- The Washington Times - Monday, July 10, 2006

ISTANBUL — Turkey is missing out on an opportunity to profit from Arab oil wealth as tensions between its secular government and religious authorities prevent it from issuing interest-free Islamic bonds that have become popular throughout the Muslim world.

Government ministers had promised to push legislation through parliament during this legislative year. But with lawmakers now on vacation until September, the future of the measure is not clear.

Islamic bonds would have offered investors a cut of the cash flow of projects financed by the bonds, thereby avoiding the interest payments on conventional bonds that are in breach of Islamic practice.

Banking analyst Saduman Okumus blamed the delay on the nature of Islamic finance in this staunchly secular Muslim country. “Those who say money has no color don’t know Turkey,” she said.

For a country that set its heart on Western modernity 150 years ago, trade here is heavily weighted westward, with about 70 percent of exports going to European Union countries.

Just as Turkey’s founders saw the Middle East as a morass of religious ignorance, so some Turks today tend to see investment from their Muslim neighbors as a potential Islamic threat to their secular system.

This issue of so-called “green capital” surfaced again last week with secular opposition politicians renewing calls for the firing of a businessman and close aide of the Turkish prime minister.

In the 1990s, Cuneyt Zapsu was in partnership with a Saudi millionaire who Washington now thinks had financial links to al Qaeda.

Opponents of the government also have called on the state banking watchdog to seize accounts of the Turkish interest-free bank Zapsu, which reportedly have been used to transfer money.

It is hardly an atmosphere conducive to Islamic banking, which remains marginal in Turkey two decades after its introduction.

Worth about $300 billion worldwide, it makes up barely 3 percent of Turkey’s banking sector, compared with more than 10 percent in Malaysia and 22 percent in Kuwait.

Although analysts say Turkish religious pragmatism has a lot to do with the disparity, interest-free banks were not fully accepted into the banking community until 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 go by the deliberately neutral name of participation banks to sidestep restrictions on the public use of Islam in Turkey.

Islamic banks are not unlike old-fashioned savings and loans in the United States, in which depositors owned shares of the S&L; and received dividends from the institution’s earnings.

Similar restrictions have slowed drafting of the bond bill. Elsewhere, Islamic banks’ investment decisions are vetted by religious authorities for their compliance with Islamic law. In Turkey, such a procedure would be unconstitutional.

Despite the slow pace of banking reforms, capital has begun to flow into Turkey, with the last year’s largest privatization, the $6.5 billion payout for Turkey’s state telecommunications company, won by a Saudi-run consortium.

A Gulf company is also behind plans to build two skyscrapers in central Istanbul.

“Turkey has always been an important market for Gulf investors,” says Adnan Youssef, chief executive officer of Al Baraka, a Bahrain-based bank. “But in the past only the big players invested. Now everybody is interested.”

Islamic bonds would offer small investors the opportunity to participate as well.

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.”

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