International Conference on Economic and Social Studies, 10-11 May, 2013, International Burch University, Sarajevo

Participation Banking in the Literature

Banking methods defined in this system called “Islamic Banking” in the international literature are methods such as various kinds of project partnership and others based on prohibition of interest (Moles & Tery, 1999, p. 304). Islamic banks in general referred to the three types of. (1) Development banks, (2) Islamic banks in special purpose, (3) Islamic Commercial Banks. Participation banks may categorize in Islamic Commercial Banks groups (Canbaş & Doğukanlı, 2007, p. 237). Islamic bank works as a trading concern and financial intermediary to perform interest-free activities purely according to principles of Sharia’h. It is a welfare organization that promotes business and trade activities by pooling the financial resources for the sake of profit and loss for mutual benefit (Ahmad, Humayoun, & Hassan, 2010, p. 8).

Participation or Islamic banks are not institutions peculiar to Turkey. All around the world, especially in Muslim countries, there are many financial bodies operating according to a similar system. Even if the system consisting of such kind of institutions operating on the basis of partnership of profit and loss is known as “interest free banking” or “Islamic banking” in the world, it is taken first as “special finance house”, and then as “participation banking” in the Turkish regulations.

The first modern experiment with Islamic banking can be traced to the establishment of the Mit Ghamr Savings Bank in Egypt in 1963. During the past four decades, however, Islamic banking has grown rapidly in terms of size and the number of players. Islamic banking is currently practiced in more than 50 countries worldwide. In Iran, Pakistan, and Sudan, only Islamic banking is allowed. In other countries, such as Bangladesh, Egypt, Indonesia, Jordan and Malaysia, Islamic banking co-exists with conventional banking. Islamic banking, moreover, is not limited to Islamic countries (Chong & Liu, 2009, s. 125-126).

But, when we look at the books of financial institutions generally we can’t see these institutions among the financial institutions (Rose & Marquis, 2009). (Burton, Nasiba, & Brown, 2009) (Mishkin & Eakins, 2009) On the other hand Islamic banks’ ability to withstand the global downturn has fuelled an expansion of Islamic finance around the world. Islamic banks have learned that customer loyalty and brand loyalty must be earned (Omar & Ali, 2010, p. 25).

The Islamic banking and finance systems in West will continue to grow in areas like Sukuk, Takaful, hedging funds, mutual funds, equity & asset management, corporate finance, wealth and asset management. These high street banks are far more accessible and popular, and all offer similar services. The main reason for the struggle is that, the Islamic bank is introducing an entirely new banking model into a country that has been built around an existing banking system that has been around for a long time (Malik & Malik, 2011, p. 184).

Related Legal Regulations in Turkey

Generally six types of regulations seek to enhance the net social benefits of commercial banks services to the economy(1)safety and soundness regulation, (2)monetary policy regulation, (3)credit allocation regulation, (4)consumer protection regulation, (5)investor protection regulation and (6) entry and chartering regulation (Saunders & Cornett, Financial Markets and Institutions, 2004, p. 379). We will deal with some of these regulations in this study for Turkey.

Deposit banks, participation banks, development and investment banks, branches of foreign banks, financial holding firms in Turkey, The Banks Association of Turkey (BAT – Türkiye Bankalar Birliği), The Participation Banks Association of Turkey (PBAT – Türkiye Katılım Bankaları Birliği), Banking Regulation and Supervision Agency (BRSA – Bankacılık Düzenleme ve Denetleme Kurumu-BDDK), Savings Insurance Deposit Fund (SIDF – Tasarruf Mevduatı Sigorta Fonu-TMSF) and their activities are regulated by the mentioned Banking Act. With the condition that the provisions of the related law are also valid for the banks founded according to special acts, the provisions of the Banking Act are applied. In case of absence of related provisions in the special act, general provisions are applied (Banking Act no. 5411, article 2).

Participation banks are supervised by Banking Regulation and Supervision Agency (BRSA). In 2004, the Uniform Chart of Account was formed for participation banks, and these institutions began bookkeeping as other banks, in accordance with the mentioned chart of account (Central Bank of Republic of Turkey, 2005).

Definitions Regarding Participation Banks in the Banking Act

In the 3rd article of the Banking Act no. 5411, there are important definitions showing differences and similarities between participation banks and other banks. According to these definitions, both deposit banks and participation banks consist two lower members of the higher definition of “Loan Institution”. There are also two banks associations defined in the Banking Act, one of which is the Participation Banks Association of Turkey, and other is the Banks Association of Turkey with a more widespread structuring.

The definition of “bank” in the Banking Act includes 3 types of banks. These are:

Deposit bank: Institutions operating mainly by accepting deposit and utilizing loan in accordance with the Act in the name and account of itself, and branches in Turkey of such foreign institutions,

Participation bank: Institutions operating mainly by collecting funds through special current accounts and participation accounts and utilizing loan in accordance with the Act in the name and account of itself, and branches in Turkey of such foreign institutions, and

Development and investment bank: Institutions operating mainly by utilizing loan rather than accepting deposit or participation funds, in accordance with the Act in the name and account of itself, and branches in Turkey of such foreign institutions.