The problematic regulation of participation banking

Participation banks in Turkey (otherwise known as interest-free banking, Islamic banking) earn their income from three types of transactions: usury /muraabahah, participation/mushaaraqah and leasing.

The most applied among these (over 90 percent) is the option of usury "in the name of financial support". While participation is the collaborative work of the bank with the client investing money in it, leasing means that the bank is renting out the property or service (for example that the bank rents for itself) to the client so that he or she can possess it at the end of a period.

The credit card that the participation banks issue by definition of these banks must not be "credit card" but an "agent or bail card".

The card holder as the agent of the bank must buy the property from the bank, as soon as the bank is informed on the acquisition, it must sell it to the client either in advance or in a fixed term. The cards must be regulated in this way.

The more problematic transactions are usury and leasing.

According to the current regulation, leasing by definition does not fit for trading or renting. If the bank acquires a property and rents it out, as long as its relationship with rental applies, it must be the duty of the bank to assure the property insurance, loss without injury, and the mending in case of ageing. However, this is not the regulation. If the bank has sold a property to the client, in that case it cannot demand any rental which it has been receiving it so far.

As for usury (financial support), the problem here is clear and certain (incompatibility with the Islamic Jurisprudence). The transaction is operated by the current regulation as such:

The client applies to the bank and the bank sends a form of order to the client who is willing to acquire the property. In this form, it states a proposal as such "Sell this property to this person and I will pay the price". The firm operates it and informs the bank on it, thus the bank charges the client with debt by putting an additional fee on the price he or she paid.

When applied based on the written regulation as it is, it will not be permissible in terms of Islamic jurisprudence; because the client"s debt is then paid off but either in short or long term more amount is collected from him or her.

When this law was passed, the most used transaction that the participation banks apply became impermissible in terms of Islamic Jurisprudence. A resolution was sought by Islamic scholars and – even though it was not in the law – the oral and written "procuration" method was proposed between the client and the bank. Accordingly, the bank will give the procuration to the client so that he can "acquire the property in the name of the bank and then acquire it from the bank for himself".

This formula made the transaction permissible but because it was incompatible with the regulation it was not obligatory, also employees could act negligibly on the issue.

We have written on this repetitively as such "Please review the regulation of participation banks in terms of interest-free principle and change the inconvenient articles and on this basis, start the double billing application, have the bank send an invoice when the agent client acquires the property and when the bank sells it, have the client send an invoice, adjust the tax status that gives way to competition". However, all fell on deaf ears and no one implemented it.

We are willing and supporting these banks to maintain and wishing success and expect the glitches mentioned above to be corrected without delay.