The Role Of The Participation Banks In The Prevention Of Financial Crisis

BOOK REVIEW 28.01.2022, 11:30 28.01.2022, 11:49
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The Role Of The Participation Banks In The Prevention Of Financial Crisis

As is the case in liberal economies, there is freedom of enterprise in commercial life in the Islamic economy as well. In fact, one of the most important features that distinguish Islamic economics from economic liberalism is not that individuals do whatever they want but they maintain their business activities in which moral rules and the interests of society are respected. Following the global financial crisis that started in 2008, ethical rules in banking and finance have become more significant. For this reason, it has been expressed on various platforms by academics and regulatory authorities that excessive profit motive, insatiateness, and high profit appetite should be rasped, transparency should be increased and customer satisfaction should be emphasized.  The possibility of crisis always exists due to asymmetric information, moral hazard, and the principal-agent problem. It is argued that due to high leverage ratios, excessive risk appetite, and herd behavior, the markets are not actually efficient, individuals do not always act rationally and market efficiency does not appear by itself. Looking at most of the crises in the world, we see that the stock market reached its peak by increasing in the 3-4 years before the crisis, then it decreased continuously for 2-3 years after the crisis, and the recovery started after 3 years and completed the crisis cycle by reaching the pre-crisis level. It is stated that global and regional crises that recur every 8-10 years are caused by the nature of capitalism and structural problems, and excessive ambition, high-profit appetite, and regulatory gaps invite these crises. A pure competitive market equilibrium occurs where aggregate supply and aggregate demand prices intersect. It is stated that investors do not act rationally in the free market system due to the fact that individuals put their own interests forward, future market conditions cannot be fully predicted, seasonal effects, lack of reliable information, and market inconsistencies. For this reason, acting in a rational way is not possible for all investors. The crises seen in the 2000s show that the markets were not efficient and the investors were not acting rationally. It is stated that behavioral finance should be used together with the efficient market hypothesis and a holistic approach should be developed in order for analyzing the crises better. On the other hand, it is stated that understanding and applying the knowledge of Islam in the field of economy and finance will lead the world to get rid of the global crises that it has constantly faced and to establish a more livable world. After the 2008 global financial crisis, it has been emphasized in many international meetings that the financial system should be redesigned and financial stability should be ensured. As of 2018, the Islamic finance system around the world has been approaching USD 2.5 trillion and spreading rapidly. In case Islamic banking maintains the high growth rates it has achieved in recent years, it is predicted that Islamic banking will have increased even more by 2025. While Islamic finance has been operating via its unique products and applications for the last fifty years, it has been relatively less affected by global crises compared to conventional banking. The need for Islamic banks to hold higher capital has provided them with better performance in the most recent global crisis. The reasons such as the Islamic finance system being based on the real economy and risk sharing, the absence of speculative derivative transactions, and the low leverage ratios increase the interest in the interest-free banking sector. Even though Participation Banking that operates in Turkey in a form of interest-free banking first emerged as a requirement of the Islamic Religion, it can also be regarded as a substitute for the traditional financial system, which is seen as the cause of the financial crises. Because, basically, the products offered by participation banking are primarily aimed at promoting supply, that is, production. On the contrary, the financing methods of traditional banking generally nurture the process of imbalance between supply and demand by creating demand in advance. This leads to economic depressions and financial crises that occur in various ways. Conditions such as the fact that the amount to be paid by the customer in participation banks does not change according to the economy at the end of the term, and that the trade of commodities instead of currency is performed will prevent problems such as the global financial crisis, which originates from the traditional financial system and whose effects continue, or will free the person from this situation a little more. The products and services offered by interest-free banking-type financial systems give them the power to prevent financial crises.

