Islamic Development Bank (IDB) has agreed to loan $300 million to the Prime Ministry Directorate General of Foundations of Turkey for the establishment of Vakif Participation Bank, a new Islamic bank.

In a statement IDB said that the loan of $300 million will provide the financial resources required by the Banking Regulation and Supervision Agency (BBDK) to establish Vakif Participation Bank.

BBDK approved March 3 the application of Vakif Katilim Bankasi with a lira capital equivalent to $300 million.

"The loan is a example of IDB to support the growth of Islamic finance in its member countries," the statement said.

"Through interventions such as support for establishment of Islamic banks, IDB has been able to strategically position itself as an efficient and reliable partner of government's mandated financial institutions and as a provider of niche Islamic financial products with long tenor financing," the statement added.  

Islamic banking comprises 5 percent of the total banking system in Turkey. The country aims to increase the market share of islamic banking to 20 percent by 2023.

There are currently four Islamic banks operating in Turkey: Albaraka Turk, Bank Asya, Kuveyt Turk and Turkiye Finans. State-run lender Ziraat is the fifth bank entering into that sector.

The Turkish government aims to see the establishment of three Islamic banks as subsidiaries of the current state-run conventional banks by the end of 2015.

One of Turkey's largest state-owned banks, Ziraat Bank, has launched its first branch for Islamic finance in Istanbul on May 29 of the year. The other state lender Halkbank has taken steps to open up interest rate-free participation banks.