Justin Vela

Islamic banking in Turkey, a short history involving the secular military and the Naksibendi…

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Istanbul-Yesterday, EurasiaNet.org published an article by me on Islamic banking in Turkey. 

Amid Turkey’s turn away from strict secularism, Islamic banking practices in the country are gaining currency. But they still face significant obstacles as they strive to enter the financial mainstream.

The Atlantic also ran the story. 

While researching the article, I went through a lot of background material on the history of Islamic finance in Turkey.

Below is a short history:

Islamic banking is slowly gaining ground in Turkey. This might seem controversial in a country whose military has long-protected its official, secular identity. However, Islamic banking actually got its start under the military junta that ruled the country for three years following a 1980 coup.

In the years preceding the coup, Turkey’s economy had collapsed. There was three-figure inflation, a surging current account deficit, and mass unemployment. To combat this, Turkey adopted the neo-liberal policies proscribed by the World Bank and International Monetary Fund: strict austerity, deregulation, and an open economy.

The architect of these policies in Turkey was Turgut Özal, a government bureaucrat who had served as an advisor to the World Bank from 1971-1973. Özal championed neo-liberal economics, but he was also a pious Muslim who had once been a parliamentary candidate for the Islamic National Salvation Party. At least during his youth and perhaps later in life as well, he belonged to an Islamic order call the Naksibendi, a Sufi group to which several of Turkey’s leaders allegedly were connected.

According to Dr. Mehmet Asutay, the Director of the Durham Centre for Islamic Economics and Finance, Özal used the power handed to him by the military and the status he and his brother had in Islamic elites to introduce Islamic banking to Turkey.

“It was Özal’s aim, it was very much his aspiration to bring Islamic banking into Turkish society,” he said. “In the process of liberalization, they began to introduce Islamic banking.”

Özal’s plan to liberalize the economy went into effect in January 1980. The military coup, officially aimed at ending political violence wracking the country, came in September. However, the generals agreed with the neo-liberal policies Özal advocated and made him the country’s deputy prime minister for economic affairs. “They brought him along to carry out the liberalization,” said Asutay.

Özal might have been considered an Islamist in certain circles. But he was implementing the military’s preferred policies. And the crippled Turkish economy was in dire need of foreign direct investment and capital flows. Seeing an opportunity, Özal argued that if the junta allowed Islamic banking, Turkey would attract money from the wealthy Gulf States. Additionally, there were many Turks who refused to deposit their savings in banks, preferring to keep their money “under the mattress.” This was due to a general mistrust of the banking system. And more pious Turks could not deposit with conventional banks because they used interest. Usury is prohibited in Islam and other Abrahamic religions.

“The main reasons for establishing the Islamic banks was that there was a demand inside Turkey for them,” Osman Akyuz, secretary-general of the Participation Banks Association of Turkey, said.

In 1983, the junta issued a decree that paved the way for Islamic banking to be introduced to Turkey.

Özal was considered trustworthy, but the decision also came at a time when the military was trying to define how Islam in Turkey developed, Asutay said. “Islamization in Turkey was going beyond the space the state wanted for it,” he said. “They wanted to define the nature of Islam. Few governments elsewhere in the Muslim world have been able to do this. The establishment managed it well.”

Of course, the military could not be seen as introducing an openly religious institution. Nor did they want to anger conventional banks. However, calling the Islamic banks “Special Finance Houses” and not including them under the banking law created a suitable loophole. Then, partnered with Turkish businessmen, such as Özal’s brother Korkut, two Saudi princes helped establish the first “Special Finance Houses,” the Faisal Finance Institution and Albaraka Turkey Finance House, in the 1980s.

Today, Gulf countries have majority stakes in three of the four Islamic banks in Turkey. Regional and domestic financial crises proved the need to carefully regulate the banking sector and the Islamic banks are now subject to Turkish banking law. They have also had their name changed to “Participation Banks” and currently have about a five percent share of the market, according to Akyuz, who expects there soon to be six to seven Islamic banks active in Turkey. In 2005, Turkish banks composed 2.8 percent of the market.

“Participation banks are more successful than their conventional peers in attracting Gulf financial capital and transforming it to real investments in the economy,” said Ilham Mehraliyev, of DinarStandard, a research firm specializing in Muslim markets. “They facilitate trade and export relations with Muslim countries, where most of the businesspeople prefer to deal with Islamic banks comparing to conventional ones.”

Özal went on to become prime minister and then president of Turkey, dying in office under suspicious circumstance in 1993. His introduction of Islamic banking was a first step towards incorporating the more traditional population of Anatolia into the Turkish economy, said Asutay, which preceded a greater class shift in Turkey. Yet many are skeptical of the mass growth potential Islamic banking has in Turkey. And Islamic bankers interviewed in Istanbul stressed that they are strictly in the realm of finance rather than religion or politics. However, the beginning of Islamic banking in Turkey highlights a dualism that the military establishment unsuccessfully tried to suppress: Turks wants their religious identity at the forefront. But this will not interfere with business.

I have also written about Islamic finance in Kyrgyzstan 

A woman in a sewing factory established by "Muslim," Kyrgyzstan's first Islamic brokerage house.

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Written by Justin Vela

November 3, 2011 at 3:51 pm

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