Islamic banking an antidote to crises should be promoted

The global economy would not have to wrestle with so many ongoing problems had the world adopted and effectively used Islamic financial tools, which are relatively more resilient against shocks, Finance Minister Mehmet Şimşek declared at a meeting in İstanbul on Saturday.

Şimşek was speaking at a symposium on Islamic finance and the participation banking model. Underlining that the importance and role of participation banking in maintaining stable economic growth have so far been underestimated by many, the minister attributed the recent problems in world markets to such ignorance.

“We can all see from today’s crisis that an economic system supported by a banking model that gives priority to interest income is vulnerable to external shocks. … Participation banking, on the contrary, is a reliable model that contributes relatively more to the non-financial economy. This makes the real sector stronger,” Şimşek said.

Participation banks have not transferred money to what he called “speculative fields” but rather shared the profits directly with their customers. With assets totaling $30 billion, participation banks extend 84 percent of this money as loans while other banks in Turkey only share 63 percent of their assets. According to the minister, if Turkey is to consider the reform of its financial structure, participation banking would be the best model to adopt as it will increase the country’s resilience against external shocks.

Şimşek said many countries have now started to benefit from Islamic financial tools in their own financial systems. He emphasized that the Islamic banking model should be promoted. In meeting such preferences as not paying or being paid interest on loans and of not getting involved in any kind of investment in companies that sell goods or services considered forbidden in Islamic teachings, Islamic financial institutions have grown considerably over the years not only in Islamic countries but also in the West.

Şimşek underlined that such leading Western banks as Citibank, HSBC and Goldman Sachs have also made a place for this model in their systems. “We need to change the negative image of participation banking in Turkey for the better. … This will benefit not only the country’s economy but also entrepreneurs,” he opined.

Şimşek said the capital adequacy ratio (CAR) of participation banks in Turkey was 14.3 percent as of September, an encouraging figure, and added that the share of Turkey’s four participation banks in total bank assets reached 4.4 percent in September — an 80 percent rise over the figure in 2005.

Additionally showing participation banks’ growing appeal to Turkish customers, the number of such banks increased to four with 685 branches across the country from only two banks with two branches in 2005. The participation banks, like all other banks in Turkey, operate under the prevailing Turkish Banking Law, regulated and supervised by the Banking Regulation and Supervision Agency (BDDK).