Islamic Finance in a European-Based Legal Regime
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ISLAMIC FINANCE IN A EUROPEAN-BASED LEGAL REGIME - THE CASE OF TURKEY -
ÖZGE TOSUN* Introduction
Prior to Turkey’s financial leap within the last decade, it’s of being a “hub” between Middle East and Europe1 or for some a “gateway” connecting different continents wherein legal and commercial perception was and is by far differentiated, had been less esteemed than supposed to be. Relying on the political scene of the region, said quasi-bridge peculiarity was emphasized as well as underlined conventionally in international relations and bureaucracy. The negative atmosphere wrapping its neighbors –to be specific civil wars, strikes and never ending violence in Iraq and Syria resulting in millions seeking asylum in Europe, Crimea’s annexation by Russia after a disputed referendum which triggered a global plunge in oil price,2 nuclear-based sanctions against Iran and finally Greece’s debt crisis and its bail out- brought Turkey one step further and made it so called “relatively a safe port” in storm. Needless to say Fed’s reluctance to hike interest rate kept Turkey vacuuming foreign but mostly Qatar and Saudi entrepreneurs’ capital investment(Some suppose 9/11 attacks were the threshold of Arab investors leaving American markets). Long term tourists from Gulf-Region and as the outcome of rapid growth rates, escalation of purchase power and prosperity in conservative citizens were one of the major reasons of rising Islamic Finance in Turkey. Islamic Banking or in other words banks operating in accordance with sharia standards are main instruments to serve and fulfill mentioned type clients’ needs. While conventional banks make money by lending money at rates higher than it cost and collect deposit from clients promising an interest rate in return, Islamic Banks deviate from said traditional way.3 This article will put forward the practice of Islamic Finance in a country
* Özge TOSUN, LLB (Istanbul University 2005), LLM (Istanbul University 2010 and Stockholm University 2012) PhD candidate at Istanbul University, Lawyer at Turk Eximbank. He is a member of YIAG and SIAC. 1 World Bank established The World Bank Global Islamic Finance Development Center, (GIFDC) in Istanbul and said entity is aimed to utilize Turkeys of being hub and help World Bank client countries take advantage of the rapid growth of financial assets that are compliant with Islamic law For further details please visit http://www.worldbank.org/en/events/2015/09/08/inaugural-annual-symposium-on-islamic-finance as of 13.01.2016. 2 According to some authors, petrodollar investors who owed their income to constant oil price sought a place without an interest revenue and Turkey had been putting painstaking effort into attracting foreign currency reserves. For the discussion please see; GÖNCÜOĞLU, Mustafa & KARAAHMETOĞLU, Mahmut, Islamic Finance and Capital Markets, pp. 14. Available at www.tkbb.org.tr last checked on 14.12.2015. 3 In some authors’ opinion, Islamic Finance has four fundamental principles which are interest-free transaction, avoiding speculation, recognizing the practice of alms(zakat) and avoiding operations supporting and 1 which adopted most of its regulations from Swiss, German codes or at least codified under the influence of those. Thus, contrary to comparative studies, as a case study, 4 standards of Sharia and its appliance peculiar to Turkey as well as Islamic Finance’s background, instruments, contemporary concerns in Turkish jurisdiction will have been observed.
1. The Banking System of Turkey
The chart below is the true banking system of Turkey and as a must of Banking Law Islamic Banks operate as participation banks and as defined under said Law mentioned banks may only collect fund through special current accounts and participation accounts. At first glance, it might be supposed that participation banks are the sole instruments as means of Islamic Finance, however considering so, might be misleading. In order to support domestic or overseas investments and foreign trade, Development and Investment Banks are entitled to engage in activities such as providing loans obtained from Institutions operating in accordance with the principles of Shari’ah. And since such loans requires a specific purpose, it is imperative that borrowers of Development and Investment Banks are obliged to ensure that their projects are in conformity with Sharia’ah standards.5
2. A Regulatory Overlook at Turkish Banking System consuming of goods and services that do not conform the Islamic view. Please see; Arslan, Bengul Gülümser & Ergeç, Etem Hakan, The Efficiency of Participation and Conventional Banks in Turkey: Using Data Envelopment Analysis, pp.156. Available at www.tkbb.org.tr 4 Astonishingly I have learned that a conference was held with the name that is almost identical to my study topic For the details of the conference please see; www.borsaistanbul.com/en/islamic-economics- conference/islamic-economics-conference-2014 as of 16.12.2015. 5 For instance in recent years Islamic Development Bank and Development Bank of Turkey had entered into a contract amounting to USD OF 220 million. For further detail please see; www.english.kalkinma.com.tr/development_bank_of_turkey_received_220_million_usd_long_term_loan.aspx last checked on 14.12.2015. 2 2.1. Regulatory Bodies
The order given hereunder has set according to duties of those bodies. Since this study is based on the appearance of Islamic Banking in Turkey, bodies such as Saving Deposit Insurance Fund -which insures and pays real persons’ savings deposits and participation funds in the credit institutions (to some certain amount which is as of today TL of 100.000) provided that such institution have difficulties in paying- will be out of the scope.6
2.1.1. Banking Regulation And Supervision Agency
Banking Law(No: 5411, hereinafter referred to as “Law”) which might also be regarded as the constitution of Banking System is the main source in Turkey and under article 82 of said Law, duties as well as structure and responsibilities of BRSA (Banking Regulation and Supervision Agency) are briefly provided. According to said article, BRSA is a public legal person with administrative and financial autonomy which independently performs and uses the regulatory and supervisory duties and rights assigned by said Law. 7 And BRSB (Banking Regulation and Supervision Board which is the decision-making organ of BRSA) has full power to grant permission of a Bank to be established in Turkey.
2.1.2. Capital Markets Board of Turkey
Capital Markets Board of Turkey is the regulatory and supervisory authority in charge of the securities markets in Turkey which is conferred power by the Capital Markets Law. (Law no :6362) Some of its duties are as follows; enhancing investor protection, adopting the norms of the international capital markets and fully integrate them into regulations, promoting and enhancing the effectiveness of both the supply and the demand side of the markets, promoting transparency and fairness in the capital markets.8
2.1.3. Participation Banks Association of Turkey
6 Please check the following link for further information; http://www.tmsf.org.tr/ last checked on 14.12.2015. Although some Islamic scholars have taken the position that the deposits can be insured but that the risk of loss must remain with the account holders and depositors should share the risk of loss in a collective fashion. See; Brown Jr, J. Robert, Secularism, Sharia, and the Turkish Financial Markets, Brooklyn Journal of International Law, Volume 40, Issue 2 pp.428, found at http://brooklynworks.brooklaw.edu/ last visited 04.01.2016. Due to the absence of an insurance to recover funds, collapse of Ihlas (the largest finance house) in 2001 could have resulted in collapsing whole segment after the withdrawal of deposits. 7 For detailed information please see; http://www.bddk.org.tr/ last checked on 14.12.2015. 8 For more information please check; http://www.cmb.gov.tr/ last checked on 14.12.2015. 3 Under article 79 of Law, while Deposit banks as well as development and investment banks are obligated to become members of the Banks Association of Turkey, Participation Banks Association of Turkey on the other hand emerges as the other public legal person which participation banks are obligated to be a member to. Aside from other public entities stated above, association is not a pure a regulatory body and compared to those, its actual task is to set moral principles, standards and ensure as well as sustain collaboration among members, prevent unfair competition and so forth.
3. Participation Banking
In order to broaden existing financial market and draw foreign capital, Islamic Banking were introduced under the name of Special Finance Houses (SFH) in 1985. Until adopting pioneer regulations specific to Islamic Banking in 2005, mentioned banks were subjected to same regulations as conventional banks were and SFHs promptly abandoned the term (financial houses) in favor of participation banks.9
Participation banks are foremost instruments in Sharia-complaint banking. According to article 48/2 of Law, together with ordinary loans, payment of all movable and immovable property and services fees of participation banks or the profit and loss sharing investments, immovable, equipment or property procurement or financial leasing or joint investments by financing documents in return for property, and similar methods are also deemed “loan”. Thus foregoing provision unambiguously defines/narrows participation banks’ operations.
