Islamic Banking
Islamic Banking struggles to take of in Turkey
By EurasiaNet
Jul 11, 2006, 12:29

ISLAMIC BANKING STRUGGLES TO MAKE INROADS IN STAUNCHLY SECULAR TURKEY

Nicolas Birch 7/10/06

Delays surrounding legislation that would enable Turkey to enter the interest-free bond market underscore the wariness of many Turks toward Muslim banking practices.

Turkey’s deeply entrenched secular tradition exerts heavy influence over economic decision-making. Turkish trade, for example, is firmly oriented toward the West, with around 70 percent of exports going to European Union countries. A considerable segment of Turkey’s political-military elite tend to see investment from their Muslim neighbors as a potential threat to Turkey’s secular system.

With the global market in interest-free bonds booming, leaders of the moderate Islamist governing Justice and Development Party wanted to win passage of an Islamic bond bill before the end of the legislative year. In order to avoid interest payments, the bill would offer investors a cut of the cash flow of projects financed by the bonds. However, the future of the bill is in doubt, as parliament is in recess until September.

The caution over Islamic bonds may be depriving Turkey considerable foreign investment. Governments and corporate interests in the Muslim world, especially in the Gulf region, now find themselves with lots of cash on hand given the high price of oil and gas, and they are looking for sound investment opportunities. "Turkey has always been an important market for Gulf investors," says Adnan Yousef, CEO of Albaraka, a Bahrain-based bank. "But in the past only the big players invested. Now everybody is interested."

Hence, say proponents, the importance of Islamic bonds, which offer potential investors of all sizes the chance of immediate gains.

Passing bond legislation is "common sense, nothing more," says one senior Turkish banker. "Turkey may continue to make easy money off Europe, but more diversity means more profit."

Today, Islamic banking accounts for barely 3 percent of the activity of the country’s financial sector, compared to over 10 percent in Malaysia and 22 percent in Kuwait. Analysts say Turkish religious pragmatism has a lot to do with the disparity, as well as two decades of economic instability, which have slowed efforts at innovation.

But ideology has also played a role. Bankers point out that interest-free banks were only fully accepted into the banking community last year. "We used to pay taxes three times higher than normal banks", says Unal Kabaca, head of interest-free Bank Asya.

Even today, interest-free banks in Turkey often go by the deliberately neutral name of participation banks to sidestep restrictions on the public use of Islam in Turkey. "In the past, we were called ‘special finance houses,’" Kabaca adds. "The name’s neither camel nor bird! No wonder ordinary Turks didn’t have much idea what we stood for."

Similar restrictions slowed drafting of the bond bill. Elsewhere, Islamic banks’ investment decisions are vetted by religious experts for their compliance with Islamic law. In Turkey, such a procedure would be unconstitutional. According to Osman Akyuz, head of the Turkish Participation Banks Association, the drafting of the Islamic bond bill dragged on for two years.

Cautious attitudes toward so-called "green capital" were on full display in late June, when secular opposition politicians renewed years-old calls for the sacking of a businessman and close aide of the Turkish Prime Minister Recep Tayyip Erdogan. In the 1990s, Cuneyt Zapsu was in partnership with Yasin al-Qadi, a Saudi millionaire who Washington now believes had financial links to the al Qaeda terrorist organization. Earlier investigations found no evidence that either Zapsu or the Turkish interest-free bank he used to transfer money had links with, or knew of al-Qadi’s supposed links to terrorists.

But that hasn’t stopped secularist opposition parliamentarians from calling for Zapsu to be sacked and the state banking watchdog to seize the bank’s accounts. "Those who are targeting him [Zapsu] seem to be disregarding the facts, and are motivated by this incredible drive to harm Prime Minister Erdogan and his government at all costs," political analyst Ilhur Cevik wrote in a June 27 issue of the New Anatolian daily.

Some prominent entrepreneurs, including Omer Bolat, who heads the Independent Industrialists’ and Businessmen’s Association or MUSIAD, believe that established interests are trying to prevent increased competition in the Turkish market.

"If the disagreements were purely intellectual, we could sort them out," he says. "But rhetoric about secularism is an excuse to guard the economic status quo. Big [Istanbul] businesses don’t want us newcomers to get a slice of the cake."

Editor’s Note: Nicolas Birch specializes in Turkey, Iran and the Middle East.

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