By Dr. Altay Atlı

In a recent meeting with the country’s top bankers, Deputy Prime Minister Ali Babacan announced that Turkey will join Indonesia to launch an Islamic “megabank” which will serve as a central bank for lenders in the global Islamic finance industry.  The project is supported by the Islamic Development Bank (IDB), and Turkey’s initial contribution to the bank’s capital is reported to be $300 million. This move complements Ankara’s efforts for developing Islamic finance at home as an effective funding platform for the national economy.

Over the past few months Turkey has taken important steps for the development of interest-free banking, with the most crucial being the amendment of the country’s Banking Law, which made its possible for public banks to offer Islamic finance services. There are fifty-one banks currently operating in Turkey, yet only four of them (Albaraka, Bank Asya, Kuveyt Türk, and Türkiye Finans) are offering services in Islamic finance, and the entry of the large state-owned banks will enlarge the market as well as the customer base. In fact, the first public bank to obtain the authorization, Ziraat Bankası, will launch its Islamic finance operations on May 29, and will be followed by two other public banks, Vakıfbank and Halkbank.

The market share of Islamic finance providers in Turkey’s banking sector, as measured in terms of total assets, is currently 5.2%; and, as stated in a strategy paper prepared by the country’s banking authority, Turkey’s aim is to increase this rate to 15% by 2025. Reaching this target will require total assets of Islamic finance institutions to go up from their 2014 figure of $51.2 billion to $300 billion in ten years. The annual growth rate of the sector stands currently at 8.5%, and the strategy paper calculates that for the target to be achieved, this figure needs to rise to 18% per annum. The entry of large public banks into the market will surely provide an initial boost; but this won’t be enough, and greater integration with global networks and becoming a “hub” for global Islamic finance is of vital importance for Turkey.

Facing competition from countries with much larger Islamic finance sectors, such as Malaysia, Saudi Arabia, Iran, and the United Arab Emirates, Turkey’s strategy is to facilitate global governance structures in order to spread the use of Islamic finance and strengthen its own position at the global level. This is the reason why Turkey has partnered with a fellow G-20 member, Indonesia, for the establishment of the Islamic megabank. This year, having the presidency of G-20, Turkey has placed Islamic finance on the agenda. During the finance ministers’ meetings held in February and April, G-20 members agreed on improving the use of interest-free Islamic banking around the world. A G-20/International Monetary Fund (IMF) seminar on Islamic finance was held in April with the aim of (as the title of the seminar went) “unlocking its potential and supporting stability.” More recently, on May 19, a meeting organized by Turkish Presidency of G-20 and Global Islamic Finance Development Centre of the World Bank Group brought experts together to discuss how Islamic finance could contribute to recovery of the global economy in the post-crisis period. In all of these platforms, Turkey and Indonesia are working together, which helps G-20 efforts and the megabank project to merge into one single process of globalizing Islamic finance.

Islamic finance can offer benefits for the global economy, such as better risk management, protection against speculation, and a long-term focus on investment rather than short-term opportunism, among others. But for this, it has to be made an integral part of global financial architecture, and not remain just an alternative method restricted to certain groups. This is not an easy task. To start with, there is currently no consensus on how a global Islamic finance industry should operate and how it should interact with the conventional financial system. Also, there is the widespread misperception that this method of financing is accessible for Muslims only. Moreover there are technical issues, such as harmonizing regulations, streamlining costs and processes and so on.  Despite these challenges, with the right approach, progress can be made. In Turkey, the official name for Islamic banking is “katılım bankacılığı” (participation banking); i.e. no reference is made to Islam, implying that these types of transactions are not exclusively for Muslims. This is the right approach — but more important is the fact that it is two G-20 members partnering for the megabank project, using the synergy of G-20 for this purpose, and cooperating with multilateral institutions like the World Bank, IMF and IDB in their effort to promote Islamic finance globally. This is why while several other Islamic megabank projects so far have failed — even in Malaysia where total Islamic finance assets are eight times greater than those in Turkey — the collaborative nature of the Turkish-Indonesian partnership can give it a real chance.

Dr. Altay Atlı is a research fellow at the Center of Global Studies at Shanghai University, and a non-resident scholar at the Asian Studies Center of Boğaziçi University in Istanbul.

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