Nevertheless, according to article 57 of Law, Banks (deposit banks in this case) are precluded from engaging in trading property and commodity for commercial purposes, participation banks on the other hand are fully authorized to execute transactions on property and commodity deriving from liabilities including but not limited to procuring property, equipment or commodity, financial leasing, profit or loss sharing investment, or activities of providing finance through joint investments.
9 Arslan, Bengul Gülümser & Ergeç, Etem Hakan, Impact of Interest Rates on Islamic and Conventional Banks: The Case of Turkey, (MPRA Paper No. 29848, 2011) found at https://mpra.ub.uni-muenchen.de/29848/ as of 05.01.2016. 4 4. Terminology of Islamic Finance Models Opted For in Turkey
Definitions listed below are underlined in the issuance of sukuk and inherently most preferred Islamic Finance concept and needless to say, assets subject to sukuk have to full Islamic criteria.
4.1. Sukuk
Sukuk is certificate that represents pro rata beneficial interests in underlying assets. The underlying assets generate their revenue by means of one of the financing structures discussed below and Sukuk holders are entitled to a share of such revenue. One may define Sukuk as means of tradable and non-tradable certificates and some may also define as papers representing financial obligations arising from trade and other commercial activities. Under Shari’ah permissibility of sukuk rests upon whether underlying asset is tangible and identified.
Should the assets are merely described but not identified it is not permissible to trade in the certificates as doing so would be tantamount to trading in debt.10
AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) on the other hand defines sukuk as “…certificate of equal value representing, after closing subscription, receipt of the value of the certificates and putting it to use as planned, common title to shares and rights in tangible assets, usufructs and services, or equity of a given project or equity of a special investment activity”11
In Turkey, issuance of Sukuk is regulated with the Communiqué on Lease Certificates (Hereinafter referred to as “Communiqué”) 12 And Communiqué introduced five certificates based on partnership(Mudarabah Sukuk), management agreement(Musharakah Sukuk), trading(Murabahah Sukuk), EPC (Istisna Sukuk -engineering, procurement and construction-)
10 Please see; http://www.istisna.kz as of 13.01.2016. 11 Ariffhidiyat, Ali, Islamic Law of Contracts, The Global University in Islamic Finance, pp.29. Also see; http://www.islamicfinance.com/wp-content/uploads/2015/06/Guide-to-structurings-sukuk-2015.pdf as of 16.12.2015. 12 Communiqué on Lease Certificates (III-61.1). For the full text of the Please see; http://www.cmb.gov.tr/apps/teblig/displayteblig.aspx?id=473&ct=f&action=displayfile as of 16.12.2015. 5 and ownership(Ijarah), contract or through combined use of those listed above by ALCs.13 According to article 12 of mentioned regulation ALC can also be incorporated by banks.14
4.2. Mudarabah (Silent Partnership/Labor-Capital Partnership)
Mudarabah is a way of profit sharing. As a brief definition, it is an agreement between a capital provider and an entrepreneur whereby Rabbul-Maal(Investor) contributes capital to the business which is to be managed by the mudarib (Working Partner/ Entrepreneur) and wherein investor and the entrepreneur are entitled to share the profit which must be distributed in accordance with a pre-agreed percentage based formula. 15 Since working partner puts only its efforts, losses to be borne by the investor unless a loss occurs as a result of working partner’s misconduct, fraud, negligence or breach of contractual obligations.16 And in this transaction working partner cannot be deemed guarantor in respect of profit as well as capital.17
4.3. Musharakah (Partnership Financing)
As opposed to mudarabah, musharakah is a joint partnership which sounds slightly a “fair agreement” and according to which both parties contribute capital in partnership and profits generated therein are shared in accordance with said agreement and speaking of sharing, losses are allocated in a proportion to the respective contributor’s share of capital. 18 In this model, PLS (Profit and Loss Sharing) mechanism is well furnished.19
13 Under the Communiqué ALC stands for capital market institution founded in the form of a joint-stock company solely and exclusively to issue lease certificates within the frame of article 61 of the Law. 14 In recent years the demand to Sukuk has remarkably increased and Capital Markets of Turkey started to deal with more Sukuk transactions than it used to, for instance it permitted a Sukuk transaction that was approved by Amanie Shariah Board. And in 2015, some of Turkish Shari’ah-compliant lenders applied to Capital Markets Board Turkey. Found at http://www.hurriyetdailynews.com/ last checked on 16.12.2015. And visit; Workshop on Participation Banking and Interest Free Financing please see; http://www.mutlu.av.tr/Dosyalar/file/CALISTAY%20RAPORU.pdf also http://www.amanieadvisors.com/ as of 06.01.2016. 15 Islamic Development Bank introduced a sub-version of Mudraba(Restricted) in which Mudarib is entitled to use the loan only in sectors previously specified. Available at http://www.isdb.org/mof/index.html#p=52 visited on 13.01.2016. 16 Please see; Aström, Zeyneb Hafsa, Risk Analysis For Profit And Loss Sharing Instruments, 2012 pp. 7 http://www.tkbb.org.tr/Documents/Tezler/Yukseklisans/thesis.pdf last checked on 14.12.2015. 17 Under article 8 of Communique partnership-based lease certificate was defined as lease certificates issued by ALC for the purpose of partnership in a joint venture. 18 Plaese see; http://www.istisna.kz/ last checked on 14.12.2015. 19 Some authors believe that PLS is the most preferred mode in Islamic Finance, please see, Warde, Ibrahim, Islamic Finance in the Global Economy, 2010, p7. In article 6 of Communiqué Management agreement-based lease certificates are defined as lease certificates issued for the purpose of transfer, of revenues obtained as a result of management of assets or rights owned by the originator in favor of ALC, also including the lease of 6 4.4. Murabahah (Cost-plus Financing/ Mark up Sale)
This is an agreement of sale of goods in which seller (Bank) reveals buyer the cost of goods and in which mark-up profit is included in the price. Goods subject to contract need not be concrete but should exist and together with sale contract been concluded, price is fixed. In the event of belated payment, seller is entitled to request penalty in order to be used for just charity purposes.20 Despite of being arguable and controversial among scholars due to cost, inherently mark-up profit are explicit and known by the parties which cast doubts in minds as to whether said transaction is different than interest earning or not, murabahah is also another way of Islamic Finance exercised in Turkey. 21
4.5. Istisna (Commission to Manufacture/Project Financing)
As a brief definition, Istisna’a is an agreement of sale whereby Buyer (The Bank) places an order for the commodities to be manufactured with a fixed price. Said price may either be lump sum or in installments then Buyer may extend finance to a firm that agrees to manufacture the requested object and to deliver it an agreed future date which is known as parallel Istisna’a.22 This time The Bank becomes Seller and by their very nature these two contracts are independent thereby there is no bond between rights and obligations of them. In a single Istisna’a, upon delivery of commodity(ies).23
4.6. Leasing (Ijarah)
It is a contract of letting on lease, under which the owner of an Asset sells a definite usufruct of the Asset in exchange for a periodic definite reward.24
them until the end of maturity, to ALC within the frame of provisions of the management agreement. 20 See infra note 76. 21 This is applied mostly in asset acquisition based products e.g. house financing, shop-house financing, vehicle financing, trade working capital financing. Please see; www.bankislam.com last checked on 14.12.2015. 22 Please see; Ahmad, Abdel-Rahman Yousri, Islamic Models of Finance and the Role of Sukuk, Islamic Finance: Instruments and Markets Journal pp.7. Communiqué defines Murarakah Sukuk as lease certificates issued to finance the purchase of certain assets or rights by ALC in order to be sold on deferred payment basis to companies described in the first paragraph of article 12. See article 7 of Communiqué. 23 Communiqué defines EPC contract-based lease certificates are lease certificates issued for the purpose of creation of works pursuant to an EPC contract to which ALC is a party as work owner. See art. 9. 24 Please see; http://www.isdb.org/ last checked on 14.12.2015. According to article 5 of Communique ownership-based on Lease certificates are lease certificates issued to finance the assets and rights to be acquired by ALC from originator in order to be leased to originator or third parties or to be managed in the name of ALC. 7 5. The Conflict of Turkish Law and Sharia’ah