Inclusion of Idle Funds into the System

Turkey adopted the open economy principles by starting the export-based growth strategy as a result of the decisions dated January 24, 1980. As a result of these decisions, most of the obstacles to capital movements were removed and foreign capital was encouraged. The interest-free banking practice in Turkey was implemented for the first time by the late Turgut Özal, one of the former prime ministers, through the Council of Ministers' Decree No. 83/7506 on 16.12.1983. After this date, investors who wanted to make use of participation funds according to profit/loss sharing principles were included in the financial system through Special Finance Houses (ÖFK - participation banks). The basis for the initiation of this practice is the access of citizens who observe the principles of interest-free finance to alternative financing methods and the effort to bring their mattress savings into the economy. There are many reasons why Islamic finance has recently been adopted by foreigners. First of all, Islamic finance has unique products, models, and applications. The second main reason is the effort to lure the funds of interest-sensitive customers stemming from oil revenues in Muslim and Gulf countries. Another reason is that Islamic finance has its own ethical rules and participation banks are more humane. It is stated that the lease certificate transactions that are in line with the principles of Islamic finance can act as an alternative to the bond market. It is emphasized that Islamic finance can offer a good financial solution not only for Muslims of faith but also for Europe and other Western countries. On top of it, it was stated that the financing problem in infrastructure, automobile, and other sectors can be solved through lease certificate transactions based on profit sharing.

 Financing of the Real Sector

 Today, maintaining the activities of the real sector has become largely dependent on the resources it will provide from the financial system. In terms of providing resources for real sector activities, commercial banks are the most significant actors of the financial system in our country. Banks basically realize maturity transformation by financing long-term loans over short-term liabilities (deposit or participation funds). At this point, it is argued that Islamic banks have richer opportunities to solve the problems arising from maturity mismatch, thanks to the principles of partnership and risk-sharing. Underlying this view is that Islamic banks make funding based on the resources obtained on the basis of profit and loss sharing as a result of the activity, instead of interest, which is a fixed debt with a predetermined amount. The principles of Islamic finance do not allow interest on receivables, speculation, and financing of various banned products. Islamic banking is based on the idea that all transactions are real economic transactions linked to a tangible asset and that the profit-loss (risk-sharing) principle, applies, both in terms of the asset and liability part of the bank's balance sheet. Therefore, in the understanding of Islamic finance, it is possible for investors to be exposed to losses as well as profits as a result of their activities. As a matter of fact, there is always a certain risk in commercial and industrial transactions. This risk arises from the essence of Islamic finance, namely trading, and the risk probability is balanced with the profit expectation. The principles of Islamic finance recommend that banking activities should be directed towards products that support the real sector and are based on profit/loss sharing, rather than transactions that increase consumption such as consumer loans directly or that aim to generate speculative income such as derivative transactions. However, despite all these restrictions, it is also known that Islamic banks both around the world and in Turkey are in an effort to turn, albeit slowly, from debt financing products to partnership financing products. As a matter of fact, the popularization of financial instruments that provide partnership financing such as mudarabah, musharakah, and muzaraa, which are among Islamic financial products, is important in terms of providing alternative resources for the financing of sectors that need support, especially agriculture and livestock, and small and medium-sized enterprises (SMEs) that are of utmost importance for our economy. In addition, in order to fund long-term and large-scale real sector investments, the Turkish participation banking sector has started to focus on providing funds over syndication loans or issuance of lease certificates (sukuk) in recent years. However, the most significant point to be considered here is that the underlying asset subject to the lease certificate is in compliance with the principles of Islamic finance and the approval of the advisory board that the said issuances are permissible. In addition, Turkey has accelerated its activities on nuclear power plants, wind energy, liquefied natural gas, and mineral exploration activities in recent years. It is extremely significant for Islamic finance to invest in these areas and to be a partner in the consortium to be established in terms of supporting the real sector. Finally, it is seen that Islamic banks in Turkey and around the world, especially in terms of the active assets of their balance sheets, are inclined towards products such as murabahah, ijare, or exception that comply with the principle of profit and loss sharing, and produce financial results, even though they are compatible with Islamic finance principles. The reason for this is that partnership financing instruments operate under certain conditions such as low inflation, a stable macroeconomic environment, and a transparent and appropriate legal system. Even though Participation Banking that operates in Turkey in a form of interest-free banking first emerged as a requirement of the Islamic Religion, it can also be regarded as a tool for improving the traditional financial system, which is seen as the cause of the financial crises. Because, basically, the products offered by participation banking are primarily aimed at promoting production. On the contrary, the financing methods of traditional banking lead to an imbalance between supply and demand by creating demand in advance. This leads to economic depressions and financial crises. The products and services offered by interest-free banking-type financial systems have the power to prevent financial crises in order for avoiding problems such as the global financial crisis, which stemmed from the traditional financial system and whose effects continue.

Zeynep Aslı Kekeç

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