Islamic Banking-A challenge for the Turkish financial system

The Islamic banking model based on the zero interest rate or in practice, the enormously low reference interest rates and the fair distribution of profit and loss is seen as a challenge for economies that have long had the conventional economic model as their basis. The Republic of Turkey, which is one of the world's largest economies, for ideological reasons made an attempt to introduce the Islamic banking model, which required a significant reduction in the reference interest rate by the National Bank of Turkey, and as a result of this, the country faced a rapid growth in inflation, which in a given period reached over 80%, the Turkish lira recorded a historic devaluation, and the Istanbul Stock Exchange noted significant oscillations in the direction of the accelerated growth in the value of the BIST 100 (XU100) index.
The focus of this research paper is to examine the effect of the introduction of the Islamic banking model on the financial system with special reference to the financial market of the Republic of Turkey, that is, the Istanbul Stock Exchange and the representative index BIST 100 (XU100).
According to the results of the research, it can be concluded that the Islamic banking model, which contradicts the principles of the conventional economy which was based on the Turkish financial system, has caused significant destabilization of the Turkish financial system, that is, the financial market. Namely, the growth of inflation contributes to the growth of the BIST100 (XU100) index and changes in the functioning of financial flows.