The conflict between so called modern Turkish law and Shari’ah had been arisen after replacing “Mecelle” (The Medjella) 25 with Turkish Civil Code (Law no: 743) in 1926. Despite of Turkey’s denial, Ottoman is known to be its predecessor in political sense. And Medjella was the first codified version of civil rule of Islamic Shari'ah and was in force 1869 onward.26 In addition, for some authors Medjella was influential throughout the Muslim world and formed the basis of laws of Jordan and Kuwait27 and it is believed to represent the first attempt by any Islamic state to codify part of Shari’ah.28 Medjelle’s one significant difference is its of giving illustrations in articles. For instance one of the numbered articles that relates to money (article 787) exemplifies that if depository party spends the sum that was supposed to be kept, regardless of being improper and negligent, replacing with his own money instead at the time of return shall not relieve him from reimbursing other party for the loss of his money.29
Contemporary Turkish Law regime on the other hand is European-based and the answer of why Turkish Law is regarded so also lies in the reasoning of some codes. Turkish Law (private law in particular) has been influenced by European Law, for instance, according to the reasoning of Turkish Code of Obligations, Swiss Code of Obligations was opted for as a “main source”.30 And likewise, European directives were borne in mind during the codification of Banking Law.31
25 See; http://www.mecelle.com/ last visited on 08.01.2016. 26 Alshorbagy, Ahmad A., On the failure of a Legal Transplant The Case of Egyptian Takeover Law, Indiana International & Comparative Law Review Vol:22, No:2, 2012, pp. 241. 27 Colon, Julio C., Choice of Law and Islamic Finance (May 31, 2011). Texas International Law Journal, Vol. 46, No. 2, 2011. Available at SSRN: http://ssrn.com/abstract=1856351 pp. 432. 28 L. Esposito, John L., The Oxford Dictionary of Islam, Oxford University Press, 2003, pp. 199. Also see; http://www.oxfordislamicstudies.com/article/opr/t125/e1492 last visited on 08.01.2016. 29 Article itself on the other hand is as follows; “Should the goods are disposed or any loss accrues in their values as a result of improper and negligent manner of depository party, reimbursement is required”. İlhan, Cengiz, Günümüz Türkçe’siyle Meelle (Mecelle-I Ahkam-I Adliye) 2nd edition, 2014, pp.239-241. 30 http://www.kgm.adalet.gov.tr/Tasariasamalari/Kanunlasan/2011Yili/kanmetni/6098ss.pdf last checked on 14.12.2015. 31 https://www.bddk.org.tr/WebSitesi/turkce/Raporlar/Kitaplar/7960Bankacilik_Kanunu_yayin.pdf last checked on 14.12.2015. 8 Together with family and inheritance law interpretational discrepancy between Medjella and Turkish Law becomes unequivocally clear when interest is at issue. 32 As stated elsewhere, interest is one of the “not-alloweds” of Shari’ah33 but conventional banks’ core goal.34 During the codification of Medjella, whether on purpose or not, interest seems to have been omitted. Only under article 121, a rudimentary definition of a transaction that is known today as Karz was provided35. In Turkish legal practice, under Code of Obligations in force, the relation between a client/depositor and Bank is deemed “Karz/Qrz” (Loan Agreement).36 Under article 387 of said Law, unless specified otherwise in non-commercial loan agreements interest is prohibited, on the contrary in commercial loans, parties are
32 Under Medjella, limited number of articles such as 1088-1089 refer to family and inheritance law. Specifically conflicts in commercial transactions and inequality in witnessing between muslim and non-muslim necessitated the codification of Medjella. According to author, codifiers anticipated that among muslims Shari’ah courts were entitled to rule on disputes related to family and heritage and non-muslims would resort to so called religious community courts for the disputes wherein parties to transaction are non-muslim. Same author also states that In Ottoman’s multi-religious jurisdiction a unified family law relying on shari’ah would be unenforceable. See; Karahasanoğlu, Cihan Osmanağaoğlu, The Implementation of the Ottoman Civil Code (Mecelle) and its Significance in Turkish Legal History, Journal of The Center for Ottoman Studies, Ankara University, Issue:21,2011, pp.105 as of 09.01.2016 available at http://dergiler.ankara.edu.tr/dergiler/19/1682/17934.pdf and also see İlhan, Ibid, pp.329. Even in recent cases, Turkish courts keep ruling on invalidity of unfair heritage allocation where female heritors are given less or none. Needless to say mentioned void allocations are executed in accordance with Shari’ah. Decision of the 1st Civil Chamber of the Supreme Court, E2009/2826, K2009/6041. 33 Interest-related transactions are not illegal but void and unenforceable in Saudi Arabia. The Saudi Arabian courts and judicial tribunals, including the Board of Grievances, do not award interest in any manner or form. However, interest provisions in an agreement are severable, and a contract will not, therefore, be ruled invalid solely because it includes interest related provisions. See; http://www.saudilegal.com/saudilaw/02_law.html last checked on 14.12.2015. 34 While some conservative depositors who are consistently committed to keeping their financial transaction free of interest some depositors see participation banks as financial intermediary operated by practicing Muslims according to rules essentially identical to those of conventional banks and solely concentrated on the return they will be paid in the end of the day, hence interest rates obviously influence Participation Banks. As of today 5 Participation Banks operate in Turkey and competition has also to be carried out with conventional banks. In this regard participation banks must offer “interest rate-like” returns which is known as “profit share rates” in Islamic terminology which is also an actual interest in disguise. Notwithstanding it is not an interest- rate, but the term unlikely comforts some clients, on the contrary both type of banks offer same/similar rate of money to their clients in different names. To be specific, a state-owned conventional bank “Ziraat Bankası” has established the newest participation bank “Ziraat Participation” and rates they offer in different names are almost identical. Please see; http://www.ziraatbank.com.tr/en/Retail/DepositProducts/Pages/TurkishLiraTimeDepositAccounts.aspx and http://www.ziraatkatilim.com.tr/en/Pages/default.aspx as of 05.01.2016. 35 Mentioned provision’s translation is as follows; “ Karz is purchase of money with money, In Turkish it is called exchange.” See; İlhan, Ibid, pp.61. 36 Some authors believe that, Vedia(Agreement on Custody of Goods) may turn into karz if the depository of the goods (money in this case) begins to spend/consume rather than conserving it. And depending on the financial strength of its keeper, disposal of that sum without the permission of its owner will be deemed sinful. In this regard, since poor keeper will be in incapacity to turn the money, said disposal will be deemed a deliberate failure that is inexcusable under Islam. Turan, M. Fatih, Islam Hukuku Açısından Usulsüz Vedia Akdi, Jornal of Islamic Law Studies, Volume 15, 2010, pp. 423-424. 9 always entitled request interest even if it was not previously agreed. Islamic banks cannot issue loans except “Qrz e Hasna” which is interest-free loans37 however they may charge a commission.38 Some call this interest-free but commission-included lending “benevolent”.39
Speaking of Islamic Law, a Turkish author mentions a multi-tier solution. At first and if possible creditor should discharge the debtor from all his due debts, if not, for the convenience of the debtor, maturity should be postponed provided that the creditor sees the likelihood of payment. And despite of being solvent, depositor’s default is found tormenting by Quran. Under Shari’ah, nullity of additional and moral benefits is disputed, according to one author benefits are not deemed “interest” in terms of Islamic contractual law, by contrast they are incentive instruments devised to provoke debtor to act in a good manner. 40 Opposing view points out that any benefit attached to the debt is interest. 41 For instance, lending money on a condition that the debtor buys a meal in addition to debt is forbidden.42
