In Turkey, Islamic finance is called participation finance: it relies on participation banks licensed and supervised by the BDDK, which take profit-sharing participation accounts and finance through sale, lease or partnership rather than interest-bearing loans.
Why participation banking rather than Islamic banking?
In a constitutionally secular state, official vocabulary avoids religious references. Legal texts speak of katılım bankacılığı, literally participation banking, and faizsiz bankacılık, interest-free banking, to describe activity that complies with Sharia principles.
1983: special finance houses are born
A 1983 decree authorised özel finans kurumları, special finance houses, outside the conventional banking framework. Albaraka Türk and Faisal Finans opened in the mid-1980s, followed by Kuveyt Türk at the end of the decade, with Gulf capital.
The collapse of Ihlas Finans and the need for protection
During the 2001 financial crisis, Ihlas Finans failed and its depositors, who had no deposit insurance, suffered losses. The episode convinced the sector to seek the same status and the same protection as banks.
Participation accounts now insured
Since regulatory alignment in the mid-2000s, funds held in participation accounts have been covered by the Savings Deposit Insurance Fund, TMSF, within the same limits as deposits at conventional banks.
Banking Law No. 5411 of 2005
In force since November 2005, this law turned special finance houses into participation banks under BDDK supervision. In 2006 the industry body took the name Participation Banks Association of Türkiye, TKBB.
A 2019 BDDK communiqué on compliance
Effective on 14 September 2019, a BDDK communiqué requires every participation bank to have an independent advisory committee. At least two-thirds of members need training in theology or interest-free finance and three years of experience.
The TKBB central advisory board
Above the internal committees, the TKBB set up a central advisory board that adopts common standards, drawing in particular on AAOIFI standards. The aim is to limit differences of interpretation between banks on the same product.
How a participation account works
The client picks a term, say three months, and the bank invests the funds in a financing pool. The return is not fixed in advance: it depends on the pool's result, shared at an announced ratio, with a loss theoretically possible.
Ziraat, Vakıf, Emlak: state-owned banks enter
From the mid-2010s, the state created its own participation banks: Ziraat Katılım, Vakıf Katılım and then Emlak Katılım. Backed by large public groups, they quickly widened the branch network, including in mid-sized cities.
Three banks with Gulf shareholders
Albaraka Türk, Kuveyt Türk and Türkiye Finans, the latter formed in 2005 from the merger of Family Finans and Anadolu Finans, remain major players. They offer home finance, leasing, gold accounts and foreign trade finance.
Lease certificates: the Turkish Treasury's Sukuk
Since 2012, the Treasury has issued kira sertifikaları, lease certificates backed by public assets, in Turkish lira and foreign currency. These securities give participation banks a liquid, compliant investment for managing their cash.
Participation insurance and the capital market
A 2017 regulation governs participation insurance, the Turkish equivalent of Takaful, with a separate policyholders' fund. Borsa Istanbul also publishes participation equity indices whose constituents are screened on debt levels and business activity criteria.
Specialist external source
The BDDK website publishes Turkish banking legislation, communiqués on interest-free banking principles and monthly data on participation banks.