Banking Against Global Crises
The financial system is filled with crises that come after the loan supply increase, rise in investments, and high economic growth. Banks conduct their activities through the management of the risks that arise. They allocate the funds they collect with their reputation to those in need of funding.
Participation banking turned crises into success stories
The 1997 Asian Financial Crisis arose due to the overvaluation of national currencies and the hot money invested in speculative areas. The depreciation of money after the crisis by 80% damaged the real sector and the banks considerably. Participation banks, on the other hand, survived the crisis with the least damage.
In the 2001 Crisis, Turkey was starting to feel the impacts of it while the world economy was starting to leave it behind in its cycle. Turkey experienced an eight per cent contraction in the crisis. The devaluation amounted to 80%. The crisis caused 23 deposit banks to bankrupt. The treasury was burdened with $50 billion due to the bankruptcy of banks. Private Financial Institutions (PFI) that went bankrupt did not put a burden on the state, however. Because the damage was assumed by the account owners due to the basis of profit & loss participation.
The 2008 Crisis spread to the whole world from the United States of America. Developed countries were affected more by it than developing countries. There was a meaningful slogan at that time, which was "Let's Bank According to Islamic Principles" carried by a protester among the crowd protesting the system and suffered due to the crisis on Wall Street.
What are the measures of participation banks against economic crises?
The most important resistance point of participation banks against economic crises is their working principles, which are;
Prohibition of interest protects banks against future risks and minimises the worst scenarios that may arise in a possible crisis situation. Because, due to the principle of profit-loss participation, they leave crises behind more easily as they share the profit they generate.
Prohibition of uncertainty protects the parties suffering from losses. And interest is actually a type of uncertainty. The parties make their commitments without knowing what they will gain. And variable interest leads to further uncertainty.
Excessive risk and speculation are prohibited as they may lead to great damages. Bitcoin, for example, is not regarded as permissible by Islamic scholars.
Prohibition of services with objects that may harm humanity; banking services for alcoholic beverages, tobacco products, and games of chance, for example, are prohibited.
Basis of risk-sharing; in interest-free banking, participation in profit is not considered permissible in businesses without participation in the loss. It is not acceptable for one person to carry the risks.
Commitment to the real economy; crises often arise when financial transactions create a large bubble. Reasons such as excessive ambition to make money and non-transparent management further contribute to this financial bubble. The bankruptcy of Lehman Brothers can be an example of that.