The term Islamic finance refers to a system of financing or financial activity that is consistent with Islamic rules and principles. The model outlined under Islamic finance is based on two main pillars: sharing profit and loss and the prohibition of charging interest. Several modes of financing are being used in Islamic finance practice, some of which could be considered similar to conventional banking products. However, the main rule dominating financial instruments in Islamic finance is the prohibition of recovering interest, which gives rise to the essential mode of financing based on the deferred sale of a commodity, that is, murabaha.
Murabaha, which was originally a contract of sale in which a commodity is sold on profit, has been modified for application in the financial sector and has become the single most popular technique of financing among Islamic banks all over the world. A murabaha transaction is completed in two stages. In the first stage, the client requests the financial institution to undertake a murabaha transaction and promises to buy a specified commodity after the bank acquires it. In the second stage, the client purchases the good acquired by the bank on a deferred payment basis and agrees to a payment schedule. So the murabaha transaction consists of two sales contracts, one through which the bank acquires the commodity, and the other through which it sells it to the client.
The murabaha form of financing is widely used by Islamic banks to satisfy various kinds of financing requirements. It is used to provide financing in a variety of diverse sectors (for example, in consumer finance, for the purchase of consumer durables such as cars and household appliances; in real estate, to provide housing finance; and in the production sector, to finance the purchase of machinery, equipment and raw material).
Turkey has been institutionally using Islamic finance techniques since the late 1980s through financial institutions known as special finance houses (özel finans kurumu), which became the participation banks (kat¦l¦m bankas¦) with the enactment of the Banking Act 5411 on November 1 2005. There are four participation banks operating in Turkey, whose activities are under the supervision of the Banking Regulation and Supervision Agency. Participation banks are authorized by the Banking Act to collect deposit funds from the public through profit-and-loss participation accounts and special current accounts. The profit-and-loss accounts could be considered a version of the Islamic finance instrument known as the mudaraba, where the bank uses funds deposited by account holders that are accumulated in a pool for specific business activities. Any profits earned are shared between the account holder and the bank, in proportion to an agreed ratio.
Participation banks mainly offer two types of financing. The first is murabaha, under which the funds are made available to companies in need of capital. The other is financial leasing, with terms similar to those offered by other leasing companies.
Apart from the institutionalized Islamic finance activities described above, a large number of syndicated loans in the form of murabaha have been made available to large Turkish companies such as Turkcell, Petrol Ofisi and Vestel in recent years. In these transactions, the companies were provided with syndicated loans in the murabaha form made available by credit consortiums consisting of financial institutions from the Persian Gulf region, led by the big players of the global financial market. Considering that rising oil prices cause considerable capital accumulation in the Gulf Region, murabaha syndications are a serious financing alternative for Turkish companies.