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The term of Islamic financial system is never been introduced until in the mid1980s. The proponents of Islamic economic and finance say that philosophical
foundation of an Islamic financial system goes beyond the interaction of factors of
production and economic behavior. Whereas the conventional financial system
focuses primarily on the economic and financial aspects of transactions, the Islamic
system places equal emphasis on the ethical, moral, social, and religious
dimensions, to enhance equality and fairness for the good of society as a whole. The
system can be fully appreciated only in the context of Islamic teachings of the work
ethics, wealth distribution, social and economic justice, and the role of the state. It
is obviously a challenge of Islamic system to be implemented in the current
economic environment.
The Islamic financial system is a system in a countrys economy consisting of
financial markets, financial institutions, financial instruments and market
participants that operate along with Islamic principles and aimed at meeting the
Maqasid (objectives) of Shariah. In general, all Islamic financial instruments and
institutions must comply with the Shariah principles, such as prohibition of riba,
application of al-bay (trade and commerce), avoidance of gharar (ambiguity) in
contractual agreement, prohibition of maysir (gambling) and disengagement from
production of prohibited commodities (pork, liquor, tobacco etc).
In addition, many Islamic finance scholars assert that although Islamic finance
institutions perform mostly the same functions as conventional one, they do this in
distinctly different ways. Some of the salient features of Islamic banking and finance
which make it distinct and unique from its conventional counterparts.

The history of Islamic financial system and Islamic banking and finance
development in Turkey
Islamic finance system has been born with appearance of Islamic banking which
introduce products and services not based on interest, and in time, it improved
many financial products in insurance and capital fields suitable for Islamic rules
such as; Sukuk (Islamic bonds), and Takaful (insurance). Introducing above
mentioned financial products have been acted by participating banks working
according to Islamic rules, in Turkey. (Tok, 2009, 1).
These banks worked in banking sectors as Private Finance Foundations before
2006. After 2006, they have been integrated to banking sector as participating
banks and their disadvantages against their traditional rivals have been omitted.
This helped them improve rapidly.
Participating banks aim to gain inactive funds which could not be valued for
economy because of many reasons, by method of interest-free finance.
In this work, Islamic banking system and its development in Turkey have been
examined in details. Initially, work of literature has been held related to
fundamental principles of Islamic finance, its increasing importance and Islamic
banking. Later on, comparison of Islamic banking and traditional banking takes
place. At last, development of participating banks which work according to Islamic
rules, monthly detailed and their increasing share in Turkish finance system, with
different banking indicators have been introduced.
Turkey met this kind of banking model (Today it is called Participating banking), in
years 1980s when a transformation experienced passing from closed economy into
open market system, in the process of adaptation to international markets. The
years 1980s have been a term in which some efforts have been spent such as to
gain depth to Turkish finance system, to provide more and different institutions and
instruments in increasing rate. As a result of these efforts, participating banks took
part in our financial system in 1985, as a new finance and banking model.
(zulucan ve Deran, 2009, 90). Participating banking can be defined as follow:
foundations which work on bases of loss and profit income and have been founded
in order to put inactive deposits into producing process that being kept as gold,
currency, property and field inside or outside the country. Even under the pillow and
not to be put into bank accounts because of religious reasons. (zulucan ve
zdemir, 2010, 6). Basic expectation behind to provide facilities for activities of
Islamic banks, to draw huge amount of funds to Turkey which accumulated in oilproducer Islamic countries and prepare a suitable base to use them within principle
of interest-free and loss and profit partnership. In addition, they wanted to form a
system to direct inactive deposits which people do not put into interest-based banks
because of their believes and held in inactive fields. (Canba ve Doukanl, 2008,

