H. E. President Abdullah Gül’s Speech At The “International Forum On Financial Systems” Held By SESRIC

Dear Chairman,

Distinguished Guests,

First of all, I welcome you, our esteemed guests who are participating from the four corners of the world, to Istanbul, which was the capital of three empires in the past.

When I look at the conference hall, I am pleased to see academicians, bankers, and economists each of whom are experienced and specialized in their fields.

I am also pleased to see this picture in the conference hall as an economist academician who served at the Islamic Development Bank (IDB) for eight years, and as a politician who played a role in forming the economic and financial policies of Turkey and now as a President.

I have seen former fellow colleagues today and this has refreshed my memories of the years I spent in the IDB; it brought back the excitement I felt in those days when I was a young economist.

Valuable Participants,

Esteemed Guests,

In recent years, the global economy has been going through turbulence. The root of the crises, which are felt more heavily in especially the developed market economies, lies in the problems in the financial system. As a result, the whole world has been influenced by the negative economic picture that has arisen

Therefore, it would be beneficial to discuss the policies and alternative financial methods from all dimensions and all points of views that can help the world come out of the global economic crisis.

In this vein, I have found the idea to organize an “International Financial Systems Forum” valuable and have taken the forum under my patronage as President.

I would like to congratulate the SESRIC and its partners IDB, Borsa Istanbul, The Banks Association of Turkey  and the Independent Industrialists and Businessmen’s Association (MUSIAD) that have organized this Forum with the participation of such esteemed guests.

Dear Participants,

For many years, the Islamic economy, banking and financial instruments have remained an area in which only theoreticians have been interested.

The studies carried out by some economists and academicians were either dealt with at a theoretical level or could not surpass generic applications.

For this reason, while conventional banking and financial instruments gained volume and great depth, the Islamic financing sector remained in the background.

However, the specialists who have been interested in Islamic financing in recent years, are those who have been trained in conventional banking, who can take responsibilities regarding economy management, who are knowledgeable of the facts of the international financing system and who come from a background of practice.

I know that there are many people among us today who fit this evaluation.

These specialists and managers are not only working in Muslim countries or at the Islamic banks but also at financing institutions which are active on a global scale and in the western countries.

Thus, at the point where we have reached today, the Islamic financing establishments and instruments do not serve as entirely alternative to the conventional system, but they are a different, reliable, and functional choice for account owners and for those who demand funds.

Actually, it is also the duty of the modern economy to present innovative choices to individuals and entrepreneurs in the globalizing world and the post- modern social order.

Therefore, I believe that it is of great importance that while you discuss the global financial problems and the global financial architecture during the Forum, you scrutinize the financing models, especially focusing on risk sharing and real economy.

I hope that the discussions that you will carry out and the suggestions that you will present will bring out new and applicable financial instruments and processes for the economy of the whole world.

Now, I would like to share some of my thoughts regarding the global economic and financial architectural problems.

Dear Participants,

Esteemed Guests,

We are experiencing the globalization period the influences of which have been gaining force each day since the 1980’s. We are going through a phase where the barriers in front of trade have been lifted and where capital is moving freely. The global economy and financial architecture is now intermingled.

This situation not only makes it easier to distribute new products and new opportunities but also heightens the wavelength of the global economic shocks and widens the areas of influence. Therefore, no one has the luxury to be indifferent to developments occurring outside of their borders.

The crisis which started in the mortgage market in the USA in 2008, soon after penetrated first into Europe and then into the whole of the world.

The states that spent large amounts of funds to save the finance sector in the beginning have reached a point where they now need to be saved due to their deteriorated public finances.

As a result, the crisis has also affected the real economy and the economies of many countries have either diminished or achieved only a small growth rate which is much lower than their real potential.

When an evaluation is made regarding this issue it should be kept in mind that the crisis has not fully been overcome despite the fact that all efforts, global risks and uncertainties toward to the economic growth are continuing. The confidence in markets has still not completely been restored.

The international economic system is almost moving on a “balance of economic terror”.  For this reason, the architecture of the global finance system is increasingly being questioned.

In my opinion, the most important reason for this is that the aims and tools have been mixed within the management of the economy and finance sector.

It should never be forgotten that the ultimate aim of economic activities is to raise the level of welfare of communities and to ensure happiness for people.

The main function of the finance sector is to provide additional sources in order to reach this aim, thus setting the idle potential in the economy in motion.

During the process which brought about the 2008 crisis, these fundamental principles, unfortunately, were not taken into consideration.

The global financial architecture has been built on future expectations rather than on real economic values and responses.

The financial instruments developed have not been used to provide employment, food, income and welfare but to satisfy the greed of the players in the sector. As a result, the system has been fictionalized reversely and the risk has not been managed correctly.

Within this scope, the tendency of the financial players to transfer the risks they have been carrying to others rather than accepting responsibilities has become a burden which cannot be overcome for the whole system.

When this was all combined with short term profit maximization and a speculative tendency, a recipe for disaster was created.

On the other hand, the human dimension of the crisis should also be taken into consideration.  While everyone is experiencing a decrease in welfare, the groups with lower incomes are suffering much more from the crisis.

The gap between the rich and the poor in increasing more and more and the injustice in the income distribution continues to increase.

While less than 1% of the world population owns almost 40% of the total assets, nearly 70% of the population has only some 3% of these assets. Almost 1 billion people face starvation and malnutrition.

Unemployment especially among young people is increasing more and more.

A significant amount of decrease has occurred regarding the disposable income of people and the debt ratios have increased. Consequently, life has become much more difficult for common people.

