Innovation in Participation Banks: A Review on Turkey

Abstract

Innovation is defined as a change that makes money. Innovation increases the competitive power ofbusinesses and provides significant advantages in the competition process by creating different products thatare provided by the competitors. Innovation is more prominent in the manufacturing sector, however, theimportance of innovation has also been increasing rapidly in the service industry in recent years. As the shareof the banking sector increases in the service industry, the banks also gain an importance in the service industry.Thus, innovation in banking is very important in diversifying financial instruments and increasing productivity.Increased level of financial success has been observed with the implementation of the financial innovationprocess in the banking sector. It is stated that the share of participation banking in the world banking sector isincreasing day by day in the studies related to banking activities. Participation banking, also referred to asIslamic finance, is developing new financial instruments in accordance with Islamic rules to compete in theworld banking sector. Participation banks, which offer interest-free banking services to their customers, havedeveloped innovative products and are offering these services to their customers to provide a better qualityservice. From this point on, the first part of this study reveals the historical development of the participationbanks from the beginning of their establishment up until today. The role of participation banking and itsimportance in the banking sector have been examined from a financial standpoint. In this study, innovationprocedures in participation banks are explained. The effect innovation processes have on the financial incomeand expenses have been examined. Despite the increase in the incomes of the banks, it was seen that theinnovative processes did not directly affect the profitability of the bank. It is recommended for new models tobe developed for profitability-enhancing innovative processes.