Are low interest policies guided by religion in Turkey?

The ruling Justice and Development Party’s (AKP) insistence on keeping interest rates low, despite high inflation and depreciation in TL, and its introduction of risky financial instruments such as “foreign-currency protected TL deposits” simply to avoid interest rates raises curiosity among observers of Turkish politics.

Students of Turkish politics seek answers to why the ruling party insists on such debated policies, after nearly twenty years in power, only one and a half years left to the elections and with support rates lower than ever.

Certainly, there are different opinions. According to a widely accepted one, the ruling party is motivated by religious principles. That is, the insistence on low interest rates stems from the belief that collecting interest (ribâ) is forbidden in Islam.

This discoursive frame provides some legitimacy to the otherwise contested policies of the ruling party.

But is this indeed the main motivation? Is it really religious preferences behind the ruling party’s new economic model? Most importantly, would religious voters support this model with low rates, even if they find it economically too costly?

A study we conducted a while ago about Islamic participation banks provides some answers to this question. Would religious individuals who have sensitivities regarding interest and thus, prefer interest-free financial instruments such as profit-sharing (murabaha) contracts with participation banks, stay at these options if they were economically less advantagous? That is, if they had to make a choice between religious preferences and economic benefits, how would they act?

Indirect interest balance in Islamic participation banks

This question is hard to answer. First of all, interviews or surveys are hardly helpful because what individuals believe they would do and what they actually do may not be the same. Thus, we must look at actual choices made between religious and economic preferences. Yet, there is another challenge. The rates of profit-shares provided by participation banks are almost the same with interest rates offered by conventional banks. Thus, under normal circumstances, we can say that an individual who prefers a participation banks has religious sensitivities but we cannot say that such sensitivities are dominant over economic interests. In fact, the success of participation banks lie in their ability to bring together religious and economic benefits and free the individual from having to choose between the two.

Under the circumstances, we must look at the rare moments when religious and economic preferences diverge. One of these times is when central banks decide to raise interest rates. These decisions are typically followed by conventional banks almost immediately raising interest rates of deposits and credits and participation banks raising rates of profit shares shortly after. However, since participation banks need more time to adjust, until profit-share rates catch up with interest rates there emerges a short time period when conventional banks offer more gains to their customers.

When the profit-share rates catch up with interest rates…

It is this short period that gives us data about priorities of customers of participation banks. Our study shows that an important part of capital moves from participation banks to conventional banks during that period and only return to participation banks when profit-share rates catch up with interest rates. Only a small core group keep their money in interest-free options despite economic losses.

These findings suggest the following. Religious sensitivies certainly shape actors’ behavior in Turkey and elsewhere. But so do economic interests.

Then it is safe to say that, yes, religious actors prefer options where religious and economic benefits overlap. As long as they can avoid economic losses they will turn to religiously safer options and support such policies over others. However, when religious and economic benefits begin to diverge, the impact of the former will significantly decline.

Conservative investors respond to economic interests, too

In sum, the demand for an interest-free economics, at the cost of economic interests, is not high in Turkey. Participation bank managers’ comments at a recent meeting with Nureddin Nebati, The Minister of Treasury and Finance, that interest rates should match inflation rates, simply supports this conclusion.

In conclusion, I do not think that recent government policies and decisions are a response to a public demand for “low interest rates at any economic costs.” In other words, if voters continue to support the ruling party, their economic conditions are probably not as bad as portrayed. If their conditions are indeed as bad, then we should expect them to withdraw their political support.

A common mistake is not to consider Islamic actors as rational ones. I find it important to understand that Islamic actors, both decision makers and their supporters, are rational actors and they respond to economic interests (as much as other individuals), in addition to their ideological preferences.

Certainly, rationality assumption does not guarantee that actors will manage to identify the most beneficial option or get there. After all, we are only flawed humans. Rationality only assumes that actors are motivated to achieve benefits. At this point, the questions we should ask are “what benefits are pursued?” or “which groups are meant to win?” Today, no one really has a good answer to either question, which shall be the topic of another article.