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THE POLITICAL ECONOMY – Book Sample

INTRODUCTION – THE POLITICAL ECONOMY

At the heart of the global financial crisis in 2008, was the finance sector’s craving for making more profit by taking excessive risks. The sector tried to achieve high profit through complex and abstruse finance products that were generated by dint of weak regulations. The price of the trillion dollars’ worth of toxic derivative products were unrealistic, and after a point the financial crisis was inevitable.(( James Crotty, “Structural Causes of the Global Financial Crisis: A Critical Assessment of the ‘New Financial Architecture’”, Cambridge Journal of Economics, Vol.: 33, Issue: 4, (July 2009), pp. 563-580)) One of the main characteristics of Islamic finance is its asset-based nature.

Financial products with excessive uncertainty (gharar) are not allowed. Financing the real economy based on interest-free methods and profit/loss sharing are Islamic finance’s main principles. Islamic Financial Institutions (IFIs) showed successful performance during the glob-al crisis and captured the international community’s attention.(( For the news published in a Vatican newspaper, see “Vatican Paper Supports Islamic Finance. France Wants Its Share of Sharia Banking”, The Brussels Journal, March 12, 2009)) Moreover, the high growth performance of Islamic finance has increased this attention.

Islamic banking in Turkey started a decade after the establishment of the Islamic Development Bank (IDB) in 1975, which is considered as a turning point for Islamic finance. Although it seems a long time, it is fair to say that a decade later was not late to launch the Islamic financial sector when Turkey’s political and economic circumstances at that time are considered. However, SFHs were ignored by both governments and bureaucracy, and were treated unfairly within the financial system.

Thus, their share in the sector remained around 1 percent for a long time. Similar to Turkey, Malaysia established its first Islamic bank in 1983. Although just a bit more than half of its population is Muslim, Malaysia has the largest share in the Islamic finance market in the world.3

The country owes this success to the fact that governments and the public view Islamic finance as a strategic area and provide support. In contrast, Turkey has turned a blind eye to Islamic finance for a long time.

Turkey restructured the banking system after the 2000-2001 crises. In 2002, the periods of the AK Party governments began. Although not immediately, the state’s perspective notably changed towards Islamic finance in the following years. The change of attitude on the state’s part was a critical turning point for Islamic finance in Turkey.

Hence, this study first discusses the development of Islamic finance in the world and then examines the Islamic finance under two separate headings: before and after 2002. Finally, policy recommendations for further development of Islamic finance in Turkey are provided.

Intellectual efforts on Islamic economics in the modern era date back to the 1950s. In particular, postcolonial Muslim countries partook in the first struggle to figure out how to build an economic system that would comply with the Quran and Sunnah, the ontological sources of Islam. In this approach, there is an understanding of an alternative system which addresses not only the aspects overtly mandated or prohibited by Islam – e.g. zakah and riba – but also the basic principles and values that embrace society at large.

Mehmet Asutay states that the aim of the presumed founding fathers of Islam-ic economics is to set up an economic system using an approach that cares about human and ethical values versus the failure of the capitalist economic development strategy.(( Mehmet Asutay, “A Political Economy Approach to Islamic Economics: Systemic Understanding for an Alterna tive Economic System”, Kyoto Bulletin of Islamic Area Studies, Vol.: 1, Issue: 2, (2007), pp. 3-18)) During this period, discussions intensified over what the main values and axioms of the Islamic economics ought to be, its aspects that would be different from those of the current economic systems, and its main institutions. Islamic banking was considered as a functional unit of the Islamic economics model.

Theory was somewhat put into practice with the establishment of the first Islamic bank. The first modern experiment with Islamic banking was the Mit Ghamr Savings Bank established by Ahmad Al Naggar in 1963 in the town of Mit Ghamr, Egypt. The goal of this bank was to collect the savings of low-income groups and generate returns for them on the basis of profit-loss; it was inspired by German

saving banks known as Sparkasse.(( Hussein E. Kotby, Financial Engineering for Islamic Banks, (Japan: Institute for Middle Eastern Studies, 1990), p. 16)) However, such an important initiative lasted only three years and Mit Ghamr, including its nine branches in Egypt, closed down in 1967.6 The founder of the bank and one of the founding fathers of Islamic banking Ahmad Al Naggar stated upon the closure of Mit Ghamr that “those who are blind-folded by fanaticism, who are caught by the storm of their emotions and who do not want the good of the people” were responsible for the bank’s closure.7

Despite the difficulties, Mit Ghamr’s successful operation drew the attention of many. Mit Ghamr was a remarkable experience as it showed that an interest-free institution in the areas of savings and investment could be formed and operate profitably; it also expedited the establishment of other interest-free banks.8

After Al Naggar’s bank was closed down in 1967, other Muslim countries made some attempts to set up interest-free banks. The most critical turning point in Islamic banking, however, occurred when the IDB was founded in the city of Jeddah, Saudi Arabia, in 1975.9 After the establishment of this institution, inter-est-free banks became more visible.10

The IDB made tremendous contributions of capital and ideas to the formation of interest-free banks in other Islamic countries. The IDB usually supports interest-free banks founded in member states by making capital contributions as a shareholder. The IDB is also a shareholder of two participation banks in Turkey.11

Dubai Islamic Bank, founded in 1975, is also the first Islamic commercial bank and the oldest bank to date following the IDB. Many Islamic banks were founded mostly in the Middle East in the following years such as Faisal Islamic Bank of Egypt (1977); Faisal Islamic Bank of Sudan (1977); Faisal Islamic Bank of Jordan (1978); Jordan Islamic Bank (1978); Bahrain Islamic Bank (1979); and the United Arab