Conventional economic wisdom goes something like this: raising interest rates during high inflation is needed, because it will make borrowing money more expensive. And as people and businesses borrow less money, they have less money to spend, and that reduces the demand for goods and services. This will dampen the “velocity of money” – the speed at which money circulates through the economy – and that will then halt or reduce the price of goods and services. That way, there will not be too much money chasing the same goods and services, and as such, the problem of inflation is addressed.
Of course, the issue with an interest rate hike is that this will most likely – if not certainly – also cause an economic recession. The problem then is which is the lesser of the two evils: an immediate recession, or continued inflation leading to gradual decline into poverty?
Not to lose track of the purpose of this article, Erdogan justifies his action of cutting interest rates by appealing to Islamic grounds. As he puts it, usury “is the mother of all evil”. So here comes our problem: people – by which I mean the general non-Muslims and even liberal Muslims – will look at this so called Islamic economic tenet on the prohibition of usury and point at its terrible consequences by citing Turkey as their case study. It is this criticism of this Islamic economic tenet which I take issue with, but I am very much open to a critique of the Turkish government – the two are not the same!
Firstly, there is no validity to the basis of this complaint because it does not consider the Islamic economic model as a whole; to use Turkey as an example of one is invalid because it does not abide by a complete Islamic economic model. The two biggest contentions are the usage of a fiat currency, and interest-bearing debt as an investment instrument.
Moreover, just because a country is having an economic problem, it does not necessarily mean that their economic tenets are flawed or wrong. The fact is that all governments – regardless of their economic policies, age, or era – face economic problems and recessions. People have short memories: what caused the economic crisis of 2008-9? Pick up any encyclopaedia of your choice and read about recessions going back decades and even centuries ago.
The stories we read of the Madinan era – where stones were tied around stomachs to alleviate hunger – are strong indicators of an economic recession. This is during the time of the Prophet ﷺ, who led the best Muslim government ever to have existed.
Economic adversity seems to be a divine decree; all civilisations are afflicted by it, and this is readily deducible by a quick survey of history. The reason for this is quite simple: there are too many factors outside the control of any government to avoid recessions:
- Issues relating to climate, such as droughts,
- Disease and pandemics,
- Sanctions, blockades, and tariffs by foreign antagonising entities,
- Last but not least, fiat money must be added to this list.
This takes me to the point about why Turkey is facing such staggering rates of inflation. Firstly, to blame it all on Erdogan is not supported by the data; decades ago, Turkey had a painful experience of high and chronic inflation from 1985 to 2004, which was well before Erdogan; during this time, overtly secular forces were comfortably in power. So much for Islam and the Islamising of Turkey being the cause of all its problems.
In 2001, an independent central bank was established just to fight inflation; the initiative was successful and subsequently led to an economic boom into the country and lifted millions out of poverty.
But what is the cause of the latest inflation problem?
Here is my summary of the main reasons:
The usage of fiat currency. This is by far the most important factor, and the one you will not read about often because popular media does not take exception to fiat currency. When the underlying medium of exchange has no intrinsic value and can be easily and readily manipulated through the increase of money supply, then it should be no surprise we open ourselves up for the possibility of too much money chasing the same too-few goods and services.
The supply of money in Turkey has shot up quite radically over the past decade.
In a global environment where fiat currency is ubiquitously used, the underlying control of inflation consists of trust in the government to enable valuable goods and services to be produced, so that they can be paid for by other countries. Think about trying to buy something with Zimbabwean dollars. Once confidence tumbles, the value of the fiat currency falls.
Inflation is tricky because it is subject to self-fulfilling prophecy: the expectation of rising inflation causes inflation to rise. Since conventional wisdom requires interest rates to increase when inflation is high, and since the Turkish government is refusing to do that, the appetite for investment in Turkey has fallen; what is the point of investing in a country when your investment will automatically depreciate by more than 20% within a year just due to currency fluctuation? This lack of investment will impede – if not reduce – the goods and services that can be produced, and therefore inflation becomes a bigger problem.
One of the critical flaws of choosing to run an economy with fiat currency is the large degree on which the wealth of the population depends on the government. It is also tied to what other nations think it is worth. This takes me to another point: is that exposure risk really worth the capability of manipulating the domestic supply of money, especially for a government and people who do not subscribe to the norms of the rest of the world? I am reminded of the statement attributed to the French philosopher Voltaire: “Paper money eventually returns to its intrinsic value – zero.”