Under these circumstances, the risk of social unrest has reached a peak level.  Unless such structural problems in the international system are solved, the effects of the crisis could turn into situations which lead to instability and imbalance within societies.

It is time for everyone to put their thinking caps on and estimate the situation. Everyone should ask themselves such questions as where and how we made a mistake and what can be done to overcome this stage.

In order to overcome the existing problems, first of all, the shortcomings in the early warning, surveillance and supervision architecture in the financial markets must be resolved.

Secondly, the risks arising from the derivatives which do not have a real asset behind them need to be minimized or even completely eliminated.

Lastly, overcoming the problem of accessing liquidation, credit and financial instruments in crises is of great importance.

All of these issues make it crucial to have new global mechanisms and tools that will regulate the financial architecture. The Bretton Woods organizations and traditional financial instruments have proved to be far from satisfying.

New regulating structures and instruments that are comprehensive, which have a high rate of representation, which are equalitarian and which protect the interests of all players in the system are needed.

It is obvious that the new financial architecture must better reflect the weight of the developing countries in the global economy.

Accordingly, the G-20 stands out as an important platform.  The aim of the G-20 is to establish a healthy, strong and well-functioning global financial architecture which depends on mutual understanding, cooperation and common sense.

Turkey, as an active member, will continue to lend her contributions to these efforts within the G-20.

Esteemed Guests,

While the international financial architecture is being re-structured, it is crucial that alternative approaches which support risk sharing be corroborated.--

Within this context, the interest-free finance system is a choice which complements the existing system.

It is a very important advantage, in terms of preventing applications which are open to abuse and which create a basis for crises, that all agreements in this system are based on real assets.

Likewise, the participative structure of this system, in which the account holders and investors become partners in sharing not only the profit but also the risks, makes this system more attractive.

In order to popularize this system which necessitates sharing both the risk and the profit, utmost care should be given to the perception management of the public opinion and to diversifying the applicable products.

After all, in the global finance architecture which will be formed by taking equal income distribution, steady growth and open competition as its basis, there will be room for an interest-free system within the bounds of the acceptance and demand of people.  It is obvious that the efforts and endeavours regarding this issue need to be supported.

Now, I would like to touch upon the activities carried out by the Organization of Islamic Cooperation and Standing Committee of Economic and Trade Cooperation (COMCEC), which has 57 members and of which I hold chairmanship.

COMCEC, which includes countries with different development levels, provides the opportunity for regular cooperation between the stock markets of member countries, capital market boards and central banks.

Instruments such as the COMCEC –S&P Index which have been developed as part of this responds to the increasing demands across the world regarding the interest-free financing system.—I’m especially call on you to contribute to the efforts of COMCEC in this regard.

Dear Guests,

Turkey has taken important steps in the field of finance in parallel with the stable economic growth and developments which it has carried out in recent years.

It is no doubt that one of the most important steps taken is the Istanbul Finance Centre (IFM) Strategy and Action Plan which came into force in 2009.

The Istanbul Finance Centre (IFM) whose preparations are being carried out continued shall be a source of great profit not only for our country but also for the region.

We hope to contribute to the efforts to integrate the field of Islamic finance in particular and new financial instruments with the global financial system through the IFM.

Actually, Turkey is among the countries which have achieved the fastest development in the Islamic finance sector.  Great progress has been made since the 1980’s, when the interest-free finance system was first introduced into our system.

This application which offers additional choices to economic players in addition to the traditional banking system has also brought dynamism to the Turkish economy.

The interest-free finance organizations in our country, namely participation banks, are bound with the same laws which regulate the system for all banks.

This is a well-directed approach indeed because although the interest-free working model seems to make these banks exempt from the risk of interests, the risk of liquidity applies to all financial institutions.

Participation banks can overcome this risk as long as they can collect a sufficient amount of deposit and as long as they can sell their assets when needed. In this case, there is not much difference between participation banks and other banks. Moreover, participation banks face additional restrictions.

Staying away from procedures concerning transactions with interest makes it difficult for the participation banks to meet their liquidity requirements and this increases costs.

For example, as the interbank money market, secondary markets where financial instruments are traded and more importantly liquidity management instruments such as the convenience of lender of last resort provided by central banks are deemed to be interest-based procedures, these are not used by participation banks.

Thus, the most important challenge for participation banks in the future is to resolve such problems.  For this reason, it would be correct for academicians, policy makers and bankers among us here today to concentrate on these issues.

On the other hand, there are also a few promising developments regarding this issue.

I am pleased to know that some 15 central banks including that of the Turkish Republic have founded a company called the International Islamic Liquidity Management Corporation (IILM) in order to facilitate liquidity management.

This system, which involves an instrument that can be bought and sold in domestic and international markets, that is compatible with Islamic regulations and that is liquid and of high quality, undoubtedly opens new horizons.

I find this initiative which is exciting and which has been carried out in the right direction to be very significant. This instrument, which can be shown as a guarantee, can also be used in the lender of last resort procedures of central banks.

Dear Guests,

The interest-free financing market, which has a transaction size which is getting close to 2 trillion worldwide, and which also has instruments such as Sukuk (Islamic Bonds) and lease certificates, have a great potential.

These instruments are convenient to be used in local and central administrations in the financing of infrastructure investments which are the basis of actions taken for development.

I wholeheartedly believe that many new financial instruments, which are compatible to Islamic traditions in the future, can be developed through the efforts of valuable academicians, sector representatives and policy makers like our guests among us today.

Before I end my speech, I would like to extend my thanks, first of all, to Dr. Alpay, the Chairman of SESRIC and those who have contributed to the organization of this forum, and I hope that your valuable studies help efforts to reach our target for a more prosperous and equal world and I greet you all from the bottom of my heart.