Islamic banking and finance in Turkey

Abstract

Islamic banking is growing in Turkey. The industry is garnering both domestic and international interest, with Turkish citizens increasingly adopting Islamic banking services. However, due to the secular nature of the constitution, Islamic banking is not known as such; rather employing the less religious connotative term, “Participation Banking”. Irrespective of this subtle difference in terminology, the services on offer by Participation banks follow Shari’a guidelines and allow customers to transact within an Islamic framework. The story of Participation Banking in Turkey begins in the early 1980s. Similar to most Islamic finance genesis stories in other parts of the world, a sizable group wished to obviate interest-transactions and mobilize idle funds into the real economy. It was anticipated that this would be a faithful solution to the problem of capital insufficiency, which was blighting the Turkish economy. Keeping money idly in hand or investing it on unproductive investments appeared to be major obstacles in the healthy running of the economy. Until 2005, Participation banks, previously known as “Special Finance Houses”, were excluded from Turkish banking law. The Banking Law of 2005 was the first time where Participation Banking gained legal recognition. Currently, the banking system in Turkey consists of deposit taking banks, development and investment banks, and Participation banks. There are four Participation banks at present in Turkey working on an interest free basis and according to Turkish banking law. The banking law does not permit any Participation bank to operate in Turkey without being a member of Participation Banks Association of Turkey. In effect, Participation banks and conventional banks all operate according to the same sub regulations although there are differences concerning accounting practices and certain regulatory requirements.