One modernist approach states that the term of interest should stand for extraordinary rates or loan shark transactions and same opinion goes on expressing that using other’s money for a period without a cost is injustice and interest as a means of efficient investment as well as a penalty for those who exceed the maturity date, falls within the scope of Islam. According to opposing orthodox belief, any sum that obtained in addition to capital without presence of risk and labor is redundancy that is to say interest and barred in Islam. 43
37 Hanif, Muhammad Differences and Similarities in Islamic and Conventional Banking, International Journal of Business and Social Sciences Vol:2 No:2 February 2011, pp. 169. Please see; http://www.ijbssnet.com/journals/Vol._2_No._2%3B_February_2011/20.pdf last checked on 14.12.2015. 38 Visser, Hans, Islamic Finance –Principles and Practice 2nd edition pp.71. 39 Please see; Sabir & Akhtar & Ghafoor & Hafeez & Chaudhri & Rehman, International Review of Management and Business Research, Vol:2 Issue:2 2014, pp. 1039. Available at http://www.irmbrjournal.com/papers/1402557424.pdf last checked on 14.12.2015. 40See; Özdemir, Recep, General Structure of Trade and Obligation in Islamic Law, Journal of Academic Researches in Religious Sciences, Volume 15, Issue :1, 2015, pp. 257-258-259. Found at http://www.dinbilimleri.com/ as of 07.01.2016. 41 See; Topal, Şevket, Barriers before the passage of title in sales agreement under Islamic Law, Ondokuz Mayıs University Review of The Faculty of Divinity, Number: 12-13, 2001, pp.524. Available at http://dergi.ilahiyat.omu.edu.tr/Makaleler/356912423_200113220190.pdf last visited on 09.01.2016. 42 Çeker, Orhan, Mecelle’de Ele Alınmayan Üç Konu : Faiz, Sarf ve Karz, Selçuk University Theology Faculty Journal, Volume : 5, 1994, pp. 112. Found at http://ktp.isam.org.tr/pdfdrg/D00198/1994_5/1994_5_CEKERO.pdf as of 09.01.2016. 43 For the detailed explanation please see; Tok, Ahmet İslami Finans Sistemi Çerçevesinde Sukuk (İslami Tahvil Uygulamaları, Katılım Bankaları ve Türkiye Açısından Değerlendirmeler), pp.30. Please see; 10 Interest as may be defined as the remuneration to party who has been deprived from the money he previously deposited for a period of time, at some point differentiates from the definition brought by Islam. For instance, in the event of breach of pecuniary obligations, while Islam interprets the indemnities compensating the actual loss as “liquated damage”, Turkish Law regards this indemnification as “default interest”.44 However, according to one esteemed Turkish author, “default interest” is a sub form of “liquidated damage” in pecuniary obligations, therefore aside from terminological difference, the outcome assigned to mentioned processes by Law is identical. Furthermore, while in non-pecuniary obligations debtor is relieved from his obligation provided he proves of his being non negligent, in pecuniary obligations irrespective of whether debtor negligently or willfully defaults, he is obliged to pay the interest.45 And having said that interest is forbidden, intentional uncertainty and/or risk (gharar) exploiting of one’s ignorance (jahl) and transactions depending on chance or speculation (maysir) are explicitly prohibited.
5.1. Turkish Public Policy and Shari’ah Standards
At first glance, while Islamic Banks operate in Europe and mostly in England,46 inherently some may find topic of this study irrelevant, however, Turkey’s political, religious and even denominational heterogeneity and finally it’s Ottomanic legal background distinguishes it from a pure European jurisdiction and classifies it as a unique case.
5.1.1. Perceptual Difference of Public Policy
5.1.1.1. Is Shariah A Threat Against Secularism?
In some Supreme Court decisions, applying shari’ah to parties’ legal relation47 or willingness to establish the supremacy of Shari’ah regime within the country borders were deemed contrary to public policy and a unique ground to annul decree of the court of first instance.48 Similarly, Shari’ah and public policy conflict also transpired in political cases
http://spk.gov.tr/yayingoster.aspx?yid=992&ct=f&action=displayfile as of 16.12.2015. 44 Battal, Ahmet, Para Borçlarının Gecikmiş İfası ile İlgili Uygulamanın Tenkidi, Dicle University Law Faculty Journal, Issue.6, 1993. Available at http://w3.gazi.edu.tr/~battal/images/makale/makale5/Binder1.pdf 45 Oğuzman, Kemal & Öz, Turgut, Borçlar Genel Hukuku, 11th edition, Volume 1 2013, pp. 502-503. 46 See; infra note 73-74. 47 Please see; Decision of the 1st Civil Chamber of the Supreme Court, E2009/2826, K2009/6041. 48 Please see; Decision of the 8th Criminal Chamber of the Supreme Court, E2002/9667, K2002/10406. 11 where a party49 sought to introduce a regime based on Sharia and was claimed to violate principles of secularism and whereby said party ended up being closed down.50
Prior to wondering whether too much weight is being placed on this political case, it needs to be stated that, the meaning of Shari’ah was expressed in the reasoning and Turkish Constitutional Court defined it as “...a system of law applicable to relations between Muslims themselves and between Muslims and the adherents of other faiths.” 51 Furthermore the court considered that sharia, which faithfully reflects the dogmas and divine rules laid down by religion, is stable and invariable.52 And it stated in its judgment that “The rules of sharia were incompatible with the democratic regime. The principle of secularism prevented the State from manifesting a preference for a particular religion or belief and constituted the foundation of freedom of conscience and equality between citizens before the law.”
Apart from finance or contract law in Turkey, this time, public policy in democratic and secular regime caused the denial of Shari’ah.53 Notwithstanding that said party had won the most votes in elections and a place in government, European Court of Human Rights found arguments of Turkish Court “relevant and sufficient” 54 and unanimously upheld the award.55 However, prior to Grand Chamber’s ruling, while the case was heard at the Chamber of the European Court of Human Rights, dissenting minority opined that the dissolution of the Party was an excessive or disproportionate response to the allegations
49 To quote “Refah Partisi was established in 1983, and soon experienced success in local and general elections. In the Turkish general election in December 1995, Refah Partisi obtained 22 per cent of the vote and was the biggest in the Grand National assembly. On 28 June 1996, it came to power as the senior partner in a coalition government and in January 1997, an opinion poll suggested that it was likely to win 67 per cent of the votes in the following general election to be held four years later. On 16 January 1998, the Constitutional Court of Turkey ordered the dissolution of the party.” Please see Zand, Joseph & Keser, Hayri Democracy is One of The Main Features of the European Convention on Human Rights, Gazi University Faculty of Law Review Volume 17, Issue 4, 2013, footnote 177 pp.210. 50 For detailed information please see; Refah Partisi(Welfare Party v Turkey and also see; Dinler, Veysel Avrupa İnsan Hakları Sözleşmesi ve Siyasi Partiler. Available at http://eprints.sdu.edu.tr/143/1/TS00309.pdf as of 14.12.2015. 51 Please see; https://lovdata.no/static/EMDN/emd-1998-041340.pdf as of 14.12.2015. 52 Please see; http://www.icnl.org/research/journal/vol6iss1/special_5.htm as of 14.12.2015. 53 Turkish Constitutional Court held that Shari’ah would undermine democracy. Please see; Boyle, Kevin, Human Rights, Religion and Democracy: The Refah Party Case, Essex Human Rights Review Vol. 1 No. 1 pp.2. Available at http://projects.essex.ac.uk/ehrr/V1N1/Boyle.pdf as of 14.12.2015. 54 Please see; Turhan, Mehmet, European Convention on Human Rights and the Dissolution of Political Parties, Ankara University Journal of Faculty of Political Science Issue. 57-3, 2002, pp.144. 55 Please see; Karagöz, Kasım The Dissolution of Political Parties Under the Jurisdiction of The European Court of Human Rights and Examining the Case of Welfare Party According to the Venice Commission Reports Gazi University Faculty of Law Review Volume 10, Issue 1-2, pp.325. 2006. Available at http://webftpp.gazi.edu.tr/hukuk/dergi/10_13.pdf as of 14.12.2015. 12 against the applicants. 56 And similar approach had been taken in the dissenting opinion of Turkish Constitutional Court as well.57
Ironically, one of the dissenting justices (Mr. Haşim KILIÇ) then was appointed as the president of the same court and nevertheless in dissolution case of The Justice and Development Party58 which was filed on same basis, due to lack of vast majority59, his vote played vital role and case was dismissed.
