Islamic finance is a system which implements all kinds of financial activities and transactions seen as an alternative to the crisis according to the Islamic rules in the world economy. The most important difference of Islamic finance is to derive the interest which is accepted as non-halal from all transactions. So, in this context we are talking about a system that includes the principles of protection of business ethics in line with Islamic religion.
In this system, money has no value alone, it is only a mean of exchange. Therefore, in the traditional financing system, the relationship between the creditor-borrower is not apply in Islamic finance, there is a banker-client relationship. In relation to this partnership, the profits and losses of the investment subject to finance are shared.
Along with the prohibition of interest, the elements of the contract, such as the issue, the price, the delivery time, must be clear due to the Islamic rules. In addition, it is also prohibited in this system to be a shareholder for profit without any risk. Companies that trade in non-halal food or alcoholic beverages, tobacco and tobacco products, weapons, etc., can not constitute Islamic rules in the frame of Islamic finance.
Islamic Finance Systems
The common features of islamic finance systems are that in order to let application of funds by customers, the bank has information about where the customer will use this fund, and some products must be found directly in the business activity subject to the contract.
Mudarebe (Labor-Capital Partnership) : The bank provides the needed resources for investment, while the client puts the labor for the investment. Profit from the investment is distributed according to the terms of the contract. In case of loss, all losses will belong to the bank if the customer does not make a mistake. Time, labor and expertise are the responsibility of the customer. This system is often used in trade financing.
Müşareke: It is a system in which the financial institution provides capital and the customer provides both capital and labor. In this system, the customer contributes to the capital. Profit resulting from the partnership is distributed again according to the terms of the contract. Losses are undertaken in proportion to capital participation. This system is often used to finance small and medium-sized businesses.
Murabaha (Usuary Law) : It is the most commonly used system. There is a three part contract in this system. The customer orders the financial institution, the supplier, to obtain the subject matter of the financing and sells it to the financing entity with the supplier financing subject matter. The financial institution pricing this product and sells the customer with fixed rate installments. The profit margin of the financial institution is determined by interviewing the customer and the customer knows the price of the supplier.
Shortly, it’s a sales contract which calculates with “cost + profit margin” formula. This system is the most common financial method of participation banks in Turkey.
Other Islamic Financial Structures
Leasing : It is a system preferred by participation banks because of similarity to the conventional banks. It is used for the financing of real assets such as machinery and real estate. It is usually a lease contract that ends with the transfer of ownership.
Selem: It is formed when a futures contract is arranged. The entire cost of a particular good or service is paid in advance and is bought by the bank at the specified rate. This contract is the full payment of the contract amount at which the prerequisite contract is made. This system is generally preferred in Iran.
Exception: It’s a contract that allows the sale of non-produced goods. It is usually applied in agriculture and construction projects. The obligation of the two sides also arises in the future. The bank is in the agent position in this system.
Teverruk: A good is bought in installments and sold to another person in advance. Individuals who need cash generally prefer this system. Debt restructuring of participation banks also takes place in this concept.
Sukuk (rental certificates): This system, which is especially popular in recent years, is the approval of securities virtually. The basic rule in law is that securities are based on physical assets. The rental certificates, which are developed to increase financing in international capital markets for interest-free banking system, is different from traditional strocks. The person who purchases the rental certificate replaces the certificate issuing entity represented by the certificate and becomes the owner of the certificate. The entity issuing the certificate undertakes to make payments on the basis of the ownership rates to certificate owners regardless of the performance of the acts.
The rental certificates in Turkish law are regulated by Article 7 / A of Law No. 4749 on the Arrangement of Public Finance and Debt Management and provisions of the Certificate of Rent Certificates issued on the Official Gazette No. 28670 dated 7 June 2013. The rent certificates issued by the Undersecretariat of Treasury Asset Leasing Incorporation (HMVKŞ) are carried out through the sale of the immovables belonging to the public to HMVKŞ within the scope of Article 7 / A of the Law no 4749 on the Regulation of Public Finance and Debt Management. The issuance of rent certificates issued by other entities has been made with the “Disclosure of Rent Certificates” numbered III-61.1 published in the Official Gazette No. 28670 dated 07.06.2013 of the Capital Markets Board. With the disclosure, companies were provided with the opportunity to obtain capital from capital markets through export of rent certificates.
Islamic Finance Regulation in Turkey
Participation banks which are Islamic finance institutions in our country were included in banking legislation with the name of “Bank of Participation” with the Banking Law No. 5411 published in the Official Gazette on 1 November 2005. According to the related law, the participation banks can collect funds under the current and participation account name and the participation account holders share profit and loss arising from the transactions of the bank.