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Financial Distress And Bank Failure: Lessons From Closure Of Ihlas Finans In Turkey

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  • SYED ALI, SALMAN

    (Islamic Research & Training Institute)

Abstract

Islamic banks are expected to be more stable. In practice, however, some Islamic banks have shown signs of financial distress and few were forced to close their operations. What are the causes of financial distress for Islamic banks? To what extent these are unique or similar to those identified for the conventional banks? What lessons can be learned by the stakeholders of Islamic banking from the episodes of financial distress? These and other related questions are important academic and policy concerns for Islamic banking. The banking and financial crisis of 2000-2001 in Turkey provides a natural experiment to gauge the stability of Islamic banks and to analyze the channels and factors that can contribute to the their financial distress during a crisis. This paper utilizes this natural experiment by studying the factors that lead to the closure of one Islamic finance house in Turkey during which more than twenty conventional banks collapsed. The study draws some lessons for Islamic banks, their regulators, and other stakeholders in such institutions.

Suggested Citation

  • Syed Ali, Salman, 2007. "Financial Distress And Bank Failure: Lessons From Closure Of Ihlas Finans In Turkey," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 14, pages 2-52.
  • Handle: RePEc:ris:isecst:0056
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    References listed on IDEAS

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    1. Ahmed, Habib & Chapra, Mohammad Umar, 2002. "Corporate Governance in Islamic Financial Institution (Occasional Paper)," Occasional Papers 93, The Islamic Research and Teaching Institute (IRTI).
    2. Morris, Stephen & Shin, Hyun Song, 1998. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," American Economic Review, American Economic Association, vol. 88(3), pages 587-597, June.
    3. Ahmed, Habib, 2002. "A Microeconomic Model of an Islamic Bank (Research Paper)," Occasional Papers 54, The Islamic Research and Teaching Institute (IRTI).
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    5. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    6. Khan, Tariqullah & Ahmed, Habib, 2001. "Risk Management: An Analysis of Issues in Islamic Financial Industry (Occasional Papers)," Occasional Papers 91, The Islamic Research and Teaching Institute (IRTI).
    7. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-325, August.
    8. James Peck & Karl Shell, 2003. "Bank Portfolio Restrictions and Equilibrium Bank Runs," Levine's Bibliography 666156000000000077, UCLA Department of Economics.
    9. James Peck & Karl Shell, 2003. "Equilibrium Bank Runs," Journal of Political Economy, University of Chicago Press, vol. 111(1), pages 103-123, February.
    10. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
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    Cited by:

    1. Nabi, Mahmoud Sami, 2012. "Dual Banking and Financial Contagion," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 20, pages 29-54.
    2. Elsie Addo Awadzi & Carine Chartouni & Mario Tamez, 2015. "Resolution Frameworks for Islamic Banks," IMF Working Papers 15/247, International Monetary Fund.
    3. Mehmet Asutay, 2013. "The development of Islamic banking in Turkey: regulation, performance and political economy," Chapters,in: Islamic Finance in Europe, chapter 15, pages 213-227 Edward Elgar Publishing.
    4. repec:abd:kauiea:v:28:y:2015:i:2:no:1:p:3-42 is not listed on IDEAS
    5. Bourkhis, Khawla & Nabi, Mahmoud Sami, 2013. "Islamic and conventional banks' soundness during the 2007–2008 financial crisis," Review of Financial Economics, Elsevier, vol. 22(2), pages 68-77.
    6. repec:ibn:ijefaa:v:9:y:2017:i:12:p:278-290 is not listed on IDEAS

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