The system envisaged by Islam does not harm the link between the real sector and financial sector, which are often pitted against each other in the current global system, making it difficult to break free from crises

Islamic finance, offering an interest-free alternative, has been dubbed and proven to be more effective in financial crises since the system prioritizes a production-based real economy rather than the interest rate-based conventional economies that dominate the global system, experts say.

Osman Akyüz, the head of the Participation Banks Association of Turkey, told Anadolu Agency (AA) that the coronavirus pandemic showed the world once again how fragile the debt-based economic system is following the 2008 global financial crisis.

He defined Islamic economics as the promotion of an economic order compatible with the religion of Islam and its traditions. He said the concept can be expressed as a system of values that guides the economic behavior of individuals in society, noting that it cannot be defined as capitalist or socialist but should be considered a “third way” without the negative features of both systems.

Akyüz also commented that the participation banks, within the concept of the Islamic banking system, were established to gain funds that do not go to traditional banks due to the anxiety of interest and it helps savers store and safely evaluate funds. He said the word “participation” in the name of banks indicates it is a type of banking based on the principle of participating in profit and loss.

Faruk Bal, an associate professor from Istanbul Medeniyet University’s Faculty of Economics, told Daily Sabah Sunday that the interest-free system lays the ground for the very basics of Islamic finance and economy as Islam, from the very beginning of its history, prohibited interest and instead encouraged mutual risk sharing that depends on “partnership.”

Interest-free banking

Akyüz, further speaking about the benefits of the interest-free banking sector, said it “has developed rapidly in the world in the last 20 years” and has attracted the attention of not only Islamic countries but multinational banks of Western origin, such as Citibank and HSBC.

Banks created special departments or funds for investors who want to use their savings in an interest-free system, he said.

“Globally, that interest-free financial assets reached a size of more than $2.5 trillion by the end of 2018 is an important indicator of market development,” he said.

Considering that amount represents less than 2% of the financial assets worldwide, he said the sector has great potential for development.

Participation banks in Turkey

Six participation banks’ share of the banking sector in Turkey is 6.6%.The Turkish government founded three new state-owned Islamic banks between 2015 to 2019, broadening access and increasing competition.

In February 2019, the country’s Banking Regulation and Supervision Agency (BDDK) granted a banking license to Türkiye Emlak Katılım Bankası (EmlakBank).

The other five Islamic banks are state-controlled Ziraat Bankası and VakifBank, which received licenses to conduct Islamic banking in 2015 and 2016, respectively, along with Albaraka Türk, Kuveyt Türk, majority-owned by Kuwait Finance House, and Turkiye Finans.

“When we look at the first four-month period of 2020, we see that participation banks have continued their previous development and have increased their assets by 21.8% since December 2019 and reached TL 346.5 billion ($50 billion),” Akyüz said.

The sector’s net profit in 2019 increased by 16% compared to the previous year.

Istanbul to be Islamic financial hub

Earlier this year, the Moody’s credit rating agency announced that Turkey’s Islamic banking assets are set to double within a decade, as government initiatives drive growth in the sector. Turkey has positioned itself to be a hub for participation banking and Islamic finance.

Istanbul has the potential to become the center of Islamic finance with its historical background, cultural richness, and young and dynamic population.

Most recently, speaking at the 12th International Conference on Islamic Economics and Finance organized by Istanbul Sabahattin Zaim University and the Islamic Development Bank‘s Islamic Research and Education Institute (IRTI) between June 14 and June 20, President Recep Tayyip Erdoğan said participation banking and the utilization tools of Islamic finance and economics will provide a solid, sustainable and structural alternative to the existing financial system laden with crises.

Istanbul’s newly built financial center will also make it a leader in the sector, given its geostrategic advantage, Erdoğan said at the conference.

Source Daily Sabah