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Participation banking

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Participation banking is a name given to Islamic banks mainly in Turkey, as well as in the broader MENA region.[1][2] There are participation banks in Turkey, Pakistan, Bangladesh, Indonesia, Saudi Arabia, Malaysia, the UAE and other Gulf countries.

Core principles

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Participation banks operate on Islamic financial principles distinguished from conventional banking:

  • Prohibition of interest (riba): Prohibiting interest is necessary for but may guarantee Shari'ah compliance[3]
  • Risk sharing: Banks and customers share both profits and losses from investments[4]
  • Asset-backed financing: All transactions must be backed by real economic activity[5]
  • Prohibition of uncertainty (gharar): Ambiguous or uncertain transactions are not allowed[6]
  • Ethical investment: Avoiding speculative transactions and trading in impermissible products such as alcohol[7]

History

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Participation banking share of assets in the Turkish banking sector was 2.13% in 2000,[8] 5.1% in 2012,[9][10] and reached 7.8% or 717.3 billion TL in 2021.[11]

In 2020, top total sukuk issuers included: Malaysia, Saudi Arabia, and Indonesia.[12]

According to Ernst & Young, the assets of global participation banking reached US $930 billion in 2015, with growth rates declining across all regions compared to previous years.[13]

Monetary policy implications

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Integration with conventional systems

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Integration of Islamic banking principles with modern monetary systems presents opportunities and challenges for financial reform. Islamic central banks have limited conventional monetary policy instruments.[14]

Regulatory recognition

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The sector has gained international recognition through regulatory frameworks. The International Monetary Fund Executive Board endorsed a proposal on the use of the Core Principles for Islamic Finance Regulation, which were developed by the Islamic Financial Services Board.[15]

Monetary reform perspective

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From a monetary reform standpoint, participation banking presents both opportunities and challenges:

Opportunities:

  • Alternative to interest-based financial systems[16]
  • Emphasis on real economic activity over speculation[17]
  • Built-in risk-sharing mechanisms[17]

Challenges:

  • Integration with conventional monetary policy tools[18]
  • Standardization across different regulatory environments[19]
  • Limited scale compared to conventional banking[20]

List of participation banks

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Defunct

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References

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  1. ^ Erol, Cengiz; f. Baklaci, Hasan; Aydoğan, Berna; Tunç, Gökçe (2014). "Performance comparison of Islamic (participation) banks and commercial banks in Turkish banking sector". Euromed Journal of Business. 9 (2). Emerald Insight: 114–128. doi:10.1108/EMJB-05-2013-0024.
  2. ^ "Megabank project to support Turkey's aim to increase share in participation banking". Daily Sabah. 2017-05-20. Retrieved 2018-05-24.
  3. ^ REDmoney (2014-04-07). The Islamic Finance Handbook: A Practitioner's Guide to the Global Markets. John Wiley & Sons. ISBN 978-1-118-81443-7.
  4. ^ Ridhwan, Ab Aziz, Muhammad; Fuadah, Johari; Ahmad, Rafiki (2024-11-29). Digitalization of Islamic Finance. IGI Global. ISBN 979-8-3693-5655-5.{{cite book}}: CS1 maint: multiple names: authors list (link)
  5. ^ Harrison, Tina; Ibrahim, Essam B. (2016-09-20). Islamic Finance: Principles, Performance and Prospects. Springer. ISBN 978-3-319-30918-7.
  6. ^ Suzuki, Yasushi; Miah, Mohammad Dulal (2018-03-09). Dilemmas and Challenges in Islamic Finance: Looking at Equity and Microfinance. Routledge. ISBN 978-1-351-60185-6.
  7. ^ Janmohamed, Shelina (2016-08-30). Generation M: Young Muslims Changing the World. Bloomsbury Publishing. ISBN 978-0-85772-860-9.
  8. ^ Mermod, Asli Yüksel; O.Idowu, Samuel (2013-08-29). Corporate Social Responsibility in the Global Business World. Springer Science & Business Media. ISBN 978-3-642-37620-7.
  9. ^ Aysan, Ahmet Faruk; Dolgun, Muhammed Habib; Turhan, M. Ibrahim (2013). "Assessment of the Participation Banks and Their Role in Financial Inclusion in Turkey". Emerging Markets Finance & Trade. 49: 105. doi:10.2753/REE1540-496X4905S506. ISSN 1540-496X. JSTOR 24475319.
  10. ^ REDmoney (2014-04-07). The Islamic Finance Handbook: A Practitioner's Guide to the Global Markets. John Wiley & Sons. ISBN 978-1-118-81443-7.
  11. ^ Mansour, Nadia; Bujosa, Lorenzo (2024-04-09). Islamic Finance: New Trends in Law and Regulation. Springer Nature. ISBN 978-3-031-48770-5.
  12. ^ Gürak, Hasan; Hatti, Neelambar (2024-03-12). The Law of Riba in Islamic Banking: Conventional and Unconventional Approaches to Interest-Free Financing. Taylor & Francis. ISBN 978-1-003-86099-0.
  13. ^ "Global participation banking assets reached US$930 billion in 2015". Ernst & Young. Archived from the original on 2018-05-24. Retrieved 2018-05-24.
  14. ^ Kuforiji, John Oluseyi (2019-02-01). The Essentials of Islamic Banking, Finance, and Capital Markets. Bloomsbury Publishing PLC. ISBN 978-1-4985-4385-9.
  15. ^ Popkova, Elena G.; Polukhin, Andrey A.; Ragulina, Julia V. (2022-04-08). Towards an Increased Security: Green Innovations, Intellectual Property Protection and Information Security. Springer Nature. ISBN 978-3-030-93155-1.
  16. ^ Nader, Naifar (2019-09-27). Impact of Financial Technology (FinTech) on Islamic Finance and Financial Stability. IGI Global. ISBN 978-1-7998-0041-5.
  17. ^ a b Hunt-Ahmed, Karen (2013-01-14). Contemporary Islamic Finance: Innovations, Applications, and Best Practices. John Wiley & Sons. ISBN 978-1-118-24033-5.
  18. ^ Dolgun, Muhammed Habib; Mirakhor, Abbas (2021-01-18). An Alternative Approach to Liquidity Risk Management of Islamic Banks. Walter de Gruyter GmbH & Co KG. ISBN 978-3-11-058015-0.
  19. ^ The Report: Morocco 2015. Oxford Business Group. 2015-10-09. ISBN 978-1-910068-38-0.
  20. ^ Mansour, Nadia; Bujosa, Lorenzo (2024-04-09). Islamic Finance: New Trends in Law and Regulation. Springer Nature. ISBN 978-3-031-48770-5.