In another religion-related case where banishing a Christianity propaganda-maker out of state’s territory was discussed, this time Council of State overruled court of first instance’s decree due to public policy reasons and found administrative decision as to exile proper and valid.60
As is seen, since religious matters believed to be fragile and sentimental and unlike Europe in a secular country where the vast majority is Muslim, abiding by Islamic rules have been allowed (for some “tolerated”) only to the extent required by the daily worship.61 Hence, enthusiasm for selecting Shari’ah had been believed to be “interference attempt into Turkish legal regime” by Turkish Judges and courts aimed at protecting secular values against unknowns of Islamic regime in the clash of Islam and Secularism.
However in the case above Turkish Courts which were supposedly biased against Islam, this time appeared as if they were guardians of Islam in the clash of Islam and
56 Boyle, Ibid, pp.6. 57 Ironically one of the owners of dissenting opinion then appointed as the president of the same court and when 58 The Justice and Development Party (Adalet ve Kalkinma Partisi) was founded in August 2001 and obtained 34.2 per cent of the votes cast and 363 of the 550 seats in the Parliament in elections in November 2002. The leader of the party was also a former leading member of Refah (Welfare) Party and despite of being an Islamic inspired government The Justice and Development Party ran a single government rather than coalition. In the case where AK Party was defendant although the accusations were identical and party had been accused of “introducing Shari’ah” however, this time unlike its predecessor, AK Party did not share the same “close-down” destiny as Refah Party did. In order to see the decision please visit; http://www.resmigazete.gov.tr/eskiler/2008/10/20081024-10.htm as of 14.12.2015. Also see; Boyle, Ibid, pp.2. 59 Under article 149 of Turkish Constitution decisions are taken by absolute majority. For the constitution please see; https://global.tbmm.gov.tr/docs/constitution_en.pdf last checked on 14.12.2015. For the dissenting opinion please see; http://www.resmigazete.gov.tr/arsiv/23266.pdf as of 14.12.2015. 60 Please see; Decision of the 10th Chamber of the Council of State, E1993/3535, K1995/4616. 61 In Refah Partisi v Turkey case, while arguing incompatibility of Shari’ah, Turkish Government observed that the Turkish population was more than 95% Muslim and that the abusive use of religious ideas by politicians was a threat to, and a potential danger for, Turkish democracy. The countries where Islamic fundamentalism was dominant considered Turkey, the only country in the world which was both Muslim and democratic. Please see; http://hudoc.echr.coe.int/eng#{"itemid":["001-59617"]} as of 14.12.2015. 13 Christianity. Said award may not be a milestone but a specific sign of moral standpoint of Turkish Courts and it gives relatively a clear image of what may take place in a minority’s religion-related case.
Speaking of Shari’ah, as of today inquiry may be whether applying Shari’ah as governing law to contracts dealing with Turkish financial transactions is valid and if so, to what extent. Two main issues peculiar to Shari’ah standards need to be observed. Essential anxiety is interaction of Turkish public policy and Shari’ah standards, related latter problem is, in the assumption of general Shari’ah standards do conform Turkish Law, then the trustworthiness of Shari’ah Boards’ decision and of course independence and impartiality of Board members.
5.1.1.2. Boundaries of Contractual Freedom and Implementation of Shariah
Prior to explain in more depth, contractual public policy, on what basis legal persons bear public policy in mind need to be stated. Turkish legal regime is code-based and its law provides parties a freedom of contract. For instance according to article 48 of Constitution of Turkey “Everyone has the freedom to work and conclude contracts in the field of his/her choice. Establishment of private enterprises is free.” Likewise, article 26 of Code of Obligations states that parties may choose the substance of the contract to the extent permitted by law.62 However this self-determination has some legal impediments. A contract shall not infringe matters provided for in the article 27th of Code of Obligations which are “imperative provisions of law, morality, public policy, individuals rights” and besides subject of contract shall be possible and not be subject to nullity.63 As is seen, legal system assigns a vital role to “public policy” and for a better perception as well as in order to construe vigorously, where a Turkish judge stands when the public policy is at stake will be articulated.
62 As will be stated below Quran allows transactions only if they are”halal”. One author states that, after some point unlimited freedom may harm its owner and people around it. Thus excluding thoughts, in any field unlimited freedom is accepted. Pigs, carnivores, dirt eating sheep/chickens, animals (vultures and crows) feeding from carcass, animals that are both dirty by its nature and allowed to be killed by hadiths, sexual intercourse trough contracts, wines and even trading grapes to wine producers are some leading examples of Haram. Please see; Baysa, Hüseyin, The Basic Dynamics of Restriction of Freedom in Selecting the Contract Subject in Islamic Law of Obligations, Journal of Islamic Law Studies, Volume 23, 2015, pp. 158-172. Found at http://www.islamhukuku.com/ as of 07.01.2016. 63 http://www.mondaq.com/turkey/x/170306/Contract+Law/Freedom+of+Contract last checked on 14.12.2015. 14 “ Public policy is the entire set of rules and institutions, which protects the fundamental interests of society and designates the fundamental structure of society from the political, social, economic, ethical and legal perspectives within a specific time period.” says Supreme Court in one of its decisions64. And it is a vague monolithic bloc of doctrine among Turkish authors.
A Turkish court may be predisposed if a case before it is believed to threaten either its adjudicative authority or infringe public order (such as tax) and should the court finds parties’ relation or the award itself meretricious or illicit, it may play the “public policy card”. Since its definition is broad and varies from one to another, public policy pops up as an advantageous and fertile legal ground.65 Courts have been keen on to utilize interpretational ambiguity in composing legal reasoning as they struggle to find a concrete or indisputable provision to rely on or refer to while revoking enforcement of a public policy-concerned contract or an award. As a result, court defeats a potential threat and fulfills its legal reasoning duty by creating a vagueness in which authors are stuck to define. Furtherly
64 Decision of the 13th Civil Chamber of the Supreme Court, E2012/8426, K2012/10349. Also See; Balssen, Emine Eda Cerrahoglu, Court of Appeals finds ICC decision contrary to public policy. Available at http://www.internationallawoffice.com/ as of 06.01.2016. 65 In U.S. an organization named APPA (American Public Policy Alliance) devoted itself to protect U.S. constitutional rights and said organization sees Shari’ah as a potential violation of liberties guaranteed by the Constitution of the United States or the public policies of the state in question. In that matter it drafted a bill titled the American Laws for American Courts (ALAC). The model ALAC act is supposed to prevent any infringement of foreign law (including Shari’ah) to U.S. public policy. In one author’s opinion, failure to enforce Islamic law hinders the economy, while businesses are allowed to contract in Islamic law, individuals will be barred from Shari’ah, besides it unfairly favors high-income earners over low-income earners. Author further states that constraining individuals, banks and government agencies from Islamic-compliant financing also means constraining their Freedom to contract, freedom of religion, and achieving the American Dream. A majority approval of unconstitutional policy does not make the policy constitutional. State courts should enforce Islamic-compliant financing even if the majority of its citizens oppose it, because contracting around the riba prohibition is an exercise of religion. Anderson, Matt, The Threat to Interest-Free Home Financing: The Problem of State Governments’ Prohibition of Islamic-Compliant Financing Agreements. Hamline Law Review Volume 37, Issue 2, 2014 pp. 336-342. Available at : http://digitalcommons.hamline.edu/hlr/vol37/iss2/4 Also see; http://publicpolicyalliance.org/issues-2/shariah-law/ Also visit http://www.shariahinamericancourts.com and http://www.actforamerica.org/alac last visited on 12.01.2016. Despite of above mentioned author’s optimistic opinion, from a broad perspective less Muslim people appear to believe in that futuristic “American Dream”. As is known one of the runners for 2016 presidency from republicans is Donald Trump and regardless of the final result of his candidacy, one Muslim woman’s kicked out of Trump’s rally, his Anti-Muslim policy as well as his chaotic and delusional commitments such as banning Muslims from America will be unforgettable. Some may call it freedom of speech but if that speech comes from a prospective leader of a nation it is something else. Visit http://www.telegraph.co.uk/news/worldnews/republicans/12052760/republican-debate-donald-trump- las-vegas.html visited on 13.01.2016 also visit http://edition.cnn.com/2016/01/08/politics/donald-trump- muslim-woman-protesting-ejected/ last visited on 13.01.2016.
