Source: Ji-Hyang Jang. 2003. "The Politics of Islamic Banks in Turkey: Taming Political Islamists by Islamic Capital". The University of Texas at Austin
Islamic banking was first introduced to Turkey in 1985 after the government of Prime Minister Turgut Ozal passed a special legislation on interest-free banking, the Decree no. 83/ 7506 issued on December, 1983. The goals were two folds: first, it is to bring into the economy all funds that oppose to interest and thus do not go into the conventional banking system, including foreign exchange kept under pillows and jewelries of wives and daughters. Second, it is to develop economic linkages to the oil-producing Arab states and to attract a fair amount of the Gulf capital which also avoids interest-paying financial institutions. By encouraging the Islamic banks or “the Special Finance Houses”, Ozal cemented his ruling coalition of the center-right by developing domestic political counterbalance to the secular left, which he was seeking to destroy to help paving the way for structural adjustment (Henry 1996).
Similar to other Islamic banks, the Turkish Islamic banks also offer their customers profit-sharing proceeds instead of interest and charge borrowers participation-sharing instead of loan interest. Thus, the banks operate two types of accounts to collect funds from their depositors. One is “current accounts” that do not entail any return in any form and receive conventional services such as check book, money transfer, and documentary collection. The second and most popular one is “profit-loss sharing participation accounts” that can be opened in US dollars, Euro, and Turkish lira for a minimum of thirty days. The accounts can be opened by signing a “contract for participation in profits and losses” and in the name of depositor or anonymously. The holders of accounts share both the profits and losses as a result of investment of these funds. At the end of the investment activity, profits are shared between the banks and account holders, and the banks could get a maximum of 20% of the profits. After the deduction for the banks’ share from the accruing profits, the balance is paid to the holders prior to maturity provided. Not surprisingly, the profit-loss sharing participation accounts are the major earning assets of the banks constituting around 85-90% of the total funds collected by the Islamic banks than the current accounts (Buyukdeniz 1995, Ozsoy 1997).
The first Islamic bank was the Al Baraka Finance House established in February 1985 followed by the Faisal Finance House two months later. These two Saudi-Turkish joint ventures represent Islamic banking’s two principal transnational networks, Sheikh Saleh Kamel’s Al Baraka group and Prince Mohammed al Faisal’s Dar al Mal al Islam. Korkut Ozal, Prime Minister Turgut Ozal’s younger brother has a close business relationship with Sheikh Saleh Kamel, the main shareholder of the Al Baraka Finance House and introduced him to Turgut Ozal. Meanwhile, Prince Mohammed Al-Faisal, the main shareholder of the Faisal Finance House sold the bank to the Kombassan Holding in 1998, which resold it to the Ulker Group, a leading food producer with 22 companies in 2001. Sabri Ulker, the owner of the Ulker Group was one of the founding shareholders of the Faisal Finance House possessing now 97% shares, and the name of finance house was changed into the Family Finance House. Another Arab capital-financed bank is the Kuwait Turkish Finance House founded in 1989, a joint venture between the Kuwait Finance House and Turkiye Vakiflar Bankasi. Vakiflar is a small public sector bank with historical ties to Turkey’s religious endowments.
As for locally-financed Islamic banks, Turkish private investors established three banks: the Anadolu Finance House in 1991, the Ihlas Finance House in 1995, and the Asya Finance House in 1996. The Anadolu Finance House is owned by the Istikbal Group, the leading furniture manufacturer in Turkey.(The Istikbal Group began its production and marketing activities in 1940s. The main companies of the Group are Merkez Celik company, Istikbal Mobilya company, Boytas Mobilya company and Hes Hacilar electric company. The first three companies focus on manufacturing home textile and furniture while the forth one produces telecommunication and electric cables or wires. In 2000, the export volume in these four companies exceeded about 35 million US dollars (Anadolu Finance House 2001)
The owner of the Ihlas Finance House is Enver Oren, the owner of the Ihlas Holding covering divergent sectors of industry and focusing on a media sector with ownership of daily newspaper Turkiye and television channel TGRT TV (Bugra 1999). The Asya Finance House is owned by more than 200 partners from different industries. The chair man has several companies in a shipping industry serving also as one of the board of directors of Isik Sigorta, an insurance company affiliated with the Fethullah Gulen Community (Baskan 2002).
