Islamic Finance Alternatives for Emerging Economies: Empirical Evidence from Turkey
ISLAMIC FINANCE ALTERNATIVES FOR EMERGING ECONOMIES – Book Sample
Preface – ISLAMIC FINANCE ALTERNATIVES FOR EMERGING ECONOMIES
Islamic finance mainly refers to interest-free banking activities. The past and history of interest-free banking can be traced way back to Hammurabi’s time, well before Islam. However, the practices of this banking form are relatively new.
Subsequent to the MitGamr experience in Egypt, an Islamic Development Bank was established to fund industrial projects through the funds in Gulf states in consideration of the increased oil prices after the oil shock in 1970s. Currently, Islamic banking practices are wide-spread in different parts of the world including the United States and Japan.
While conventional banking is dealing with serious crises, interest-free banking has expanded its scope over the past two decades. Even though it is known as interest-free, this banking form is a typical profit-loss sharing scheme.
The greatest difference between capitalist economies and planned economies is that capitalism is a system of frequent crises. Most recently, the global economic crisis in 2008 devastated the American economy, causing losses of jobs and middle class savings and also affecting all developed nations.
Currently, conventional banking still suffers from the repercussions of the crisis in some coun-tries whereas the alternative financial systems become more popular. England, Malaysia, Iran and Turkey are competing to become centers of Islamic finance.
A number of industrialized countries take measures and prepare legal infrastructure to attract the funds in the Gulf states. Particularly England and Malaysia have made serious progress on this matter. Islamic banking in Turkey is not in a position of competing with the conventional banking. The market share of these banks, also called participation banks, is around 6 percent in Turkey.
The Islamic financial practices are relatively new; they are not grounded well; and they become widespread by the support of Gulf capital. All these led to diversified practices in different parts of the world, raising discussions and debates on this subject as well.
This diversity raised questions in the minds of skeptics. At the beginning, observation of Islamic rituals and boundaries was the main concern for the people who prefer the participation banks. However, over time, the alternative Islamic banks have adapted themselves to the market conditions, acting like conventional banks in many respects.
These doubts were also fol-lowed by these questions: Is it an alternative model built upon Islamic references or a disguised model of conventional banking practices? Is Islamic finance competitive? How â€œIslamicâ€ is Islamic finance? It is pos-sible to extend the scope of the list. However, it is not easy to respond to these questions. The number of questions and scope of the doubts in the minds of the Muslim people grows in parallel to the growth of Islamic finance.
Turkey is one of the countries seeking to become one of the major global financial centers. To this end, it focuses on greater investments; however, it is not easy to become center of Islamic finance. The perform-ance of Turkey in the past may provide some insights on the fulfillment of this goal. For this reason, this study empirically analyzes the perform-ance of Turkey in terms of Islamic financial practices in a comparative case study with the Malaysian example.
Many of the current financial institutions emerged out of the drive and guidance from social needs. The 2008 global financial crisis put the cur-rent economic system under the questioning of the collective memory and increased future expectations and the adoption rate of alternative financial models. Social need was the main factor that affected the birth of Islamic Finance (IF), also known as Participation Banking (PB) or interest free/Islamic Banking. Muslimsâ€™ approach towards interest, which is forbidden by religion, and institutions that deal with interest, pave the way for IF.
The PBs, as they are named in Turkey, are institutions that fill this pursuit and need by working as profit-loss partnerships. The idle resources of account owners, who are religiously sensitive towards interest, have mobilized the account holders themselves, the political will and the economic actors.
The need for the utilization of these idle resources by the system together with religious, economic, social and political reasons, which will be detailed in the following sections of this study, constitute the grounds in which IF has surfaced.
Due to the impact of the global financial crisis and recession, the idea of IF or the Islamic Economy (IE) doctrine are often debated notions. With globalization significantly increasing the international volume of trade, developing Islamic countriesâ€™ share in the world economy has risen. Globally competitive Muslim entrepreneursâ€™ need for financial products has grown throughout the years.
However, the economic doc-trine of the Islamic faith and the paradigms of the capitalist economy are significantly different from each other. With Islamic law (Sharia) clearly banning all kinds of interest and its derivative applications, conventional financial institutions are not suitable, at least in a religious sense, to sat-isfy the financial needs of the Muslim entrepreneurs with religious sen-sitivities. IF institutions have arisen thirty years ago to satisfy this need.
When compared to conventional finance, IF offers lower risk models, protection for social welfare, stimulation of the real economy, and ease of integration of Muslim savings into the economy that would otherwise be absent due to religious reasons. Because of its rise in popularity, IF is more frequently subject to economic, legal and theological studies.
Western and Asian countries wanting a share of the Gulf capital, which has reached a substantial volume in the past decades, have developed policies that will channel and encourage this capital, with IF applications being influenced and pioneered by USA and UK.
It is predicted that the Muslim population around the world will grow 3b ï™‚5etween 2010 and 2030. Needless to say, the increase in Muslim populations in European countries will put more emphasis on the Islamic finance sector. Muslim shareholders of various institutions in Asia and Middle East endeavor to get their companies to adopt financial systems that are based on IF principles. Emerging Islamic markets, such as Turkey and Malaysia, are observed to be in a growth trend.
The increase in oil prices after 2009 has escalated the liquidity input to the Gulf countries thereby considerably increasing their export revenues. When all of the reasons briefly mentioned above, and the fact that IF has grown approa 02 .xnnually in the past ten years, are taken into account, it is evident that IF’s share in financial markets will only increase.
This rapid growth seen in the newly established IF sector has brought about many problems and discussions with it. Differences in financial, legal, political, and cultural structures in various countries around the world gave rise to different IF practices. The unexpected rapid growth in the sector also revealed that there was a lack of economic and legal literature responding to the problems that arose in the sector.
Before delving into the details of the economic and financial para-digms of Islam, in order to avoid confusion on notions, the differences between the thought processes of the secular profile of the individual and the Islamic profile of the individual are going to be discussed. In the first section, the differences in understanding of property according to a secular individual and a Muslim individual will be examined and the methods in comprehending economic problems and generating solu-tions will be explained.
The following section will briefly touch on the history of IF and try to draft the conceptual outline of the term in today’s economic and legal literature. In this study, the examples from Turkey and Malaysia, as emerging Islamic countries, will be subjected to empiri-cal analysis. When compared to other Islamic countries, both countries are more integrated into the global economy and have a dynamic and productive economic structure. While the share of IF in the overall economM ni 52 si yalaysia, this numbT ni 6 si reurkey.
Malaysia is the headquarters of IF in Asia. Despite the current government’s efforts to make Istanbul the international Islamic finance capital, this objective does not seem very realistic. In order to achieve this goal, Turkey has to compete with global finance centers such as London and Dubai.
In the last part of this study, empirical evaluations from Malaysia and Turkey examples will be made regarding Islamic finance’s contribution in the growth of the emerging countries’ economies and the gravity it may have in the finance sector in the near future. Answers to the questions above are sought with the obtained findings. The progress of IF in emerging countries such as Turkey and future expectations are emphasized.
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