The Turkish economy is a net importer; it brings in sources of energy and intermediate goods. The problem is those goods have seen supply disruption problems and price hikes, and that is passed on to the consumers in Turkey. This problem is actually seen all over the world right now.
Emerging market currencies have all depreciated against the dollar recently, and the US Federal Reserve estimates it will reduce its asset purchase programme. This means interest rates in the US will rise, and the money seeking higher interest rates in developing countries will be brought back home to developed countries. This leads to an appreciation of the dollar against emerging market currencies, and the lira is no exception.
Trump’s tariffs on Turkish steel in 2018 caused a 20% fall of the lira against the dollar.  This effectively made Turkish exports more expensive, and the demand for their goods fell substantially.
There are probably a few more things to add to this list.
Some Thoughts for the Turkish Government and People
Firstly, we need to concede to the reality of economic adversity. The Turkish people should prepare themselves for more economic problems in the near future. When a recession does come, then addressing it fundamentally requires consistently working hard, observing patience, and yet still undertaking investments.
Allah gives us an example of an economic adversity and how it should be handled:
يُوسُفُ أَيُّهَا الصِّدِّيقُ أَفْتِنَا فِي سَبْعِ بَقَرَاتٍ سِمَانٍ يَأْكُلُهُنَّ سَبْعٌ عِجَافٌ وَسَبْعِ سُنْبُلَاتٍ خُضْرٍ وَأُخَرَ يَابِسَاتٍ لَعَلِّي أَرْجِعُ إِلَى النَّاسِ لَعَلَّهُمْ يَعْلَمُونَ (46) قَالَ تَزْرَعُونَ سَبْعَ سِنِينَ دَأَبًا فَمَا حَصَدْتُمْ فَذَرُوهُ فِي سُنْبُلِهِ إِلَّا قَلِيلًا مِمَّا تَأْكُلُونَ (47) ثُمَّ يَأْتِي مِنْ بَعْدِ ذَلِكَ سَبْعٌ شِدَادٌ يَأْكُلْنَ مَا قَدَّمْتُمْ لَهُنَّ إِلَّا قَلِيلًا مِمَّا تُحْصِنُونَ (48) ثُمَّ يَأْتِي مِنْ بَعْدِ ذَلِكَ عَامٌ فِيهِ يُغَاثُ النَّاسُ وَفِيهِ يَعْصِرُونَ (49)
“Yūsuf, O man of truth, explain to us (the interpretation of the dream) about seven fat cows eaten by seven lean (cows), and seven green spikes [of grain] and others [that were] dry – so I may return to the people; perhaps they will know.
“He said: You will plant for seven years consecutively (as usual); but leave your harvest leaves in its spikes except for a little from which you will eat (i.e. you will have seven good years of harvest, so save and be conservative with your consumption in anticipation of bad times to follow).
“Then there will come after that, seven difficult years which will consume what you saved for it, except a little from which you will store (i.e. consume what you saved in the earlier good years except a small amount which you should leave aside for the purpose of seeding the next year’s harvest).
“After that, there will come a year in which the people will be given rain and in which they will press (for olives and grapes).”
There are timeless lessons found in this short passage of the Qur’an:
Expect economic downturns in your lifetime. Good times are not perpetual. Similarly, bad times do not last forever either. Thus, you should never be unduly apocalyptic about the future. This is especially important for investors; investing requires a positive outlook of the future, or else it will not yield fruitful results.
Respect wealth (whether it is the harvest, a precious resource, or money), but be indifferent towards it. To create wealth requires hard work; people have to literally toil and spend hours of their daily lives to be economically productive. Therefore, do not let the good times cause you to forget the effort that went into making that wealth. Otherwise, you will end up spending uncontrollably and compromise your future financial security.
At the same time, wealth comes and goes, and consequently do not be obsessed with it. From time to time, you will suffer financial losses when investing – it is simply a part and parcel of the endeavour.
Bad times can last for a significant period. For instance, the famine mentioned here in these verses lasted for 7 years. The Great Depression (1929) lasted for a whole decade. Many of the recessions that followed thereafter lasted for one or two years. History should be used to calibrate our expectations – otherwise short-term thinking can cause misjudgement.
