Islamic finance has emerged over the last decade as one of the fastest-growing segments of the financial sector, gaining a lot of traction in the aftermath of the financial crisis. As a result, during global economic downturns, investors see Islamic banking as a safe haven. We will tell you everything you need to know about Islamic finance and how this system is carried out in Turkey.
What is meant by Islamic finance?
Islamic finance is a system that implements all types of financial activities and transactions following Islamic rules in the global economy as an alternative to conventional finance. The most significant distinction between Islamic finance and conventional finance is that Islamic finance derives interest from all transactions, which is considered non-halal. Money has no intrinsic worth in this system; it is only a medium of marketing.
Islamic Finance System
The bank must have information on where the client will spend the funds to allow customers to apply for funds, and some goods must be located directly in the business activity subject to the contract, according to the standard features of Islamic finance systems.
It’s a system in which the bank gives capital, and the consumer offers both capital and labor. The client contributes to the capital under this arrangement. Profits from the partnership are allocated according to the contract’s provisions. Losses are taken in proportion to the amount of money invested. Small and medium-sized firms frequently utilize this approach to finance themselves.
Mudarebe (Labor-Capital Partnership)
It is a labor-capital partnership; the bank provides the necessary resources for investment while the client contributes the work. The investment profit is allocated according to the contract’s conditions. If the consumer does not make a mistake, the bank will be responsible for any losses. The consumer is accountable for their own time, work, and expertise. This method is frequently used in trade finance.
Murabaha is a term used to describe a group of (Usuary Law). It is the most often utilized method. In this arrangement, there is a three-part contract. The client instructs the financial institution to procure the financing subject matter and sell it to the financing entity with the supplier financing subject matter. The financial institution charges a predetermined fee for this product and sells it to the consumer. The financial institution’s profit margin is established by interviewing the client, and the consumer is aware of the supplier’s pricing.
In a nutshell, it’s a sales contract calculated using the cost + profit margin method. In Turkey, this is the most prevalent financing mechanism used by participation banks.
Islamic Finance in Turkey
When unique finance houses were introduced in Turkey in 1983, Islamic finance in the banking sector gained legitimacy for the first time. Shifts in government priorities helped Islamic finance gain legitimacy in Turkey over time.
With Banking Law No. 5411 issued in the Official Gazette on November 1, 2005, participation banks, which are Islamic financial organizations in our nation, were incorporated in banking legislation under the term „Bank of Participation.“ According to the relevant law, participation banks can collect funds under the current and participation account names, and participation account holders share profit and loss from the bank’s operations.
Turkey reaffirmed its commitment by stepping up to play a pivotal role in the world of Islamic finance, particularly in the last decade. Recent events have also revealed that the future of this field is bright. The World Bank’s Global Islamic Finance Development Centre, for example, was established in 2013.
T.C. Ziraat Bankas A. Ş, Turkey’s largest state-owned bank, approved establishing a Turkish Islamic bank last year.
Following that, Vakfbank, a state-owned institution, received authority to launch a participation banking section. Türkiye Halk Bankas A. Ş. (commonly known as Halkbank), one of Turkey’s central state-owned banks, has stated that it has gained authorization from the Turkish Banking Regulatory and Supervisory Authority to open an Islamic bank division in Turkey with a share capital of TRY 1 billion.
Finally, investors will recall that Turkish lender Kuveyt Turk announced in July 2015 that it would open Germany’s first fully-fledged Islamic bank, a first step toward providing sharia-compliant retail banking services throughout the continent.
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