FINANCIAL DISTRESS AND BANK FAILURE: LESSONS FROM CLOSURE OF IHLAS FINANS IN TURKEY
Islamic Economic Studies, 2007, vol. 14-2, 2-52
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.
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