15 Regardless of whether contract is governed by Turkish Law, public policy will still remain as an inevitable barrier. Should the parties engage in willful defiance of Turkish Law and opt for arbitration, this time the court of the jurisdiction where the enforcement is sought will be entitled to review the award in accordance with New York Convention and vacate if it finds the award against public policy.66 Notably, parties entering into a Turkish Law-related transaction bear a heavy burden. Law compels them to assiduously ensure either their contract is legitimate or the governing law they chose is not contradictory to Turkish Law.67
The question in mind is where do Islamic Finance contracts and Shari’ah stand in this relation? According to an esteemed Turkish author, Shari’ah might be governing law, however since it is a non-national law and interpretational approach to it differs in every jurisdiction and because of uncertainty and lack of a superior authority to prevent or rectify existing and prospective contradictions, when the authority renders an award, reliability and validity of the award will be disputable.68 Another Turkish author believes that Sharia rules are not applicable in Turkey and may only be important especially for foreign investors.69 Obvious distinction between authors’ views on Shari’ah brings us to the conclusion that there still exists a loophole in Turkish law.
It might be supposed that after interacting with Western legal systems in many years, Shari’ah law, in terms of finance and family law evolved into slightly a relaxed legal regime.70 One author states that Shari’ah finance law and historical reasons have changed. At the time Islam began to reach trade, exploitation of the weak was common and social standing was a
66 Under Act on Private International and Procedural Law (Act no: 5718), Should the foreign court decree is openly contrary to public order (article 54) or the arbitral award is contrary to public morality and public order (article 62), Turkish court shall not enforce said foreign award. For the translation of the code please see; http://www.lawsturkey.com/laws last checked on 14.12.2015. 67 As put by one author, from arbitration standpoint the recognition of an arbitration award will be attacked on public policy grounds in U.S. courts because of the rigid wall of separation between church and state, he went on saying that in one U.S. case arbitration would be conducted "in accordance with the Rules of Procedure for Christian Conciliation of the Institute for Christian Conciliation;" and court held that arbitration was a secular contractual right. The use of Shari’ah in U.S. arbitration has not also prevented the enforcement of decisions on public policy grounds and its application does not necessitate an unacceptable intrusion by the judge in pronouncing what is right or wrong in matters of worship. See. Colon, Ibid. pp. 427-430. 68 Nomer, Ergin, Devletler Hususi Hukuku, 20th edition, 2003, pp. 557. 69 For the views of Prof. Ercüment Erdem, please see; http://www.erdem-erdem.com/en/articles/prominence- of-sukuk-in-turkey-as-an-islamic-finance-instrument/ . Last visited on 30.1.2.2015. 70 One author points out three major differences between Islamic and Western Law. First Islamic law derives its legitimacy from God not from the enforcement power of the state, second it is interpreted by religious scholars rather than by state officials and finally Islamic law does not consist of general applicable, compulsory laws. See; Trumbull, Charles P. Islamic Arbitration: A New Path for Interpreting Islamic Legal Contracts, Vanderbilt Law Review Volume 59/2, 2006, pp.630-631. 16 contributing factor in order to reach a fair business and modernity has cured many of these problems.71 In this sense my belief is said quasi-evolution may only turn into a real- revolution as the discrimination and disproportionate penalties abolished.
Needless to state, unequal treatment to women, old-fashioned, severe rules and punishments aggravate reliability and in particular the reputation of Shari’ah Law. Islamic finance on the other hand seems to be less affected from these concerns and similar to Common Law principle a judge-made law (fatwa) forms the boundaries of Islamic law. Dilemma is, even in England (despite of establishing itself a hub for Islamic Finance activities)72 existence of Shari’ah organizations73 and legality of their rulings is highly argued74 and judge-made law is reluctant to recognize qadi-made law.
One author divides the doctrinal responses to modernity within Islamic Law into four broad categories (preservation of the medieval fiqh, Islamic modernism, a rejection of political expressions of Islam, and the Jihadist approach) and states Turkey as an amalgam of first three approaches.75
Speaking of modernized Islamic understanding especially in terms of Islamic finance, a brief parenthesis need to be placed. As a financial product, Islamic banks also issue credit cards in order to compete with their conventional rivals. Conventional credit cards offer loan, some are also free of interest during a grace period but most come with so called membership-fee.