The Ihlas Finance House however, went bankrupt in February, 2001. The Banking Regulation and Supervision Agency (BRSA) revoked the license of the Ihlas Finance House, a subsidiary of media and industry group Ihlas Holding because the finance house faced acute liquidity problems. According to the BRSA, the funds were transferred to the companies of the affiliated group who used them to their own advantage, impeded it from working in a reliable manner, and had difficulties paying back to the Ihlas Finance House (Turkish Daily News, February 12, 2001).
During the late 1980s, the decree that allowed the establishments of the Islamic banks had given them a competitive advantage compared to other conventional banks. The decree reserved to the Prime Ministry the right to supervise them, and especially exempted the Al Baraka and Faisal Finance House from the provisions of the banking law. For instance, the Islamic banks were required to keep only 10% of their current accounts and 1% of their much larger profit and loss sharing participation accounts as required reserves with the Central Bank, whereas otherbanks lost the use of 10 to 15% of their deposits (Henry 1996: 125-6). Nevertheless, their market share in the total banking system’s total assets was less than 1% before 1990 and could not exceed 2% until 1994. Their market share of the total banking deposits also started to exceed 1% in 1990 and 2% in 1992.
During the Welfare Party (WP) and the True Path Party (TPP) coalition government period from 1995 until 1997, the Islamic banks might enjoy a relatively favorable climate. But in February 28, 1997, the National Security Council (NSC) decided to ban the coalition government due to Islamic fundamentalist stance of the WP and defined the Islamist capital including the Islamic banks as their supporters by agreeing to take a number of legal measures against the Islamic banks. Following the NSC meeting on Dec. 23, 1997 chaired by then State Minister Gunes Taner, the Islamic banks would not be allowed to open new branches and the “the privileges of interest-free banks would be abolished” (Turkish Daily News, December 30, 1997).
Two years later, a new banking law, the Banking Act no. 4389 effective on December 12, 1999 however began to recognize the Islamic banks as one component of Turkish banking system which then comprised three different kinds of banking: commercial banks, investment and development banks, and interest-free banks. Before the 1999 law, the Islamic banks have been continuously regulated by the special legislation of 1983 decree by which the Ozal government first allowed the establishment of Islamic banks in Turkey. Due to the 1999 law, the Islamic banks could be officially integrated within the banking system, and the IMF played an important role in implementing this law as an effort of the Turkish financial reform (Turkish Daily News, February 21, 2001). Regarding the 1999 law, the chairmen of Islamic banks expressed their overall satisfaction about “protection by the law even though it did not bring very much” (Can Akin Caglar, the executive board chairman of the Faisal Finance House, Turkish Daily News, July 22, 2000) and “rescue from the previous system” (Yunus Nacar, the chairman of Anadolu Finance House, Turkish Daily News, July 15, 2000).
Nonetheless, the Islamic banks still could not be a member of the Banks Association, and thus they were not included in the deposit insurance fund and would not receive state guarantee on deposits as other conventional banks did. Although investment and development banks with more and less 1% of market share and foreign banks with around 1.5% of market share enjoy the membership benefits of Turkish Banks Association, the Islamic banks with about 3.5% of market share in the total banking system’s deposits could not. Hence, when their licenses would be canceled, the Islamic banks would not be handed over to the deposit insurance fund, but be liquidated.
A new banking law, the Banking Act no. 4491 effective from May, 2001 however provided the Islamic banks more secure positions and the legal arrangements they demanded. This law was implemented largely by the suggestion of the IMF and World Bank in the process of financial sector reform that the Islamic banks should be transformed into the current banking system and be guaranteed by necessary legal arrangements in order to avoid unfair competition, which overlapped with the demands of the Islamic banks. As a result, the Islamic banks could be guaranteed by the deposit insurance fund of the government, and liquidation would be more difficult than earlier. Also, they established their own public and legal association “the Special Finance Institutions' Union (Finansbir)” as a banks’ union.