Participating banks collect deposits from customers, like traditional banks, and
make them used in principles of interest-free finance, different from classical
interest-bearer banking, and share loss or profit gained with the deposit
owners. They have acted completing functions of interest-based banks, on one
hand. On the other hand, they have improved an alternative market to classical
interest-based banks, by introducing new financial products which can be converted
into investment-aimed credits classical banks have not done before. In addition, a
resistance has been improved against sectors using funds, to be nourishing, in both
vertically and horizontally dynamic; not to be in relations with immoral production
units such as alcohol and gambling; speculative waving and crisis. They have had a
positive participation to Turkish finance market to gain depth and variety, by
widening service facilities of banking sector. (Ulusever, 2009, 1).
The application of participating banking in our country cannot be determined as
Islamic banking totally. Participating banks functioning in a system which has
different concepts of law and economy have done all banking services by keeping
interest away from collecting deposits and making used of funds, in the frame of
present acts. They have acted loss and profit sharing principle, instead of interest.
This causes to name such an application as interest-free banking in literature. This
is most important property to differ participating banks from traditional banks.
(zulucan va Deran, 2009, 86).
The share of participating banks in Turkish finance sector was decreased because of
disadvantage of not having a guarantee, after 2001 crisis. But, it showed an
increasing acceleration after 2003. Obstacles were removed in front of the system
and increasing acceleration continued, by integrating private finance foundations as
participating banks, in 2006. Participating banks have grown rapidly in Turkish
economy, and have made an important contribution to economy recently. These
contributions as follows: (TKBB, 2009a, 23-27).
A. Participating Banks provides fresh source to economy: New deposit owners
are gained to finance system by participating banks. This means to provide
fresh source to economy. In fact, participating banks have achieved to attract
some deposits as a fresh source that some people hold them under pillow
with anxiety of interest, instead of putting them in banks, because of
systems necessity.
B. Participating Banks Provides Finance to Real Economy: Every action and
enterprise decreasing interest rate makes a positive contribution to economy.
Participating banks bears a function that decrease current interest rates, by
their elastic fund collecting methods, and finance forms based on commerce.
This causes increase volume of investment, and grow value of goods and
services produced and finally grow national income.
C. Participating Banks Provide Contributions to economy by finance of KOB
(SME: Small and Medium Enterprises): Small and Medium Enterprises
constitutes backbone of Turkish economy in either investment and production

or export and employment. 98 % of enterprises are Small and Medium

Enterprises and they have 76.7 % of total employment in Turkey. Participating
banks together with deposit banks give support to SMEs which cannot take
enough shares from financial system, in investment and production.

Both the development Islamic finance and the efforts to become an international
financial centre in Turkey have been recent phenomena that have attracted great
attention. The secular identity of state and military consistently and routinely
resisted the Islamic influence on the business and finance sectors. For that reason,
up to just a decade ago it was almost unimaginable that a government would be
able to issue Sukuk, Islamic bonds, since it was believed that such activities may
destroy Turkeys strong secular identity. Through the fundamental change in
approach to politics by Erdogans Government the Islamic banking sector has grown
year by year the share of Islamic banks has increased from 2 per cent to 6 per cent
as regards total banking assets over the last ten years. Also, the trust in
conventional banking sector has fallen due to recent financial crises in 2001 and
2009. As one of the plans to celebrate the 100th anniversary of the modern Turkey
in 2023, the government targets to turn Istanbul into an international financial
centre. In this regard, they are planning to invest $350 billion in infrastructure and
carry out many different types of reform and regulation with respect to the
realization of the international finance centre project. As part of the effort to make
Turkey a regionally important centre, in the short term, the government wishes to
see Istanbul become an international Islamic financial centre. Historically and
geographically Istanbul has always been a key link between east and west as well
as north and south for centuries. Istanbul was technically ready to be an
international Islamic finance centre ten years ago however did not want to be take
part in Islamic finance because of its secular sensitiveness. For that reason, it was
questioned whether Istanbul had already left it too late to catch up with other
financial centres such as Kuala Lumpur. Nevertheless, 142 the government and the
Islamic banking sector in Turkey are optimistic with regard to Istanbuls long term
objective to achieve its goal and aim to contribute to its legal and regulatory
environment, human resources, image, and infrastructure. Istanbul still has a long
way to go to create an Islamic financial centre. For example, regarding the legal
environment, the government must increase the efficiency of courts, establish new
specialized courts that concentrate Islamic finance disputes and Turkey also needs
to have a stable, transparent and predictable tax system. Moreover, the
coordination and cooperation between regulators and market participants must be
enhanced. To compete with other financial centers Istanbul has to improve its image
regarding Islamic financial services. The government has already identified these
issues and others not mentioned here in its 2009 plan. However, these have not

been addressed fully and, as a natural result, Istanbul still has a long way to realize
its dream.