Islamic Finance

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Islamic Banks hold well over US {does not divide}700 billion in assets and are growing at over 15% p.a. Islamic Banking and Finance (IBF) involves wider ethical and moral issues than simply 'interest-free' transactions. Its advocates argue that these make it more economically efficient than conventional banking and promote greater economic equity and justice. To what extent, then, do actual Islamic Banking practices live up to the ideal, and how different are they from conventional banking?

More than 200 Islamic Financial Institutions (IFIs) are reported to have total combined assets in excess of US$ 200 billion with an annual growth rate estimated between 10 and 15%. The regulatory regime governing IFIs varies across countries. International organizations have been established to set standards that would strengthen and eventually harmonize prudential regulations as they apply to IFIs. The paper contributes to the discussion on the nature of the prudential standards to be developed.

We study a representative dataset from Turkey that identifies firm-bank connections. Banks in Turkey differ not only in size and nationality, but also in ownership and orientation (non-Islamic versus Islamic)-resulting in at least six distinct bank types. We estimate a multinomial logit of the choice by the firm of bank type. We document a strong correspondence between bank type and firm characteristics that is not always the same as has been documented so far for US datasets. For example, small firms engage large rather than small banks.

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While SMEs constitute the backbone of many economies, many SMEs have limited access to finance. Yet, banks in some countries are actively financing SMEs. This paper examines whether this is true in the case of Turkey, a G20 economy that has a significant SME sector. We study the determinants of banks' willingness to finance SMEs and banks' processing ability of SME financing portfolio in Turkey based on a unique quarterly small business panel data set of 40 commercial banks from 2006 to 2014.

This paper attempts to explain the dominance of asset side debt contracts in Islamic banks, even though many consider alternative Islamic joint venture (IJV) contracts to be the ideal Islamic financing mode. Theoretical models based on asymmetric information are used to argue that adverse selection and moral hazard alone cannot explain this phenomenon. The model is augmented with risk averse depositors to show that the emergence of asset side IJV could be deterred by Islamic banks' liability side.