Have the foresight to think about the bad times, and then be competent enough to prepare properly for it. Had the Egyptians consumed all their produce in the good years, they would not have had anything for the bad years. And had they not known how to preserve the produce in the good years, again they would not have had anything for the bad years. Similarly, expect downturns in your life and prepare your budget for when it comes.
Invest even in difficult times, and set yourself up for success for when there is a turn-around. This means that you should not consume everything in the bad years; instead, literally sow your seeds now for the upcoming good years. Therefore, continue to work hard and put capital into your investments, even in bad times, if possible.
Yūsuf عليه السلام was given personal education and insight by Allah to understand and correctly interpret dreams. Although the king himself did not have that insight, nonetheless he was smart enough to recognise the truth when it was spoken. Knowledge is widely available, and as Muslims we have an obligation to continuously educate ourselves. We need to have at least the minimum knowledge to ask the right questions, and correctly judge between a plausible answer from one that is completely wrong.
Economic recessions can even have a cleansing effect in a country, as they lead to the pruning of businesses. Bad businesses die out or are cut down, and new pasture is formed for newer and better companies to grow. If bad businesses are allowed to survive e.g. by government intervention, then bad practices may continue and we will end up with zombie-businesses. This happened during the 1990s in Japan. Having said this, I do advocate for some services to continue to be supported. National services which are for the benefit of society, such as healthcare and infrastructure (both physical and electronic), should be supported receive direct government aid.
There are other points I feel strongly about:
An Islamic economy requires the avoidance of interest-bearing debt as an investment instrument. Debt in Islam is wholly reserved as an act of charity, and therefore the lender should not expect to profit from being in the privileged position of loaning money. Therefore, those with money wishing to make a profit should engage in genuine investment where risks are much more equitably shared. Psychologically, the investor has a much stronger urge and interest for the success of the enterprise. That should hopefully lead to better businesses.
As things stand, Turkey – like many other countries – use a tremendous amount of interest-bearing debt for its investment ventures. Such a policy has even had bad historical consequences, e.g. the construction bust of 2018 where debts were not being serviced, resulting in ghost-towns to date.  The country needs to wean itself out of interest-bearing debt.
Turkey should continue to produce unique goods and services that the world needs and wants. Economically speaking, Turkey is actually in a good place; it has a diversified economy with good exports, an educated populace, and good and conducive demographics for growth into the future.
In the short term, I personally do not think raising interest rates is necessarily ‘sinful’, since in cases of necessity prohibited religious injunctions are relaxed:
فَمَنِ اضْطُرَّ غَيْرَ بَاغٍ وَلَا عَادٍ فَإِنَّ اللَّهَ غَفُورٌ رَحِيمٌ
“But if one is forced by necessity, without wilful disobedience, nor transgressing due limits, then Allah is Oft-Forgiving, Most Merciful.”
It is imperative that a maṣlaḥah/mafsadah (cost/benefit) analysis be carried out which assesses the constraints of the current state, such as living with the problems of fiat currencies.
The pros of increasing the interest rate
Avoid runaway inflation. We have a living example of what can happen when inflation gets out of control. In Venezuela, people are literally eating rotting meat just to survive. 
The Taliban are the least compromising of people, and even they have not stopped opium production in Afghanistan due to the state of extreme poverty. 
Reduce the likelihood of a political defeat in the 2023 election. I do not think the younger and poorer Turks will support the Justice and Development (AKP) party if inflation continues to rise.
The cons of increasing the interest rate
Implicit and continuous support of the interest-bearing debt investment instrument. This ultimately makes one liable for divine chastisement in this world and the next. I should add that unless the interest rate is zero, lowering the interest rate to even a relatively low amount like 3% does not remove the moral problem for a Muslim. In fact, reducing the interest rate to an attractively low number will increase the uptake of interest-bearing debts, and ironically makes the moral problem even worst.
So in order to avoid usuary, why don’t they make it prohibitively expensive?
This idea has its own problems: all variable-interest contracts will suddenly become extremely expensive and lead to mass bankruptcy. In some way, this will exhibit the exact oppression of usuary which Islam wants to prohibit since the rich will become richer, and the poor will become poorer. This makes me to the next point.
The Turkish economy goes into a recession in the short run. If the recession is more painful than just weak purchasing power due to inflation, then I think it could equally lead to the AKP losing the next election.
 Al-Qur’an, 12:46-49
 Al-Qur’an, 16:115