Islamic banking was first introduced to Turkey in 1985 after the government of Prime Minister Turgut Ozal passed a special legislation on interest-free banking, the Decree no. 83/ 7506 issued on December, 1983. The goals were two folds: first, it is to bring into the economy all funds that oppose to interest and thus do not go into the conventional banking system, including foreign exchange kept under pillows and jewelries of wives and daughters. Second, it is to develop economic linkages to the oil-producing Arab states and to attract a fair amount of the Gulf capital which also avoids interest-paying financial institutions. By encouraging the Islamic banks or “the Special Finance Houses”, Ozal cemented his ruling coalition of the center-right by developing domestic political counterbalance to the secular left, which he was seeking to destroy to help paving the way for structural adjustment (Henry 1996).
Similar to other Islamic banks, the Turkish Islamic banks also offer their customers profit-sharing proceeds instead of interest and charge borrowers participation-sharing instead of loan interest. Thus, the banks operate two types of accounts to collect funds from their depositors. One is “current accounts” that do not entail any return in any form and receive conventional services such as check book, money transfer, and documentary collection. The second and most popular one is “profit-loss sharing participation accounts” that can be opened in US dollars, Euro, and Turkish lira for a minimum of thirty days. The accounts can be opened by signing a “contract for participation in profits and losses” and in the name of depositor or anonymously. The holders of accounts share both the profits and losses as a result of investment of these funds. At the end of the investment activity, profits are shared between the banks and account holders, and the banks could get a maximum of 20% of the profits. After the deduction for the banks’ share from the accruing profits, the balance is paid to the holders prior to maturity provided. Not surprisingly, the profit-loss sharing participation accounts are the major earning assets of the banks constituting around 85-90% of the total funds collected by the Islamic banks than the current accounts (Buyukdeniz 1995, Ozsoy 1997).
The first Islamic bank was the Al Baraka Finance House established in February 1985 followed by the Faisal Finance House two months later. These two Saudi-Turkish joint ventures represent Islamic banking’s two principal transnational networks, Sheikh Saleh Kamel’s Al Baraka group and Prince Mohammed al Faisal’s Dar al Mal al Islam. Korkut Ozal, Prime Minister Turgut Ozal’s younger brother has a close business relationship with Sheikh Saleh Kamel, the main shareholder of the Al Baraka Finance House and introduced him to Turgut Ozal. Meanwhile, Prince Mohammed Al-Faisal, the main shareholder of the Faisal Finance House sold the bank to the Kombassan Holding in 1998, which resold it to the Ulker Group, a leading food producer with 22 companies in 2001. Sabri Ulker, the owner of the Ulker Group was one of the founding shareholders of the Faisal Finance House possessing now 97% shares, and the name of finance house was changed into the Family Finance House. Another Arab capital-financed bank is the Kuwait Turkish Finance House founded in 1989, a joint venture between the Kuwait Finance House and Turkiye Vakiflar Bankasi. Vakiflar is a small public sector bank with historical ties to Turkey’s religious endowments.
As for locally-financed Islamic banks, Turkish private investors established three banks: the Anadolu Finance House in 1991, the Ihlas Finance House in 1995, and the Asya Finance House in 1996. The Anadolu Finance House is owned by the Istikbal Group, the leading furniture manufacturer in Turkey.(The Istikbal Group began its production and marketing activities in 1940s. The main companies of the Group are Merkez Celik company, Istikbal Mobilya company, Boytas Mobilya company and Hes Hacilar electric company. The first three companies focus on manufacturing home textile and furniture while the forth one produces telecommunication and electric cables or wires. In 2000, the export volume in these four companies exceeded about 35 million US dollars (Anadolu Finance House 2001)
The owner of the Ihlas Finance House is Enver Oren, the owner of the Ihlas Holding covering divergent sectors of industry and focusing on a media sector with ownership of daily newspaper Turkiye and television channel TGRT TV (Bugra 1999). The Asya Finance House is owned by more than 200 partners from different industries. The chair man has several companies in a shipping industry serving also as one of the board of directors of Isik Sigorta, an insurance company affiliated with the Fethullah Gulen Community (Baskan 2002).
