Turkey’s failed coup creates an unlikely winner: Islamic banking

As the Turkish people pick up the pieces following the attempted military takeover of their government on June 15, speculation about the country’s economic future is rampant. From a slump in capital and credit markets to a downgrade in the country’s sovereign credit rating, many pundits are bearish about the long-term prospects for the republic. At least one sector, however, is standing strong after the coup attempt: Islamic banking.

As a dual financial system that practices both conventional and Islamic finance, Turkey was introduced to Islamic lenders (or “participation banks,” as they’re known there) at the end of 1980s, and the sector grew rapidly by the beginning of the 2000s. In 2005, the Islamist-oriented government officially recognized them and offered state guarantees on deposits, attracting interest from religious depositors and nearly doubling the industry’s market share by 2013.

Growth over the last few years has also been compelling. The Participation Banks Association of Turkey reveals that total assets in five Turkish Islamic lenders grew to 120.3 billion Turkish lira ($33.6 billion) in 2015, an increase of more than 15% from the previous year. And there is more room for expansion, considering the size of Islamic lenders as compared to the overall Turkish banking sector. With approximately 17,000 employees and 1,000 branches, Islamic banking in Turkey had a modest 5% share as of last year.

According to an S&P report released in June, government initiatives to involve state-run banks in the interest-free system are expected to provide further momentum for Islamic banking. That report–titled The Emergence of New Turkish Islamic Lenders: A Game Changer?–said that the growth rate for Islamic banks in Turkey was poised to exceed that of conventional lenders, projecting the market share of Islamic banks to double to more than 10% per year by 2025. Although the S&P report was issued prior to the attempted coup, there is no reason to believe that government plans will be rolled back. The opposite appears to be true. Now that the Erdogan government has begun to use the uprising to consolidate power and double down on its market-oriented reforms, Islamic banking seems even more likely to take large strides.

And whether you agree with the current political situation in Turkey or not, ethical banking is an idea everyone can get behind.

Although Islamic commercial banks have many products similar to those offered by conventional banks, the two entities differ conceptually. One key difference is that conventional banks earn their money by charging interest and fees for services, while Islamic banks usually earn their money through profit-and-loss sharing, partnering with small business owners in their communities and growing local economies. Islamic banks also set aside a certain amount of money from their total funding sources to serve the localities in which they operate.

Think of Islamic banks as public benefit corporations, a designation that is gaining popularity as an alternative business structure here in the United States. And that’s how it often plays out in Turkey. Participation banks there are regularly involved in programs that help promote social and economic justice, which are often imperiled in developing nations.

By creating an environment that allows Islamic banking to flourish, regulators are giving millions of conscientious Muslims a viable banking option while also furthering the public good in local communities. Government support for this industry helps everyone. And that’s why the growth of Islamic banking is the silver lining in this volatile situation.

 

Joshua Brockwell (joshua@azzad.net) is Investment Communications Director at Azzad Asset Management, a socially responsible registered investment advisor located in Falls Church, Virginia. The firm regularly invests in Turkish fixed-income instruments through the Azzad Wise Capital Fund to earn a competitive, socially responsible return for clients.

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