Delayed Receivables Management and Restructuring in Participation Banks

 Receivables management in the financial sector is of critical importance for the sustainability of banks. As participation banking operates within the framework of interest-free finance principles, it manages delayed receivables and debt restructuring processes with unique methods compared to traditional banking. So, how do participation banks manage delayed receivables? How do their restructuring processes work? 

Delayed Receivables and Participation Banks 

Delayed receivables arise when customers are unable to fulfill their financial obligations by the due date, and they play an important role in banks’ risk management processes. Given that participation banks follow the principles of interest-free finance, they develop alternative methods to manage these processes instead of using traditional interest-based penalty systems. 

In participation banks, the management of delayed receivables typically consists of the following steps: 

• Early Warning and Monitoring: The payment performance of loan customers is regularly monitored. 

• Administrative Follow-up: Banks contact customers with overdue payments and attempt to create alternative payment plans. 

• Legal Follow-up: If the payment issue persists, legal measures are taken, and collateral is evaluated. 

Debt Restructuring in Participation Banks 

One of the most common methods of managing overdue receivables is debt restructuring. However, since participation banks must adhere to interest-free finance principles, they apply methods consistent with Islamic finance rules, rather than using traditional restructuring models from conventional banks. 

One of the most frequently used methods in this context is the Tawarruq process. Tawarruq enables participation banks to provide liquidity to customers by conducting buy-and-sell transactions, thus facilitating a new financing model to restructure the customer’s debt and ease the repayment process. 

Effects of Debt Restructuring 

Debt restructuring in participation banks offers several advantages both for the bank and the customer: 

• Firms’ cash flow is eased, and short-term financial difficulties are alleviated. 

• Risk management becomes healthier for the bank, and the proportion of non-performing loans is kept under control. 

• Economic stability is preserved, the risk of firm bankruptcies is reduced, and the labor market is protected. 

Altman Z-Score Effectiveness Analysis 

In Mustafa Dereci’s doctoral thesis, the impact of debt restructuring on firms’ financial stability was examined using the Altman Z-Score model. According to the research findings, the bankruptcy risk of firms undergoing the restructuring process decreases to a certain extent. However, economic conditions and firm-specific dynamics can directly affect the effectiveness of this process. 

Conclusion 

Managing delayed receivables in participation banks is a process that must be carried out with great care, both ethically and financially. Debt restructuring methods aim to minimize customer grievances while keeping the bank’s risks under control. Islamic finance tools like Tawarruq help ensure that these processes are conducted in accordance with interest-free banking rules. 

In this context, it is expected that, in the future, participation banks will further improve their debt restructuring processes with more innovative financial tools and enhance their early warning systems by using technology more effectively.