On the view that Islamic credit card holder fails to pay in grace period, distinction among Turkish Shari’ah scholars’ views became explicit. One author believes that it is
71 Holden, Kelly, Islamic Finance, “Legal Hypocrisy” Moot Point, Problematic Future Bigger Concern, Boston University Law Journal, Vol:25:341, pp.358. 72www.gov.uk/government/uploads/system/uploads/attachment_data/file/367154/UKTI_UK_Excellence_in_Isl amic_Finance_Reprint_2014_Spread.pdf as of 30.12.2015. 73 Islamic Sharia Council and Shariah Council are acknowledged as mediation and arbitration bodies under English Arbitration Act. And finally Muslim Arbitration Tribunal operates within the remit of the Arbitration Act and the decision of the tribunal is binding on parties. Boyle states that in Canada, Muslims may recourse to arbitration for some personal issues where Shari’ah may be applied and secular courts may uphold tribunal decisions provided they are reasonable and do not violate the Canadian Charter of Rights. See; Boyle, Ibid, pp.15 and for England-based tribunals please visit http://test.islamic-sharia.org/, http://www.shariahcouncil.org/ and http://www.matribunal.com/ as of 30.12.2015. And further details might be found at http://www.independent.co.uk/news/uk/home-news/sharia-courts-in-britain-lock-women-into- marital-captivity-study-says-a6761141.html as of 08.01.2016. 74 http://www.independent.co.uk/news/uk/home-news/sharia-in-the-uk-the-courts-in-the-shadow-of-british- law-offering-rough-justice-for-muslim-women-a6761221.html as of 30.12.2015. 75 Powell, Russell, Evolving Views of Islamic Law in Turkey. Journal of Law and Religion, Volume 28, Issue 02, 2013, pp 479. Available at http://journals.cambridge.org/ as of 31.12.2015. 17 legitimate to use any credit card, even a conventional one, if one avoids the need to pay interest. According to other scholars, regardless of its form, belated payment would violate the Qur’anic ban on interest. Finally in one of pragmatic scholars’ opinion, card holders may exploit the absence of a late payment charge on purpose whereby creditor may endure foregone profit risk which also needs to be compensated.76 Source of Islamic law defer to the judgment of state officials and the penalty that the state specifies -which might well be financially- for late payment does not constitute interest.77
One author states that, under Shari’ah, Islamic compliant credit cards confront a number of limitations and imposition of penalty is one of those and in addition to this, it may also encourage unnecessary consumption and debt.78 However in Turkey, penalty to Islamic compliant credit cards seem to be valid.79 Same author also put forward that said credit cards cannot be used for sinful or “haram” purchase. And in order to prevent improper purchase, banks may either rely on business-by-business basis approach and prohibit using credit cards at bars, casinos or they may rely on self-enforcement if potential place sells mix of sinful and non-sinful goods at once. In this sense, some of Turkish academics state that no Islamic card issued in Turkey equipped with a filtering procedure which raises the question of whether the cards are inherently un-Islamic.80
Unlike Shari’ah law regimes, some of so-called sinful products (such as alcohol) are legal to be sold in Turkey and unlike Sweden, alcohol is not available in a specific store and finally impracticality of identifying each store that is involved in sinful product transaction lead us to self-enforcement. In this method card holders are supposedly aware of the difference between proper and improper transaction and they agree to avoid sinful purchases. Even tough further discussions held on whether buying pizza from Domino’s or purchase a song from itunes that praises wine is considered haram or not.81
76 In this case, one author states that profit must be donated to charity and in Turkey charity programs of Islamic Banks are shady. Please see; Robert Brown Jr, Ibid pp.426. and also see; Çokgezen, Murat & Kuran, Timur, Between consumer demand and Islamic law: The evolution of Islamic credit cards in Turkey, Journal of Comparative Economics (2015), pp.9, found at http://econ.duke.edu/uploads/media_items/cokgezen-kuran- final-pdf.original.pdf as of 05.01.2016. 77 For the Shari’ah authors’ views and discussion please see; Çokgezen & Kuran, Ibid, pp.8-9. 78 Robert Brown Jr, Ibid, pp.415-416. 79 Some Turkish Islamic compliant banks charge penalty or profit-sharing fees. For the rates please see http://www.kuveytturk.com.tr/fees_and_commissions_company.aspx and http://www.happycard.com.tr/hakkimizda/karpayiodemebilgileri.aspx as of 04.01.2016. 80 Çokgezen & Kuran Ibid, pp.8. 81 Robert Brown Jr, Ibid, pp.418, footnote 38-39. 18 Statistics show that in 2015, with its approximately 58 million users, 82 Turkey ranked 2nd place in overall number of credit card holders in Europe.83 While conventional bank credit card holders spent 90.996,10 million, participation bank credit card holders spent 1.652.78 million Turkish liras in 2015.84 In Turkish practice, consumers’ demand for credit card derives from avoidance of shopping in cash or in other words allowance to postpone maturity. However regardless of its substance, using a card for any means of credit and any sum given to the card provider in return under any financial name does not change its characteristic.
5.2. Sharia’ah Boards
Islamic Institutions have a body so called “Shari’ah Board” which performs a religious audit of accounts. AAOIFI and IFSB (Islamic Financial Services Board) are leading institutions filling the regulatory gaps. These institutions also publish standards and documents that can be considered to have legal and quasi-legal status. While the scope of issues deliberated by the IFA is wide and includes non-economic matters, the AAOIFI and IFSB focus on the rulings and guidelines related exclusively to the Islamic financial industry.85
Needless to say, the reason of Boards’ existence is to ensure whether bank operates in accordance with the Shari’ah standards, however some authors believe that their existence as well as functioning is disputable. One concern is about the religious validity of opinions, authors allege that despite of being appointed and numerated by General Assembly (for some General Assembly is under the influence of Board of Directors of the institution) prospective fatwas may not be trustworthy, on the contrary fatwas may be for sale.86
Another related fact is Shari’ah Board members of being appointed for numerous boards cast doubts in minds as to conflict of interest.87 Due to paucity of time, what they
82 Please visit http://bkm.com.tr/en/pos-atm-kart-sayilari/ as of 05.01.2016. 83Available at http://www.bkm.com.tr/wp-content/uploads/2015/07/25th-Year.pdf as of 05.01.2016. 84 Available at http://ebulten.bddk.org.tr/ABMVC/en/Gosterim/Gelismis# as of 05.01.2016. 85 Also see; Habib, Ahmed, Islamic Law, Investors’ Rights and Corporate Finance, Journal of Corporate Finance, Vol:12 pp. 382-383. 86 Güney, Necmeddin, Sharia’ah Governance in Islamic Finance and in Overview of the Debates, Turkish Journal of Islamic Economics, Vol.2 No.2 August 2015 pp. 63. 87 In Some jurisdictions, supervisory authorities have their own Shari’ah boards and they prohibit the members of the Sharī`ah panel from sitting on a Sharī`ah board of the market players in order to remove any perception of conflicts of interest. In addition, each member of the Sharī`ah board is restricted in terms of the number of Sharī`ah boards of market players that he or she can serve. See article 13 of IFSB Guiding Principles on Shariah Governance Systems for Institutions Offering Islamic Financial Services, also see IFSB Core Principles For 19 would draft might be perfunctory or unreliable.88 Therefore regardless of the substance of fatwas the path leading to fatwa is assumed to be prejudiced and improper. And cruel competition in the market compels fatwas to be varied and as a result, leniency becomes inevitable.89 According to a survey that took place in 1996, %56,6 of Islamic Finance Institutions(IFI) that contributed to survey find fatwas legally binding.90 By bearing the date and the outcome of the survey in mind, it might be stated that irrespective of being enforceable in their home jurisdictions, fatwas mean more than a guideline according to majority of IFIs.91
5.2.1. Role of Prospective Turkish Shari’ah Boards
In Turkey, in order to pave a religious service (solely on Islam) as well as for the avoidance of multipolarity in views, a state organ had been introduced in 1935 and Turkey’s former Constitution (1961) has devised this organ (The Presidency of Religious Affairs) as a Constitutional Institution.92 One of its main and existing objectives is to enlighten society on religion and administer places of worship in line with the principle of secularism, by staying out of all political views and thinking and aspiring to national solidarity and integration.
