Balancing Islamic and Conventional Banking for Economic Growth: Empirical Evidence from Emerging Economies

BALANCING ISLAMIC AND CONVENTIONAL BANKING PDF
  • Book Title:
 Balancing Islamic And Conventional Banking
  • Book Author:
Ahmet İNCEKARAMurat Ustaoğlu
  • Total Pages
143
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BALANCING ISLAMIC AND CONVENTIONAL BANKING – Book Sample

Dual Banking Systems’ Dynamics and a Brief Development History of Islamic Finance in Select Emerging Islamic Economies

Abstract Major religions in the world have introduced an interest ban for different reasons. Those other than Islam have, however, made lenient changes to this ban over the centuries, ultimately completely eliminating it. As a result, the modern financial system has evolved onto the interest-based banking model which played a huge role in the development of the Western world. On the other hand, most Muslims have distanced themselves to this model for religious reasons in predominantly

Muslim countries, leaving most financial sources idle. As a cure to this problem, an alternative model based on PLS principle has been offered, briefly called Islamic Finance (IF). A dual banking system has subsequently emerged with the involvement of both conventional and Islamic finance models in the system in some countries in the world.

INTRODUCTION

Economic relations which took two forms of monetary and real foundations reveal themselves in the measurement of the performance in improving the welfare of the people in the growth process. Harmony between real and financial sectors in the economy is very important. The main function of the financial sector in the growth process is to ensure that the real production increases are involved in the process of repro-duction. And this becomes possible in case of a financial structure that is well organized and well functioning (Nişancı et al. 2011).

For this reason, a well-functioning financial system is crucially important. In this relationship, the function of the real sector can be defined as provision of high level of contribution to the national welfare through investments that improve competitiveness in global markets.

Harmony between the two sectors made positive contribution to the development process in the Western economies. With the emergence of the modern banking system, the developmental gap between the most developed and least developed areas has become a more serious concern. The financial model that contributed to this process was interest-based banking system which raised serious controversies throughout the history.

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In the Muslim world, on the other hand, the interest-based bank-ing model has been discouraged because of the strong ban introduced by Islam. Even though ‘monetary foundations’ have been put in place in some rare occasions, no alternative model has been offered up to the 1970s. But the ground has become appropriate for an IF model in this period where debates on development have been made more frequently. It is possible to argue that the modern IF model merged the traditional com-mercial methods of Islam and the CF system’s institutions and products.

The establishment of the Islamic banks has been followed by the emergence of Takaful (Islamic insurance) and Islamic capital market…

The Turkish Economy and Financing Growth by Dual Banking: Empirical Evidence

Abstract The progress in the industrial revolution in the fields of science and technology led to production methods by attracting investments in the production factors. The change contributed to efficiency of the sectors and to the emergence of sustainable growth. Having resources that will finance new investments offers contribution to the national economy.

The conventional model dominates the financial sec-tor in most nations in the world, whereas some nations adopt the IF as an alternative. The presence of the two at the same time is called dual banking system. This study analyses the dynamics of the Turkish economy from a historical perspective, followed by an empirical evaluation of the impact of the CF and the IF in the growth rates with reference to selected real sectors.

INTRODUCTION

Brazil and Argentina were two rich countries in the world up until the 1960s after which they became less developed nations as a result of a declining growth rate since 1965 (Altıok and Tuncer 2013). On the other hand, before the industrial revolution, the per capita income of a developed nation was three times greater than the income of at least one developed nation, whereas it is now 60 times greater.

These two simple examples indicate that even a slight decline in the annual growth rate will lead to serious changes in the national welfare level in the long run (Pamuk 2015). Growth that dramatically affected the welfare level of the nations has become more visible since World War II. The economic policies of the Western states have become key elements in economic development (Genç 2015).

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As the Western world was going through this process of transformation, the Ottoman Empire remained a rural society. A group of intellectuals attempted to devise reformist economic policies for development based on the neoliberal model.

The outlook of the world economy through the initial years of the globalization process remained the same (Pamuk 2015). Least developed nations suffered from relatively low growth rates over the centuries due to inability to adapt to the trans-formation process (Savrul et al. 2013). Developing nations, on the other hand, had been trying to adapt themselves to the process of technological and economic development.

In Italy, Spain and South Korea where liberal policies have been successful in the last 60 years have become developed nations, whereas economic development remained below expectations in countries such as Turkey, Malaysia, Russia, Mexico and Brazil which are now still considered develop-ing countries (Pamuk 2015). This part of the study is focused on the eco-nomic policies that served as the foundation of development and growth since the late Ottoman era.

The progress and evolution of the finance sec-tor is also reviewed. Finally, the study analyses the impacts of loans offered by CF and IF upon the growth by reliance on empirical methods.

ECONOMIC TRANSITION FROM OTTOMAN ERA TO REPUBLIC

Turkey is a secular state founded upon the legacy of the Ottoman Empire which serves as a bridge between Europe and Asia. A predominantly Muslim country, Turkey has been governed by a multiparty parliamentary system since the second half of the twentieth century.

Because it was established upon the rubrics of the Ottoman Empire, Turkey sought to maintain growth based on modernization. This makes Turkey an interesting case of political and economic development. The economic policies implemented in the past decades, however, failed to meet the expectations. It is necessary to look at the economic policies of the Ottoman Empire in its final years for a proper understanding and analysis of the phases of growth and development in Turkey.

The Ottoman Empire became relatively weaker in comparison to the Western world in the eighteenth century in both military and economic terms. To address the problem, the governing leaders implemented dif-ferent policies. The European states supported domestic industry and promoted exports, whereas the Ottoman Empire preserved policies that would lead to lack of protection for the domestic industries (Genç 2015). Pamuk (2015) holds that the reason for this is political com-promises to the big states of the time including Britain and France to reinstate the state power.

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 But these policies fail to ensure that the gov-ernment maintains its power. As this was happening, the state also suf-fered from decline of tax revenues. In addition to Poland, the Ottoman Empire was the only government that was able to collect the least amount of taxes. It is inevitable for a country like this to experience problems in domestic and international security. As a result, the Ottoman Empire encountered serious security problems. To address these prob-lems, the government recognized privileges to powerful states of the time. To this end, the Baltalimanı Trade Agreement adopted in 1818 can be seen as a turning point (Savrul et al. 2013). The agreement featured outward liberal economic policies despite that the state was not ready for competition with the industrialized European states.

The number and amount of the machinery and equipment used in textile has increased. On the other hand, the agricultural needs of the coastal residential areas have been met through imports even if the Ottomans were an agricultural society due to lack of transportation (Pamuk 2015). The Ottoman citizens started to play a less significant role in the economy, whereas the foreigners and aliens have become more significant due to privileges recognized to the European traders over political reasons as well as the low tariff rates (Savrul et al. 2013).

The government held that a weak state would be unable to increase its internal security and military power without ensuring to collect greater amount of taxes. To restore political and military power, the government

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