Banking

Islamic banks are prohibited from charging interest, in accordance with Islamic law. As a result, making loans and providing dividends involve alternative forms of risk- and profit-sharing. These typically create a much closer relationship between borrowers and lenders. Given Turkey’s commitment to secularism since the republic was founded in 1923, Islamic banking was banned. Yet, for Turkey to be attractive as a place for petro-dollar rich Middle Eastern countries to invest, Islamic banking had to be legalized, something Ozal promoted in the 1980s.

The establishment of Islamic banks in Turkey worried secularists. Ozal was nevertheless able to effect this change owing to the country’s dire economic straits. He argued that Islamic banking would have two beneficial effects: 1) economic expansion would result from devout Turkish Muslims’ ability to invest their capital without violating their religious beliefs; 2) economic ties with wealthy Middle Eastern nations would be facilitated. Over time, banks relied less on foreign deposits and more on Turkish Islamists who, in turn, have provided financial backing for Islamist political parties.

Since 1983, Turkish Islamic Banks (referred to as Participation Banks) have become successful by any measure. In 2007, it was estimated that within a decade the assets of these institutions will exceed USD 25 billion, up from the current USD 8.5 billion, comprising 10% of assets within the entire Turkish banking system. The system itself is preparing to become EU-compliant. This necessitates improving transparency and reducing government involvement, areas in which Turkey is making satisfactory progress.