Presidency was also assigned the duty of following the discussions about religious understanding and practices in both EU member states and Turkey and give accurate information to the public opinion in the West on this matter. Ascribed mission was not a non-deliberate choice, in doing so, government aimed two things on transnational basis, one
Islamic Finance Regulation(Banking Segment) pp. 18-19, 35- www.ifsb.org last checked on 14.12.2015. 88 Güney, Ibid, pp. 64. 89 According to WARDE, this would also have been derived from religious and historical traditions and practices which I believe less linked. For detailed discussion, please see Warde, Ibıd, pp. 236 et seq. 90 Speaking of binding fatwas, in an Islamic finance-related case, between TID (The Investment Dar Company KSCC) and Blom (Blom Development Bank SAL) TID was required to invest funds through a wakala (agency) agreement which was expressed to be governed by English Law in a Shari’ah-compliant manner. However after failing its payment obligation, since its memorandum of association stated Shari’ah-compliant objectives as imperative, TID sought to argue its lack of capacity/ultra vires defense before the court even though its Shari’ah supervisory board had approved mentioned contract. As is known Shari’ah Boards ensure whether a transaction is in accordance with Islamic rules. However in the case at hand, counterparty was obligated to discuss Islamic conformity of a transaction at court which had already been reviewed and confirmed by the Board. Counterparties to Islamic finance transactions may no longer rely on Boards’ decisions not because of their being untrustworthy but being solely a guidance rather than binding in the eyes of courts. One author states that contracts may include “Waiver of Shari’ah defense” so that after the transaction parties may not claim illegality of the contract itself under Shari’ah Law. See; Colon, Ibid, pp. 416. Also See; Ariffhidiyat, Ibid, pp. 35 91 For a fatwa illustration on murabaha, please visit; www.albaraka.com/media/pdf/Research-Studies/RSMR- 200706201-EN.pdf as of 16.12.2015. 92 Some foreign authors unintendedly call this institution “The Directorate of Religious Affairs” However by the law 5634 that entered into force in 1950, institution has received its current name. Found at http://www.diyanet.gov.tr/en as of 31.12.2015. 20 was to make said institution a worldwide advisor and second one was to point out EU that as a Muslim and secular country its membership intention was embedded even to regulation of an Islamic Institution. Apart from Shari’ah Boards, this organ responds public-related inquiries rather than financial demands and in recent days, said institution dwells in the middle of a public uproar after issuing a fatwa93 which was then declared to be a result of cyberattacks.94
In Turkish Participation Banking practice, Shari’ah Boards are in charge to fulfill their clients’ Islamic conformity requirements. Members of said Boards are reputable religious scholars but assumed to be stuck between bank’s profitability and conforming Shari’ah rules. It is believed that boards’ confidential deliberations and decisions give rise to their lack of independence. 95 Furthermore under Participation Banks Association an “Islamic Law Advisory Council” composed of 5 chairs operates and each participation bank is represented by one chair. Unexpectedly, two banks appear to appoint the same counsel (Mr. Hayrettin Karaman) to the council.96
In order to prevent separate fatwas on the same matters and establish a unified regime Participation Bank Association is enthusiastic in founding a General Advisory Council.97 BRSA on the other hand divulged its intention to establish a fatwa board, however according to new watchdog Chief Mr. Mehmet Ali AKBEN, Participation Bank Association possibly be authorized to embody said board and due to lack of necessary provisions, Law is envisaged to be amended. Yet an ambiguity remains as to the title, functions and status of prospective Councils/Boards under Turkish Law.98
93 Presidency of Religious Affairs was vehemently accused of encouraging child abuse after responding to anonymous user’s question of “whether a father having sexual desire for his daughter would result in the cancellation of his marriage from a religious perspective.” In response fatwa posted on Presidency’ web-site was scandalous and it ruled that “For some, a father kissing his daughter with lust or caressing her with desire has no effect on the man’s marriage, the daughter’s mother is haram to such a man. Moreover, the girl would be over nine years of age,” Available at http://www.hurriyetdailynews.com/turkeys-diyanet-denies- responsibility-in-controversial-fatwa-on-fathers-lust-for-daughter.aspx? PageID=238&NID=93631&NewsCatID=393 last visited on 11.01.2016. 94http://www.diyanet.gov.tr/en/content/statement-by-the-supreme-council-of-religious-affairs %E2%80%A6/29443 last visited on 11.01.2016. 95 Some Turkish authors disapprove board members of serving on multiple boards. Consumers may expect that boards reach identical judgments regard to controversial matters. In practice, their opinions vary and that weakens consumer confidence in the Islamic legitimacy of Islamic banking. See; Çokgezen & Kuran, Ibid, pp.3. 96 Available at ahttp://www.tkbb.org.tr/kurumsal-calisma-komiteleri#1228 as of 11.01.2016. 97 Said aim was revealed in the Strategic Document of Turkish Participation Banking. Available at http://www.tkbb.org.tr/documents/TKBB-Strateji-Belgesi.pdf on the date of 11.01.2016, see; pp.51 onwards. 98 http://www.hurriyet.com.tr/bddk-baskani-acikladi-fetva-kurullari-geliyor-40016388 last checked on 14.12.2015. 21 As stated above, biased board members, multiple appointment, thus lack of independence and impartiality99 are growing concerns which Turkish legal regime highlights specifically in procedural law (expert witnesses100 and arbitration101). Boards on the other hand are assigned a non-adjudicative task, decisions of theirs to guide participation banks. Once Boards receive legal status, their decisions may function as guidelines or theoretically have the same legal affect as those expert reports have. So, when an Islamic finance-related case is heard before a court, said court will be obliged to at least review Boards’ decision and to some extent parties may set aside court’s award which is inconsistent with that decision.
With this prospective regulation, Boards’ status will be unique and exceptional. Obviously their decision will have legal capacity but members not be appointed by legal persons. Choice of council members will also be dubious, will they be elected or appointed? If appointed by whom? Appointed by an institution which is not neutral by its nature such as BRSA? Would it cast financial manipulation? In the assumption of opposing fatwas (domestic vs cross-border) on international transactions, which fatwa will supersede? And how will Turkish Courts recognize or enforce an award that encompasses such fatwa-conflict?
99 When it comes to independence of board members in other jurisdictions, Under IIFS regulations a Sharī’ah Board can only be deemed “independent” when none of its members has a blood or intimate relationship with the IIFS and no relation financial or otherwise exists. Also Article 42 of IFSB guiding principles state some examples thereby a member would be deemed lacking independence from the IIFS he or she is serving, and thus must be avoided: (i) a member of the Sharī`ah board being under full-time employment by the IIFS or any of its related companies for the current or during the last financial year; (ii) a member of the Sharī`ah board who has an immediate family member such as spouse, children or siblings who are, or who were during the last financial year, employed by the IIFS or any of its related companies as a senior executive officer; (iii) a member of the Sharī`ah board, or his or her immediate family member, accepting any compensation or financing from the IIFS or any of its subsidiaries other than compensation for service on the Sharī`ah board; or (iv) a member of the Sharī`ah board, or his or her immediate family member, being a substantial shareholder of or a partner in (with a stake of 5% or more), or an executive officer of, or a director of any for-profit business organization to which the IIFS or any of its subsidiaries made, or from which the IIFS or any of its subsidiaries received, significant payments in the current or immediate past financial year. Available at http://www.ifsb.org/standard/IFSB-10%20Shariah%20Governance.pdf as of 11.01.2016. 100 Under article 271 of Civil Procedure Law, Witnesses are requested to take an oath that they will serve independent and objective. 101 Prior to assignment arbitrators have to disclose circumstances that may give rise doubts as to their independence and impartiality. For domestic arbitration please see; article 417 of Civil Procedure Law and for international arbitration please see; article 7 of International Arbitration Law. Available at https://www.international-arbitration-attorney.com/wp-content/uploads/International-Arbitration-Law-Of- Turkey.pdf as of 11.01.2016. 22 As of today Turkish judges and prosecutors are appointed by High Council of Judges and Prosecutors of which president is Minister of Justice102, thus independence of adjudicators is also one of the argued topics. Speaking of council members who will be unable to rule, their appointment process will probably be out of concerns. Finally as stated elsewhere, in the event of a conflict between a domestic and foreign fatwa which is applied to same case before a Turkish court, that court -as may occur in most jurisdictions- will prefer its domestic legal products.
Conclusion
In recent years Turkey made a dramatic progress in terms of Islamic finance and country’s gates released to foreign investors. However Shari’ah law has always been one of the unspokens in this secular legal regime. While Middle-East’s borders and/or political doctrines are reshaped, Turkey stayed loyal to European Union regulations, but kept its financial interest in Arab investment.
In secular sense, parties’ freedom to opt for Shari’ah law has been penalized and the ones who suffered from those penalties now constitute majority of the parliament and whole cabinet. However, during their ruling, a ministry (Ministry for EU Affairs) was founded and dedicated solely to EU relations. In contractual sense, Turkish Law is slightly relaxed and legal doctrine is focused on the characterization of some certain Islamic terms rather than
102 http://www.hcjp.gov.tr/ last visited on 13.01.2016. 23 even discussing where those Islamic terms come from and which law governs the contract. However, some terms such as public policy is an impediment that is off-limits and yet ambiguity exists as to how legal regime may interpret it in different cases.
As the Islamic transactions increase, needs for comprehensive legal foundations will be more apparent and depending on the pressure from Islamic-compliant parties and Islamic-based regulations to be introduced, secular and Europeanized system may incur unforeseen detriment. And legal framework of Islamic Finance in Turkey remains as a “so far-so good” situation and conflicts are only at discussion level.
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