The Ihlas Finance House however, went bankrupt in February, 2001. The Banking Regulation and Supervision Agency (BRSA) revoked the license of the Ihlas Finance House, a subsidiary of media and industry group Ihlas Holding because the finance house faced acute liquidity problems. According to the BRSA, the funds were transferred to the companies of the affiliated group who used them to their own advantage, impeded it from working in a reliable manner, and had difficulties paying back to the Ihlas Finance House (Turkish Daily News, February 12, 2001).
During the late 1980s, the decree that allowed the establishments of the Islamic banks had given them a competitive advantage compared to other conventional banks. The decree reserved to the Prime Ministry the right to supervise them, and especially exempted the Al Baraka and Faisal Finance House from the provisions of the banking law. For instance, the Islamic banks were required to keep only 10% of their current accounts and 1% of their much larger profit and loss sharing participation accounts as required reserves with the Central Bank, whereas otherbanks lost the use of 10 to 15% of their deposits (Henry 1996: 125-6). Nevertheless, their market share in the total banking system’s total assets was less than 1% before 1990 and could not exceed 2% until 1994. Their market share of the total banking deposits also started to exceed 1% in 1990 and 2% in 1992.
During the Welfare Party (WP) and the True Path Party (TPP) coalition government period from 1995 until 1997, the Islamic banks might enjoy a relatively favorable climate. But in February 28, 1997, the National Security Council (NSC) decided to ban the coalition government due to Islamic fundamentalist stance of the WP and defined the Islamist capital including the Islamic banks as their supporters by agreeing to take a number of legal measures against the Islamic banks. Following the NSC meeting on Dec. 23, 1997 chaired by then State Minister Gunes Taner, the Islamic banks would not be allowed to open new branches and the “the privileges of interest-free banks would be abolished” (Turkish Daily News, December 30, 1997).
Two years later, a new banking law, the Banking Act no. 4389 effective on December 12, 1999 however began to recognize the Islamic banks as one component of Turkish banking system which then comprised three different kinds of banking: commercial banks, investment and development banks, and interest-free banks. Before the 1999 law, the Islamic banks have been continuously regulated by the special legislation of 1983 decree by which the Ozal government first allowed the establishment of Islamic banks in Turkey. Due to the 1999 law, the Islamic banks could be officially integrated within the banking system, and the IMF played an important role in implementing this law as an effort of the Turkish financial reform (Turkish Daily News, February 21, 2001). Regarding the 1999 law, the chairmen of Islamic banks expressed their overall satisfaction about “protection by the law even though it did not bring very much” (Can Akin Caglar, the executive board chairman of the Faisal Finance House, Turkish Daily News, July 22, 2000) and “rescue from the previous system” (Yunus Nacar, the chairman of Anadolu Finance House, Turkish Daily News, July 15, 2000).
Nonetheless, the Islamic banks still could not be a member of the Banks Association, and thus they were not included in the deposit insurance fund and would not receive state guarantee on deposits as other conventional banks did. Although investment and development banks with more and less 1% of market share and foreign banks with around 1.5% of market share enjoy the membership benefits of Turkish Banks Association, the Islamic banks with about 3.5% of market share in the total banking system’s deposits could not. Hence, when their licenses would be canceled, the Islamic banks would not be handed over to the deposit insurance fund, but be liquidated.
A new banking law, the Banking Act no. 4491 effective from May, 2001 however provided the Islamic banks more secure positions and the legal arrangements they demanded. This law was implemented largely by the suggestion of the IMF and World Bank in the process of financial sector reform that the Islamic banks should be transformed into the current banking system and be guaranteed by necessary legal arrangements in order to avoid unfair competition, which overlapped with the demands of the Islamic banks. As a result, the Islamic banks could be guaranteed by the deposit insurance fund of the government, and liquidation would be more difficult than earlier. Also, they established their own public and legal association “the Special Finance Institutions' Union (Finansbir)” as a banks’ union.
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