The Development of Islamic finance in Turkey

Starr, M. , & Yilmaz, R. (2007) has notified that there are 3 foreign-owned finance houses began their operation in the 1980 while there are other 3 domestic houses entered market and their main sources of funds is profit and loss participation accounts. There are several types of products that Islamic bank offered to the society for example mudarabah (capital-labour partnership), murabahah (cost-plus sale), musharakah (capital-capital partnership), and ijarah (leasing). Among these asset-side product, mudarabah and musharakah are classified under equity-based while murabahah classified under debt-based (without interest). Revenue streams and value proposition constitute the main differences between Islamic banks and the business models of conventional.

The development of Islamic finance in Turkey can be highlighted in 1985 where in this particular year, the Prime Minister Turgut Ozal pursued the first interest-free institutionalized or known as Islamic banks. ‘Bank’ term was not used to distinguish these financial institution from conventional bank. Special Finance House were not entangled to the bank legal framework and were operated under the directives of Cabinet Resolution. After that, in 1991, as interest-free institutionalized were grown, Anadolu Finans was established and followed by, Ihlas Finans which was established in 1995. After a year, Asya Finans was established. The epic point in the development of these interest-free institution was from 1999 until 2001. In this timeline, there were financial crisis happened and affected the operation of more than 20 banks. According to Alpay (2007) he said that 20 banks which had affected by the financial crisis were transferred to Savings Deposit Insurance Fund due to state warranty on the deposits at conventional banks. In addition, Ihlas Finans went bankrupt and leaving a huge void in the Islamic banking sector in Turkey. While in 2001, Turkish business was acquired Faisal Finans and changed their name to Family Finans.

Orhan (2018) has noted that as for now, there are 5 Islamic banks and 47 conventional banks were placed in Turkey. El-Gamad, Inanoglu (as cited in Orhan, 2018) argued that there are two reasons for the allowance of the operations of special finance houses in Turkey, firstly, the reason is to encourage people in savings, especially Muslim who did not want to deal with interest and conventional banking while the second reason is to attract the inflow funds from Gulf countries such as Bahrain, Iraq, Oman, Kuwait, Saudi Arabia and United Arab Emirates. Operation of Special Finance House can be classified in two categories which are corporate service and retail service (Alpay, 2007). Under corporate service, there are 3 types of service which are leasing, financial support for production and profit and loss sharing funds. Furthermore, retail service is a service that offered individual customers different type of consumer financing. Through retail service, Special Finance House will purchase goods and add certain profit margin, after that they will sell them to their customer on payment by an installment for example real estate, automobile, computer, house equipment and office equipment. Retail service were performed based on interest-free banking principles and no cash credit were given.