Turkish president Recep Tayyip Erdogan last week announced the merger of three state-owned Islamic banks, unveiling a restructuring plan aimed at expanding the role of participation banking within the country’s financial system.

The consolidation will bring together Ziraat Katilim, Vakif Katilim and Halk Katilim, a move Erdogan said would give “a different dynamic to the sector” during a speech at an Islamic economy event in Istanbul.

Alongside the merger, he confirmed that Turkey’s fourth state-linked Islamic lender, Emlak Katilim, will proceed with an initial public offering (IPO), marking another step in the sector’s expansion strategy.

Islamic banks operate under Sharia principles, which restrict or prohibit interest-based lending practices, and have steadily increased their footprint in Turkey’s financial system in recent years.

According to central bank data, participation banking accounted for 7.4 per cent of total commercial loans in the first quarter of the year, more than double its share in 2016.

The sector’s expansion is also visible on the balance sheet side, with Islamic lenders now representing 9.5 per cent of total banking assets, compared with 4.9 per cent in 2016, reflecting a sustained rise in market share.

Ziraat Katilim is a subsidiary of TC Ziraat Bankasi AS, while Halk Katilim is owned by Turkiye Halk Bankasi AS. Vakif Katilim is overseen by the General Directorate of Foundations of Turkey, placing all three institutions under direct state-linked structures.