Trusted Markets: The Exchanges of Islamic Companies
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Trusted Markets: The Exchanges of Islamic Companies GU¨L BERNA O¨ZCAN1 & MURAT C¸OKGEZEN2 1
School of Management, Royal Holloway, University of London, Egham, Surrey, TW0 OEX, UK. E-mail: [email protected] 2 Department of Economics, Marmara University, 34590 Bahcelievler, Istanbul, Turkey
In recent years, Turkey has witnessed a new form of corporate finance in which companies, commonly called ‘Islamic’, borrow directly from lenders without using any financial intermediaries. Trust among lenders and borrowers has initiated market exchange, secured deals and lowered transaction costs. This paper claims that the base of trust in direct financing for Islamic companies should be largely attributed to the self-interest of the parties rather than just to Islam or ‘shared values’. Here we do not see an individual calculation of ‘economic man’, as argued by neo-classical economists, but individuals embedded in relations within social groups and sharing ethics of money-based relations. Second, we illustrate that selfinterest based trust stems from the calculations of trusters using available information in the market about trustees. However, information asymmetry between borrowers and lenders in favour of borrowers has been a source of deep instability and abuse. Finally, the paper shows how groups have used the rhetoric of Islamic economic revival to expand the scope of transactions while trust eroded in favour of abusers. The anonymity came with thousands of investors who eroded the strength of reciprocity, surveillance and retribution in trust-based relations. This case study also illustrates that Islamic societies seek new solutions within capitalist economic systems to maximise their gains and they do not wish to be destined to live in poverty. Comparative Economic Studies (2006) 48, 132–155. doi:10.1057/palgrave.ces.8100073
Keywords: trust, Islamic companies, transactions costs, information asymmetries JEL Classifications: A10, A14, O10, O14, G14, P14, P52, Z12
¨ zcan & M C¸okgezen GB O Islamic Companies
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INTRODUCTION In recent years, Turkey has witnessed a new form of corporate finance in which companies, commonly called ‘Islamic’, borrow directly from lenders without using any financial intermediaries. The title ‘Islamic’ refers not only to the firms but also to the financial system and the business ethics within which both borrowers and lenders are bound together by a shared interpretation of Islam in economic principles. The main source of capital has come from local residents of conservative, small- and medium-sized Anatolian cities and Turkish workers abroad who invested their savings to purchase ‘share-bonds’ issued by the companies. The core principle of this form of borrowing rested upon the refrain from usury, which is considered prohibited for Muslims.1 Although this Islamic character of the system and its informal business nature has constantly being scrutinised by Turkey’s secular political regime, Islamic companies never suffered from lack of interest by small inves
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