Performance of Islamic Financial Services 239
Ihlas Finans was a subsidiary of Ihlas Holdings, a social - oriented busi-
ness organization established in the 1970s that eventually grew into a large
holding company. While its core business was in the fi elds of construction,
healthcare, and education, it had a number of subsidiary businesses ranging
from manufacturing of household appliances, to news media, to provid-
ing fi nancial services and insurance of various kinds. Ihlas Finans was one
such subsidiary, established in 1995 with the objective of providing interest -
free investment opportunities to investors and small savers. Registered as
a Special Finance House with the Central Bank of Turkey, it grew into the
largest of its class. The balance - sheet assets had grown from US$17 million
in 1995 to US$1,173 million by 1999,^7 with a majority market share of 40
percent.
However, in the wake of the banking crisis that developed in Turkey
in the last quarter of 2000 and early 2001, the company faced a run on its
deposits. On February 10, 2001, the Banking Regulation and Supervision
Agency (BRSA) intervened and cancelled its license, leaving the company’s
200,000 depositors around the country unsure as to what had become
of their deposits. The BRSA cited several reasons for this action. First, it
announced that Ihlas Finans had irregularly appropriated almost US$1 bil-
lion (practically the entire value of deposits) through connected lending to
shareholders.^8 Second, it considered that the company was unable to fulfi ll
its obligations to the public and therefore to be in violation of banking rules.
Third, there were irregularities, as Ihlas had made substantial investments in
its subsidiaries and with the agents of its subsidiaries.
The detailed analysis of the case conducted by Ali (2007), highlights
several factors for the failure of the institution and holds several stakehold-
ers and deteriorating market conditions responsible for this failure. While
there was clear evidence of carelessness on the part of the regulators and
supervisors, who were unable to detect the warning signs in time, here we
focus primarily on those factors where the management of Ihlas Finans was
directly responsible for the negligence and where the trust of the stakehold-
ers was breached through misrepresentation. It is important to understand
the implications of these factors since they were the source of considerable
concern for the depositors of other SFHs and to the reputation of the indus-
try in the country. These factors are summarized below.^9
Weak Governance Structure It appears that Ihlas Finans was not following
the best practices in corporate governance. For example, it is reported that the
members of the Board of Directors showed a lax attitude towards gover-
nance and some members appointed to the board did not have the requisite
experience. Since Ihlas Finans was a subsidiary of a large holding company,
some of its board members represented multiple boards, which resulted in
a confl ict of interests.
Fraudulent Practices It appears that Ihlas Finans tried to conceal its fi nancial
and managerial failures by indulging in fraudulent practices. For example,