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

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

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

Integration with conventional systems

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

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

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

Defunct

References

  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.
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