Islamic financial houses in Turkey

Journal of the Academy of Business and Economics, Jan, 2003 by Ayse Yuce

ABSTRACT

Islamic banking activities started in Turkey with the opening of two Islamic finance houses at 1985. At the end of 1996 four more finance houses has founded. Initially a special rule was passed to regulate these houses. The politicians were skeptical about these institutions claiming that these institutions were not financially sound and their objectives were increasing Islamic awareness.

Although the number of Islamic institutions and their assets grew approximately at an average annual rate of 15% in the world, Turkish Islamic houses have not experienced significant growth. In the last two decades the percentage of deposits and loans of these institutions among the traditional banks has been at most 3%. After the 2001 financial crisis at Turkey, one finance houses was declared bankruptcy, two of them have been sold to new owners. As of the beginning of year 2003 there are five Islamic finance companies (special finance companies) in Turkey. Their total deposit amount is only 1 billion 958 million Turkish Liras.

1. INTRODUCTION

In the last decade, importance of the Islamic banking institutions has increased not only in the Islamic countries, but also throughout the world. Initially banking specialists thought these institutions can not compete with the traditional banks. However these institutions have survived and have experienced high growth during 1980s. In 1990s this high growth rates have reduced, but still new institutions are formed and institutions have started to enter into new countries and new markets. Turkey is one of these new markets. The so called specific finance companies have begun operations in mid 1980s. Although their number has increased to 6 institutions in 1996, after 2001 this number has reduced to five.

In this paper we study the performance of these companies and examine their importance in Turkish economy. The plan of the paper is as follows: the next section examines the Islamic Banking in other countries. While the third section introduces the financial instruments used by Islamic institutions, the fourth section examines the performance of six Turkish Islamic financial institutions and compares their position within the financial system with other banks.

2. ISLAMIC BANKS IN THE WORLD

Islamic banking and finance started in 1963 when Mit Ghambr Savings Bank began offering interest free banking in Egypt (El-Ashker, 1987). This bank and its branches were forced to close down in 1971 due to perceived threat by the administration. The Islamic Summit of Lahore, Pakistan at 1974 recommended the creation of Islamic banks and an Islamic Development Bank.

Starting from 1980s various Islamic banks and Islamic financial institutions have begun their operations in mainly Islamic countries. While the countries of Iran and Pakistan has decided to implement Islamic banking in the whole banking sector, other countries have permitted Islamic banking institutions operate with the other traditional banks. Malaysia is the first country to issue bonds on Islamic basis. Malaysian government allowed conventional banks to offer Islamic instruments as well if they want.

Examination of the progress of these institutions in Iran and Pakistan reveals that in Pakistan this process is a gradual one. On the other in Iran the conversion of traditional banks and financial institutions into Islamic ones was very rapid (Nienhaus, 1988).

The government of Iran has nationalized all the banks during the period of 1979-1982 after the Islamic revolution. In August 1983 the government has passed the law for riba free banking and asked all banks to convert their deposits and finish Islamization of all their operations within three years. After this period government has started to exert control on the banks so that the banks provide interest free loans to public for housing and for small scale projects. The banks have also provided funds for government projects. The six commercial banks and three specialized banks are mainly engaged in short term projects and profit sharing agreements are only small percentage of their activities.

According to Mirakhor (1988) conversion of deposits from interest bearing to non interest bearing modes happened very quickly in Pakistan. Majority of the funds have been channeled to short term projects. In both of these countries, the governments set regulations and control the banking industry very closely. Since these institutions cannot make decisions in a competitive environment it is not appropriate to compare their performances with those in other countries.

In other Islamic countries Islamic finance institutions and banks started operations in 1980s and worked in competition with traditional banks. According to the Institute of Islamic Banking and Insurance today there are more than two hundred and fifty Islamic financial institutions in the world. These institutions are working in the following countries: Albania, Algeria, Australia, Bahamas, Bahrain, Bangladesh, British Virgin Islands, Brunei, Canada, Cayman Islands, Cyprus, Djibouti, Egypt, France, Gambia, Germany, Guinea, India, Indonesia, Iran, Iraq, Italy, Ivory Coast, Jordan, Kazakhstan, Kuwait, Lebanon, Luxembourg, Malaysia, Mauritania, Morocco, The Netherlands, Niger, Nigeria, Oman, Pakistan, Palestine, Philippines, Qatar, Russia, Saudi Arabia, Senegal, South Africa, Sri Lanka, Sudan, Switzerland, Tunisia, Turkey, Trinidad and Tobago, United Arab Emirates, United Kingdom, United States, Yemen.