Weaknesses and Strengths of the Interest-Free Financial System

Abstract

The interest-free finance model, which gained bank status in our country with the legal regulation made in 2005 and is called participation bank, has made significant contributions to development of Turkish economy for approximately 40 years. From 1960s until today, a large segment of people with religious sensitivities in the world and in our country have begun to voice louder that an alternative system to interest-based banking system should exist. While this group of people, who do not want to work with banks due to interest sensitivity, continue to produce and add value because they do not want to use the services offered by interest-based banking model, their savings, which correspond to this added value, remain idle outside financial system. In this regard, interest-free finance system, which was first established in our country in 1983, is today actively used by a segment of millions, thus these funds, which remained idle in the past, are now gaining value by being included in production and investments within financial system. Although the share of participation banks operating with the interest-free financial system in banking sector has not increased at desired rate, the fact that  interest-free banking model has both strengths and weaknesses compared to interest-based banking model is the most important evidence that interest-free banking model has a future and development potential in banking sector in the future. Today, participation banks can offer many of the services offered by deposit banks in accordance with interest-free finance model in banking sector, in other words, they complete banking system and contribute to development of our country's economy by offering products and services that traditional banks cannot offer. In our study, the weaknesses and strengths of interest-free finance model were discussed and its contributions to our economy were evaluated.