Financial stability and credit risk management of Turkish participation banks

Recently, the field of Islamic finance has experienced significant developments both in Türkiye and globally. Islamic banks as know participation banks (PBs) in Türkiye, operating in accordance with Islamic law and ethical principles, offer a unique financial landscape distinct from conventional banks (CBs). However, the distinctive nature of PBs and the industry norms they follow require tailored approaches for assessing their financial health. This thesis aims to assess the financial stability and credit risk profiles of PBs in Türkiye while making a comparative analysis with CBs. To achieve this, the study incorporates the Non-Performing Loans (NPL) ratio as a supplementary measure to the Emerging Market (EM) Score model. The EM Score is a modified version of Altman's Z-Score model. The original Z-Score and its developed versions are widely used methods for predicting the financial stability and bankruptcy probability of companies, including banks. Combining the EM Score with the NPL ratio allows for a more comprehensive evaluation of financial stability and a deeper understanding of the banks' risk profiles. The research methodology involves the collection and analysis of financial data from the banking sector, with a focus on six primary PBs in Türkiye: Kuveyt Türk, Albaraka Türk, Türkiye Finans, Ziraat, Vakıf, and Türkiye Emlak. These banks serve as Islamic banking models alongside other types of banks. The relevant financial data is sourced from the official websites of the Participant Banks Association of Turkey (TKBB) and the Banking Regulation and Supervision Agency (BRSA). The results of this study are expected to contribute to more informed decision-making processes and assist in the development of effective risk management strategies within Turkish PBs, ultimately strengthening their financial stability and resilience. Moreover, comparing PBs and CBs will offer insights into specific areas where PBs may have a competitive advantage or face unique challenges in managing risk and ensuring financial stability. These findings are anticipated to be valuable for policymakers, regulators, and stakeholders in the Turkish banking sector.