The effects of participation banks in Turkey to economy and financial development

The banks in the financial system play a vital role in the economic development of a country. It encourages both savings and investment and creates a link between savers and investors by credit mechanism. Interest-free banking activities started in Turkey since 1985 by the Special Finance Houses which have been transformed into the Participation Banks by the new Banking Law in 2005, have been operating as well as traditional banks and development/investment banks in Turkish Banking System. This study examines the performance of the participation banks within the Turkish banking sector and aims to show the contribution of the participation banks to financial development and the economy. For this purpose, the operating methods and principles of the participation banks were investigated and evaluated in terms of their contribution to economic development.The study also drew attention to he necessary policies are required for the development of the sector. The study analyses the efficiency of the participation banks by comparing their performance with traditional banks in the period of 2010-2018 by using basic financial ratios and indicators. The data used in the analysis have been collected from the financial statements of the banks which are published in the Interactive Monthly Bulletin of the Banking Supervision and Regulation Authority (BRSA). The information about the global ınterest-free banking ındustry have been provided from The Global Islamic Economy Indicator –Zawya source and "The Islamic Finance Development Indicator-Zawya reports are published by Thomson Reuters. According to the study, the participation banks are quite different compared to traditional banks, in terms of their concepts and mechanisms, however they are operating similar banking services as traditional banks by applying almost every banking services except being not related to interest. Therefore, the participation banks are seen as complementary to the traditional banking system as well as being an alternative in terms of responding customers' needs. Although the financial performance of the participation banks was seen succesful within the period of 2010-2018, the market share of the participation banks in Turkish banking system is low to fulfill its complementary effects in the economy. The study shows that the participation banks has a positive impact on the development of economy by incorporating interest sensitive savings into the financial system. The methods used by the participation banks have increased the depth and diversity of the services in the financial system. Moreover, their performance shows that the participation banking industry has a potential in terms of increasing amount of allocated funds in the financial system and ensuring the sustainable use of the funds in the economy. Key words: Participation Banks, The Special Finance Houses, Interest-Free Banking, Islamic Banking.