June 2, 2015

Bank Asya and the seizure of private property

Abdülkadir Civan

I have been teaching a public economics course for 10 years.

In this course, I cover the interactions between market mechanisms and governments. Usually, in the first week of the semester, I discuss the economic rationale for the existence of governments. I emphasize that the main role of governments is “to provide the rule of law and to protect private property.” When I say to protect private property, I usually mean to protect it from other private entities. I implicitly assume that governments would not grab the property of the citizens. I discuss illegitimate expropriation only briefly.

According to many Islamic scholars, private property is strongly protected in Islam. In fact, those who die while they are protecting their property are presumed to be martyrs. However, throughout history many states in Muslim nations have violated private property rights. Economist Timur Kuran of Duke University suggests that shortly after the death of the Prophet Muhammed (Peace be upon him), government officials started to implement tax practices which distorted the Islamic principles. Not only have non-Islamic taxes been levied, but expropriation practices began to be used frequently. Expropriation was seen as a source of government revenue and also an instrument to punish social, religious and political opposition. Dr. Kuran suggests that wealthy Muslims have utilized the strong protection provided for waqfs (a charitable trust or foundation for the needy in Muslim communities).

According to Islamic law, waqf property cannot be expropriated under any circumstances. Wealthy Muslims who feared the seizure of their assets often established waqfs. However these waqfs were not functioning as charitable foundations but as regular companies, their sole role was to protect the assets and provide for the smooth inheritance of the estate by the descendants. Though, I should mention that the majority of waqfs were genuine charitable foundations. Dr. Kuran claims that the number of seemingly charitable waqfs increased with time. He states that those waqfs absorbed the accumulated capital in Muslim nations. If the fear of public seizure did not exist, the accumulated capital might have caused some version of the Industrial Revolution in Muslim countries. According to him, that is one of the reasons for the backwardness of Muslim nations. I am not sure I am entirely convinced by this argument, but surely it has some merit.

Why did I tell you about that arcane issue of Islamic history? Because recently, illegitimate expropriation practices have re-emerged in modern Turkey. The latest developments in Turkey have shown that a new threshold has been crossed in terms of the protection of private property. Last week, the administration of Bank Asya, one of the biggest Islamic banks of Turkey, was transferred to the Savings Deposit Insurance Fund (TMSF). The TMSF is the regulatory and public oversight committee of the banking industry in Turkey. It takes over the management of troubled banks. Bank deposits up to TL 100,000 (approximately $40,000) are guaranteed by the TMSF. In case of bankruptcy, the TMSF takes over the control of the bank's assets and liabilities. It manages the bankruptcy process, and if necessary, provides public funds to cover liabilities.

After the 2001 financial crisis, the TMSF managed that process for tens of commercial banks. Most would agree that it was very efficient and relatively fair during that process. However, the details of the Bank Asya case are very troublesome. Bank Asya is widely considered to be affiliated with the social opposition, Hizmet (or Gülen) movement. For the last two years, the Turkish government has been fighting with the Hizmet movement, utilizing every available instrument. It looks like the government was trying to bankrupt Bank Asya. First, many public corporations closed their accounts with Bank Asya; later, many public institutions (the tax agency, public insurance institutions, etc.) canceled their payment protocols with Bank Asya. President Recep Tayyip Erdoğan stated that “that bank has already gone bankrupt.” However sympathizers of the Hizmet movement made every effort to keep Bank Asya afloat. In fact, according to many indicators, Bank Asya is still one of the strongest banks in Turkey. About three months ago, the day-to-day management of the bank was transferred to the TMSF by means of an obscure technical issue. The bank oversight committee officials claim that many necessary documents were not provided to them by Bank Asya. During that three-month period, the bank was controlled by the TMSF and it announced a positive profit in the last quarter. However, last week total control of Bank Asya was transferred to the TMSF. According to the latest public statement, the TMSF is supposed to prepare to sell the assets of Bank Asya to other buyers. In a way, last week's move is very funny, because the management of Bank Asya was taken from the TMSF and given to the TMSF!

The TMSF is still making public announcements that Bank Asya is very strong and that it is neither insolvent nor illiquid. In short, the move has nothing to do with the technical aspects of the banking business but is instead the outright seizure of private property. In light of these developments, starting as of next year, I will devote more class time to debates on the public seizure of private property. I will emphasize that the main goal of the government is to protect private property from other private entities and also from leviathan of the government.

Published on Today's Zaman, 02 June 2015, Tuesday