Participation Finance System and its Application in Türkiye: Participation Finance Markets, Participation Finance Institutions, and Participation Finance Instruments

Abstract

The aim of this study is to examine the application of the principle of complete interest-free financing in Türkiye, within the framework of participatory finance system, specifically focusing on participation finance institutions and instruments. The financial system consists of financial markets, financial institutions, and financial instruments that facilitate the exchange of supply and demand for funds. Based on the sources and methods of fund utilization, the financial system is grouped into three main categories: banking, insurance, and capital markets. While the percentages vary, the banking sector accounts for approximately 80%, insurance companies 10%, and capital market institutions 10% of the financial system. In Türkiye, according to the Banking Law, banks are classified as deposit banks, development and investment banks (DIBs), and participation banks. Of these bank groups, deposit banks and DIBs operate according to the interest-based banking system, while only participation banks operate partially according to the interest-free system. In the banking sector, based on asset size, the share of deposit banks was 84.3%, the share of DIBs was 6.7%, and the share of participation banks was 9% in 2023. Accordingly, 91% of the banking sector collects and lends funds according to an interest-based system, while only 9% partially operates according to an interest-free system. Consequently, the financial system becomes condemned to interest, leaving few alternatives for savers who wish to avoid interest and for those with funding shortages. The interest-free financial system is also referred to as the participation finance system and consists of participation finance institutions, participation capital markets, and participation insurance. In the participation finance system, risk sharing, asset-based structure, and ethics form the basic framework. For the participation finance system, creating a new financial architecture, proposing a new interest-free financial model, and especially developing interest-free financial instruments as alternatives to interest-based global financial instruments are of great importance. Establishing a legal, administrative, and institutional infrastructure is essential for the establishment of a participation finance system. The study reveals that financial institutions claiming to be interest-free do not operate according to the principle of complete interest-free financing, that investment instruments are not created according to the principle of complete interest-free financing, and that investment instruments containing a certain degree of interest are used. What needs to be done here is to create investment instruments based on the principle of complete interest-free transactions for savers who do not want to be involved with interest. If this is not possible, savers should be clearly informed that the financial instruments they invest in contain interest, and that they are involved in interest-bearing transactions because no other alternatives can be created, even if they do not want to.

This study will serve as a guide for future studies, particularly those examining participation banks, participation insurance companies, and participation capital market instruments according to the principle of complete interest-free transactions.