238 AN INTRODUCTION TO ISLAMIC FINANCE
likely than conventional institutions to suffer negative outcomes beyond
their capacity to sustain core profi tability and capital.^5 The report showed
that, on average, during 2008 the impact of the global crisis on liquid assets
remained limited, as refl ected in a modest downward adjustment of the
liquidity ratio. Liquid assets as a percentage of total liabilities declined dur-
ing 2008, which indicates the banks’ use of internal resources to manage the
funding shortfall. From being net providers of funds in 2007, many Islamic
banks became net borrowers from the interbank market during 2008 — an
indication of their increased liquidity needs. A few banks have large matur-
ing liabilities, which has resulted in a signifi cant negative gap; while some
have suffi cient maturing assets to support their maturing liabilities.
The performance of Islamic fi nancial institutions can be considered
good, especially in light of the fact that Islamic institutions are part of an
emerging and developing market that is trying to overcome many challenges
and obstacles. The returns to Islamic banks have been comparable to those
of conventional banks. No Islamic bank has failed as a result of the sub -
prime crisis. The risk - adjusted returns of some Islamic capital - market prod-
ucts are higher than comparable ones in conventional markets. These are,
however, preliminary results and may change with time.
BANK FAILURES
Although there has not been a major failure in more than 30 years of the
Islamic banking industry’s history, there have been instances of failures of
fi nancial institutions claiming to offer Islamic fi nancial products. A review
of the causes leading to their failure can shed light on how it could have
been avoided, how other institutions offering similar products and services
were affected and how they can learn from these experiences.
Ihlas Finans^6
Ihlas Finans was a Turkish institution that behaved similarly to a deposit -
taking bank offering Shariah - compliant fi nancial services. These fi nancial
houses were not recognized as part of the regular banking sector but were
given the status of Special Finance Houses (SFHs), as they were considered
to be offering non - conventional and specialized services. SFHs constituted
only 3.1 percent of the total banking - sector deposits, and their investment
allocations represented only 4.7 percent of the total. As SFHs, these institu-
tions were not subject to the same regulations as other institutions in the
banking sector. For example, SFHs were considered an uninsured sub - sector
of Islamic banks.
In early 2000, the Turkish fi nancial sector went through a macroeco-
nomic and fi nancial crisis which affected the entire banking sector and led to
the failure of some conventional banks. Of the fi ve SFHs engaged in Islamic
fi nance, however, Ihlas Finans was the only one that did not survive.