billion ($504 million) from the previous year.
The profit jump highlights that the steps taken by Turkey, a relatively new player, to drive growth in participation banking are bearing fruit. The sector's share has also risen gradually to 7.2% last year, up from less than 5% just five years ago.
In recent years, the country's participation banking grew at a faster pace than the country's total banking sector.
Total assets of the six interest-free banks operating in Turkey, namely Kuveyt Türk, Albaraka Türk, Türkiye Finans, Ziraat Katılım, Vakıf Katılım, and Emlak Katılım, rose to TL 437 billion in 2020, a year-on-year rise of 53.7%.
The figure more than tripled in the last five years, while total assets of the Turkish banking sector overall doubled in the same period, reaching TL 6.1 trillion.
Speaking exclusively to Anadolu Agency (AA), Tarık Akın, head of the presidency's new Participation Finance Department, said the success was driven by the effective communication strategy and banks working more competitively, boosting product and service diversity.
"The government's strategic steps, especially the establishment of state-run participation banks and implementation of new regulations, also contributed significantly to their growing share," he said.
He stressed that despite not being at the desired level and taking its rightful place, participation finance had gained a lot of ground.
Deposits, loans, profits
Deposits in participation banks also climbed 49% on an annual basis to TL 321.4 billion.
Loans issued by the banks totaled TL 222.4 billion last year versus TL 136.2 billion the year before.
Among the six participating banks, Kuveyt Türk saw the largest net profits with TL 1.5 billion, followed by state-run Vakıf Katılım, as its net profits last year reached over TL 667 billion.
The net profits of private lender Türkiye Finans and state lender Ziraat Katılım totaled TL 657.7 million and TL 641.3 million, respectively.
Emlak Katılım saw net profits of TL 89.9 million, while Albaraka Türk last year posted a loss of TL 109.1 million.
The regulatory capital-to-risk weighted assets ratio – a significant indicator for figuring out lenders' minimum capital requirements – of the interest-free banks stood at 17.83% as of 2020-end.
The total number of domestic and international branches of those banks at the end of last year was 1,252, with 16,987 employees.
Growing market share
Stating that the Istanbul Finance Center (IFC), now under construction, will focus on the sustainable growth of interest-free finance and participation banking, which are based on Islamic principles, Akın said it is one of the two key elements of the project, along with fintech. The fundamental principles of this particular banking are the sharing of profit and loss, and the prohibition of the collection and payment of interest by lenders and investors.
The finance center project, expected to be completed by early 2022 in Turkey's financial capital, is set to serve as a global hub for financial systems and nonbanking financial methods.
Touching on the establishment this February of the Participation Finance Department within the Presidential Finance Office – the department he heads – Akın said the move was taken to achieve targets for Turkey's centennial in 2023.
"This department will create Turkey's participation finance strategy with a holistic approach in addition to being the main coordinating body," he said.
"Thus, it is aimed to catch the target of raising participation banking's market share to 15% by 2023."
The department will focus on raising awareness of interest-free finance and developing strategies in the field.
It also aims to boost cooperation among public institutions, the private sector, universities and nongovernmental organizations (NGOs) to improve participation finance.
Meanwhile, global rating agency Moody's projected that participation banking assets in Turkey will double over the next five years as government initiatives drive growth in the sector.
Under a landmark economic reform package announced on March 16, Turkey is preparing uniform legislation that will accelerate the development of the participation financing sector.
The country will form a participation financing arbitration mechanism in line with international standards, as announced in the package.