Islamic financial houses in Turkey

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

Over the last two decades the number of Islamic financial institutions have grown with approximately 15% annual rate and the funds managed by these institutions have reached to $200 billion. The largest Islamic institutions are located in Bahrain, Kuwait, Saudi Arabia and Iran.

The next section will introduce specific instruments used by interest (riba) free Islamic institutions.

3. FINANCIAL INSTRUMENTS USED BY ISLAMIC BANKS

The religion of Islam forbids the believers to receive and pay interest in their daily lives. All of the financial instruments of the classical banking system involves some sort of interest payment. In order to attract devout Muslims to the banks, Islamic banks have invented new financial instruments and started to use some traditional Arabic financial instruments. In the following paragraphs we briefly introduce these new forms of Islamic financing.

Mudaraba is a profit sharing agreement between a bank and an entrepreneur or a company. Bank provides capital and the entrepreneur or the company provides the labor. The company uses the capital provided by the bank either in production or in marketing. The parties share the resulting profit or loss from the project according to pre-specified terms of the contract. Musharaka is an agreement between two parties to provide capital jointly for a project and share resulting profit and loss. Agreement to undertake a project can be made between a financial institution and a company or an entrepreneur or between two financial institutions. If one party actually manages the project then that party receives compensation for the management plus shares of profit. Murabaha is basically a re-sale agreement between a financial institution and a customer. The financial institution buys the assets on behalf of the customer and then puts a mark up on the cost and resells the assets to the customer. Until the customer pays all of the financing given by the bank, bank retains the ownership of the assets. Salaf agreement involves lending by a bank to a company in exchange of buying the products of the company at a cheap price. The bank later sells these products in the market at higher prices and obtains profit. Joalha is a service contract. Banks receive a service fee for providing various banking services to customers. These services include money transfer, cashing checks and notes and others. Quard al Hasanah, involves interest free lending by banks to individuals to promote agriculture or small scale manufacturing projects. Banks only charge service fees of these loans. Islamic banks sometimes provide direct investment in certain projects using long term funds invested by the public. When we examine the Islamic banks in different countries we observe that the long term profit sharing instruments Mudaraba and Musharaka is not very popular among investors. On the other hand medium and short term financial agreements are popular among the customers of Islamic institutions.

4. ISLAMIC FINANCIAL INSTITUTIONS IN TURKEY