Ziraat has nine months to establish the new bank. But a key question remains unanswered: Where will the capital come from? Ziraat is a conventional bank, whereas paying and charging interest is prohibited in Islam. How is a bank that charges and pays interest supposed to create a bank that rejects interest? If Ziraat’s interest-based earnings are considered illicit, how is it going to establish the capital of an interest-free bank?

To resolve the conundrum, the Treasury is reportedly planning to proivde the required caiptal. The Treasury, too, operates on the basis of interest — but perception is what matters. Hence, the Treasury is expected to transfer $300 million to Ziraat, a sum that will first figure in Ziraat’s assets and then become the capital of the prospective participation bank.

The government, seeming quite enthusiastic on the issue, is not expected to stop there. Another state-run lender, Vakifbank, is planning to follow in Ziraat’s steps. Things are likely to be easier for it since Vakifbank’s main shareholder, the Directorate General of Foundations, will provide the capital for the planned participation bank without stumbling over interest snags.

Simultaneously or shortly after, the third state-run bank, Halkbank, is expected to follow suit as the state descends on the sector with all its might.

The government has already submitted a bill to parliament to clear legal hurdles in Vakifbank and Halkbank’s path to Islamic banking.

Faik Oztrak, deputy chairman of the main opposition Republican People’s Party and a former Treasury undersecretary, argued that the state-run banks’ venture into Islamic banking would be a constitutional breach.

How is participation banking different from conventional? In participation banking, the interest, considered illicit in Islam, is replaced with dividends paid to depositors from profits derived through various investment instruments.

In Turkey, participation banks use mostly the “murabaha” and “sukuk” techniques. In murabaha, the bank buys a commodity from a company in the portfolio it has created, adds a margin and then sells it. Clients are informed in advance how much profit they will get and in what time, just as with interest. The earning, however, is called a “profit share” rather than interest. The collected deposits, meanwhile, serve to provide capital support for companies whose commodities are sold.

Sukuk can be described simply as an interest-free bond. Purchasers of sukuk issued by participation banks receive yields under names other than interest. The key difference is that conventional bonds are Treasury guaranteed, while a sukuk certificate is issued on the basis of a tangible material asset.

Islamic banking, based largely on temporary partnerships in company profits, is popular in the Gulf, other parts of the Middle East and Far East.  Participation banks, which debuted in 1985 in Turkey, have total assets of 81.5 billion Turkish lira ($36.9 billion) and 869 branches across the country today. The total financing they have made available to the real economy has exceeded 60 Turkish lira ($27.2 billion).

Globallly more than 700 Islamic banking institutuions, relying mostly on Gulf money, operate in 75 countries, offering 52 financial instruments. Their total assets reached $1.8 trillion as of 2013. The sector is expected to be worth $6.5 trillion in 2020. Observers note that Islamic banking has grown in popularity and expanded quickly since the 2008 global crisis.

Is the Turkish state going to move out of the interest zone completely and shift into the interest-free one? Or is it planning to grow in interest-free banking as well before privatizing entities in both realms?