Long-discussed public participation banks merger back on the table

K. Murat Yıldız / Duvar English

Preliminary merger negotiations and preparations have begun for three Turkish state banks, according to reports. The merger of the banks Ziraat, Vakıf, and Emlak Katılım arose out of a need to improve efficiency and achieve economies of scale for the three banks.

Plans for a structure like Türkiye Sigorta - a public insurance merger from last year - for state-owned participation banks are not new. Last year, there was already talk of a possible restructuring and merger, but it did not materialize. Experts cautioned, however, that the planned merger would not be as simple or quick as it had been with public insurance companies.

Sources close to the subject say the reason behind the state-owned bank Halkbank not being established as a participation bank was the result of the rumored consolidation of the existing three banks. Yet, reportedly Ziraat, Vakıf, and Emlak Katılım Bank’s managements have not been informed or had any involvement in the rumored merger plan until now.

“Participation banks were the entry point to the Islamic interest-free world utopia, which stemmed from the ruling Justice and Development Party’s (AKP) ideological roots. However, because the 'Murabaha System,' on which it was based, did not fit the economic reality, this dream was short-lived,” economist Evren Devrim Zelyut told Duvar English.

One of the goals of the AKP's establishment of these state-owned participation banks was to attract investors and assets from the Islamic world, particularly the Middle East, Gulf countries, and Malaysia, all of which failed, according to Zelyut.

“Instead of supporting capital markets, the cost of 'Participation Banking' support was hundreds of billions of dollars accumulated in banks disconnected from production, as well as millions of dollars in public expenditures to the institutions that are now rumored to be merged,” the economist concluded.

As of the end of last year, Ziraat Participation Bank led the three banks with a fund of 46.4 billion Turkish liras collected and 43.6 billion liras used, while Vakıf Katılım was second with a fund of 36.6 billion and 29.4 billion liras allocated.

Emlak Participation, the newest established bank among them, came in third place with 11.6 billion liras in funds collected and 13.6 billion liras allocated.

New bank will become second largest participation bank in Turkey

As of the end of 2020, three public participation banks represented a 30.5 percent asset size ratio among participation banks. With a combined asset size of 133.7 billion liras, the three banks will become the second-largest participation bank in Turkey if the merger materializes.

As of the end of 2020, three public participation banks represented a 30.5 percent asset size ratio among participation banks.

According to the Turkish Participation Banks Association, as of the end of 2020, all participation banks had collected 322 billion liras and provided 240 billion liras, representing a 49 percent increase in funds collected and a 60 percent increase in funds provided.

In addition, participation banks’ net profitability increased by 52 percent, and asset size increased by 54 percent to 437 billion liras. As a result, the banking sector's share of participation banks increased to 7.3 percent.

The asset size of participation banks increased by 9.1 percent to 477 billion liras in April 2021, compared to the end of 2020.

In comparison to the end of 2020, the funds allocated increased by 13.6 percent to 272.8 billion liras, while the funds collected increased by 8.5 percent to 349.4 billion liras.

Participation banks’ net profit on the rise

Total net profit of participation banks, on the other hand, increased by 38.3 percent to 1.2 billion liras. The banks have a total of 288 branches (Ziraat 105, Vakıf 118 and Emlak 65).

Ziraat Participation Bank achieved a profit of 114 million liras with an increase of 10 percent compared to the same first quarter the previous year while Vakıf Participation increased its profits in the first quarter of the year by 43 percent to 143 million liras.

In the first quarter of 2021, Emlak Participation reported a profit of 8 million liras. The bank recorded a 21-million-lira loss in the first quarter of 2021, and, in the first quarter of this year managed to come out of the red.