Islamic Banking

The underlying reason for this misperception is that the interest and profit share rates of both types of banking  charged from their customers who use funds and the interest and profit share rates distributed to the  account owners are very close to each other. The reason for this closeness can be explained as follows: Both types of banking operating in the same market and economy mostly meet the short-term financing / loan needs of the market, since the resources they provide from the account owners are short-term (average maturity of 35 days). Loan, interest and profit share rates are formed in the market in which they operate, and all conventional and participation banks provide funds according to the prices formed in the market.

Since the rates in the market are close to each other, the financing incomes from financing customers are also close to each other. Since the financing incomes are close to each other, the profit share rates and interest rates distributed to the account owners of both banking models are close to each other. Thus, both financing (loan) rates and participation fund (deposit) rates are close to each other.

In Islamic Banking, it is not necessary to look at the closeness of the rates, but the difference in fund collection and fund utilization methods (like the compliance with the principle of trade is halal, interest haram). In addition, due to the difference in method, the difference between the profit share and interest distributed by both types of banking to account owners can be obvious from time to time. This mostly occurs in the initial and final periods of the crisis.

As a result, the main criterion in comparing both types of banking should not be the interest and profit rate they provide from their financing customers and the profit rates and interest rates they distribute to the account owners, but the methods of fund collection and funding.

It is true that in housing and vehicle financings, there is a similarity between the two types of banking as the financing amount is paid to the seller and not to the customer. However, the payment of other banks to the seller is not related to their working principles, but to the fact that this is a healthier method. In addition, it is not an issue to be criticized for Islamic Banks in Turkey  to bring them closer to Islamic Banking due to a method applied by them, but it is a pleasing situation for Islamic Banks.

There are also legal differences between the two types of banking in housing and vehicle financings. First of all, the financing agreement in participation banks is regulated according to the purchase-sale procedure when the power of attorney process is included, thus financing process is harmonized with the interest-free principle, while it is arranged as a loan agreement in other banks. The purchase and sale transactions of the housing and vehicle financings of Islamic Banks are carried out by power of attorney principle.

While the earning arising from the cash or forward sale of a good is defined as "profit"; the earning from the forward sale of money is expressed as "interest". Conventional banks collect money from their account owners in return for the initial interest rate. In Islamic Banks, the owners of the collected funds are not promised a fixed income from the beginning, nor are they guaranteed the invested principal.

The other important difference between them is that there is no cash credit system in participation banks. (Except for karz-ı hasen and teverrük transactions in exceptional cases). The fund used in this way is used for its intended purpose, stimulates trade in the market, and thus many sectors from the manufacturer to the transporters benefit from this business. Since there is a good in return for the fund provided, its ability to be repaid increases. The economy is registered, and the government is helped to pay VAT of up to millions of liras. The profit to be received by the participation banks in the sale of goods is determined in the first phase and the customer knows how much installment to pay on which date. There is no change in the applied profit rates until the end of the maturity and the receivables are not requested back before their maturity. So there is no uncertainty for the entrepreneur. This is an important advantage for companies. Just as the profit earned by any wholesaler as a result of its activity is called profit, the profit obtained by participation banks is also profit.

In addition, excessively risky and speculative transactions involving interest and uncertainty are not allowed in any participation banking operations. Fields that are deemed harmful to the society such as alcoholic beverages, games of chance, weapons and tobacco products are out of participation banking operations' scope. Click to get more information.

The profit to be distributed to participation accounts opened on a maturity basis depends on the level of profit generated as a result of using the funds in these accounts. These funds are collected in TL, USD and EUR pools according to the currency type. The customer who wants to use a fund is financed by purchasing the goods that customer needs in advance and selling them in installment from the relevant pool, according to the currency and maturity group customer requested, and the profit arising from this transaction is distributed to participation accounts on a daily basis. The accumulated amount of profits distributed on a daily basis at the end of the term is paid to the customer as profit share.

It is by no means possible to announce the profits to be distributed in advance. Profit amount or rate cannot be known even one day before due date. Because the profits made are distributed to participation accounts on a daily basis and the total profit accumulated at the end of the term is added to the principal. The profit shares announced in the newspapers are not a table showing the profits to be distributed for the future, but the figures announced show the realized profit shares as of the given date and distributed by maturity groups. Consequently, these rates are announced in order to give customers an idea about the profit shares distributed in the past and to help them make future decisions.

Islamic Banks obtain most of their profits from financing through the purchase and sale of goods. To illustrate, after purchasing a good for 100 liras in cash, it makes 10 lira profit by selling it for 110 liras. The bank never sells the goods it buys for 100 liras for 90 liras. Therefore, it is not possible to lose from trading. The loss of the bank can only be caused by the inability to get back the price of the goods (the installments of the fund it has provided). Since the non-collection rate does not exceed maximum 3-4% of the total financing volume, the bank ultimately does not make a loss and distributes profits to the account owners. Therefore, the rate of 3-4 % only slightly reduces the profit to be distributed. For example 7.5% instead of 8%. However, in severe crisis periods (as in the 2001 crisis), when the non-collection rate of receivables rises to 10% or even higher, the profit rate to be distributed may decrease to lower levels.

In order for participation banks to complete their applications according to the principles of interest-free banking, "advisory committees" were established within each participation bank in accordance with the "Communiqué on Compliance with the Principles and Standards of Interest-Free Banking" issued by the BRSA. Products and processes of participation banks are approved by this committee. These committees, acting independently in their decisions but reporting to the Board of Directors, make the necessary examinations before the products of Islamic Banks are released to the market and express a compliance opinion. According to the Communiqué, Islamic Banks must fulfill interest-free banking compliance and supervision activities. In addition, in the eyes of the Islamic Banks Association of Turkey, "Center Advisory Board" whose decisions are binding for all participation banks was established. This board sets standards for products to be used by Islamic Banks and takes decisions on various issues concerning Participation Banks. These decisions and standards are binding for Islamic Banks. On the other hand, the Application III Department was established within the body of the BRSA in order to ensure that Islamic Banking is developed and that they operate in accordance with interest-free banking principles.