FOR over three decades successive Turkish governments did not dare speak its name for fear of being branded radical or fostering creeping Islamisation or simply because of insecurity. Instead, governments led by Turgut Ozal in the 1980s through to Recep Tayyip Erdogan today, conjured a motley of euphemisms to keep the country’s secular establishment at bay and its once politically powerful armed forces in the barracks.
I am of course referring to the phenomenon of Islamic banking, with institutions offering such services officially named, inter alia, special finance houses, profit-and-loss (PLS) banks, interest-free banks and more recently, participation banks.
Still today one would not find the word ‘Islamic’ in the statute book. In the aftermath of the Turkish financial crisis in 2001, the then government amended Banking Law No. 5411 in November 2005, which saw the transformation of “Special Finance Houses” (SFH) into “Participation Banks,” and bringing their regulation and supervision on par with conventional banks.
Yet, something is currently happening in the corridors of power in Cankaya Palace in Ankara, the official residence of President Erdogan, which has seen the elevation of Islamic finance public policy to a pivotal position in the official management of the Turkish economy and financial system — a potential transformation that will not happen overnight but if implemented with any degree of success, would be difficult to reverse down the line.
The ruling Justice and Development Party (AKP) elected Binali Yildirim as the new prime minister in May to replace Ahmet Davutoglu, a former professor at the International Islamic University of Malaysia (IIUM). Davutoglu was effectively dismissed by Erdogan and is a political rival. The president, who is supposed to be a ceremonial one, is effectively ruling the country, as he seeks a two-thirds majority to democratically transform the political system to a presidential one.
Only a few days ago, Erdogan appointed Osman Celik, the erstwhile general manager of one of the country’s largest participation banks, Turkiye Finans, in which Saudi Arabia’s National Commercial Bank has a majority 62 per cent equity stake, as the powerful new Undersecretary of the Treasury, effectively the economic and finance supremo of the AKP government.
“I just signed the by-law stipulating the appointment of former Türkiye Finance General Manager Osman Çelik as the Undersecretary of the Treasury. Çelik is a successful economist with an experience in the private sector,” tweeted Deputy Prime Minister Mehmet Şimşek, who had effectively been managing the Turkish economy for the last few years.
Celik’s appointment is the third recent one of a former Islamic banker to key financial positions. In April, the government appointed a colleague of Celik, Murat Cetinkaya, as the new Governor of the Central Bank of Turkey. This follows the appointment earlier of yet another veteran Islamic banker, Mehmet Ali Akben, as chairman of the country’s Banking Regulation and Supervision Agency (BDDK).
So what’s going on? Before Turkey’s fundamentalist secularists and right-wing media get hot under the collar, this is no wholesale Islamisation of the banking system — creeping or otherwise.
I have known Osman Bey for most of his banking career at various times in Faisal Finans Institution, Ihlas Finans, Anadolu Finans and Turkiye Finans. The latter, incidentally, was the first Turkish participation bank to issue a sukuk (Islamic bonds) in the Malaysian ringgit market — a RM800 million Sukuk Murabaha in 2014.
Celik is a quietly effective operator — a competent statistical economist. He has experience of both the state institutions and in the private sector.
But, equally importantly, he has also tasted corporate failure when he was project and marketing manager at İhlas Finans between 1995 and 1999. Ihlas at that time was the largest SFH in Turkey and was the only Islamic banking casualty of the Turkish financial crisis of 2001 as opposed to over tens of conventional financial institutions, when the bank had a run on its deposits following over-exposure to companies in the Ihlas Holdings Group.
In the end, Ihlas went into liquidation, but to the credit of the owners of Ihlas Holdings, the parent, they paid every creditor of the bank even if it took a few years down the line.
The rationale for the romancing of Islamic finance is more functional. Ankara has recently embarked on a wholesale restructuring of its participation banking sector, which has seen the entry of three new banks including Ziraat Participation Bank, a subsidiary of the state-owned bank, which is the largest in Turkey; Halk Participation Bank and Vakif Bank.
This brings the total number of participation banks in Turkey to seven including the four established ones — Kuveyt Turk Participation Bank, Albaraka Turk Participation Bank, Turkiye Finans and Asya Bank.
Ankara is also keen in making Turkey a leading proponent of Islamic finance and developing Istanbul into an international financial centre for both conventional and Islamic banking.
That is also why Erdogan has been pushing the idea of establishing an Islamic mega bank “within a year” in a joint venture with the Islamic Development Bank and Qatar, pledging to put up $300 million of the $2 billion capital.
Similarly, at the G20 summit held in Antalya in November 2015, it was Turkey that pushed the potential role of sukuk in financing infrastructure onto the agenda with the result it was included in the final communiqué — the first time Islamic finance was so mentioned by the organisation.
In a recent speech, Simsek reiterated that Islamic finance was of “critical importance and has the potential for growth. But we need to mobilise this potential.”
The Turkish participation banking sector is an increasingly economically important one employing almost 20,000 people across Turkey. Total participation banking assets have reached TL140 billion at end 2015, comprising about 6 per cent of the market share of the banking sector, with the target of achieving a 15 per cent market share by 2020.
Turkey in fact introduced Islamic banking at the same time as Malaysia — in 1983. But, contrary to popular misconception, it was the Turkish military that facilitated the introduction of Islamic finance as part of its policy of rapprochement with the Middle East countries.
It was the quasi-military government of Prime Minister Bulent Ulusu, supported by his political master, General Kenan Evren, the leader of the last military coup in 1980, who was subsequently ‘elected’ as president of the Republic, who facilitated the introduction of the Special Decree 83/7506 of Dec 16, 1983 pertaining to “Special Finance Houses.” This was just a few months after Malaysia introduced its Islamic Banking Act 1983 under the general BAFIA Act.
Given the contemporary Kemalist history of Turkey and in the wake of the fall of the Ottoman Empire in the onset of the 20th Century, the introduction of Islamic banking would always be mired in politics. True, there were two camps lobbying for the introduction of special finance houses (SFHs). The influential Ozal family whose two scions, Korkut and Yusuf Bozkurt were members of the National Assembly, were lobbying for a SFH licence on behalf of Saudi entrepreneur Sheikh Saleh Kamel, owner of the Albaraka Banking Group.
On the other hand you had other members of the National Assembly such as Salih Ozcan who lobbied on behalf of Saleh Kamel’s arch rival, Prince Muhammed Al Faisal, son of King Faisal and major shareholder of the Geneva-based Dar Al Maal Al Islamic Trust (DMI), the holding company of the Faisal Group of Banks, to get a similar licence. All this lobbying paid off, resulting in two licences being granted, one for Albaraka Turk and the other for Faisal Finance Institution.
Such were the seeds sown of the topsy turvy evolution of Islamic finance in republican Turkey.
Evren’s Middle East rapprochement policy was highly successful, paying handsome dividends, for Turkish contractors alone amassed US$20 billion of contracts in the Gulf Cooperation Council (GCC) countries and Libya over the decade of the 1980s. Similarly, today Turkey continues to attract billions of dollars of Islamic finance to fund infrastructure, exports and imports and inward investment. A fact, which unfortunately the majority of Turks are oblivious of!
The writer, Mushtak Parker is an independent London-based economist and writer. He can be reached via [email protected]