Interest-Free Banking
What is Participation Banking?
Participation banking is a banking model that adopts interest-free banking principles, carries out all kinds of banking activities in line with these principles, collects funds on the basis of labour-capital partnership or agency, and provides funds through purchase-sale, partnership, financial leasing and other methods compliant with interest-free banking principles.
As a participation bank, Emlak Katılım provides financial services in three strategic areas — fund collection, fund utilisation and other banking services — based on its own values, i.e. remaining committed to interest-free banking principles.
How Does Participation Banking Work?
In the participation banking system, funds collected from customers are utilised through various financing methods and the profit obtained is shared with the fund owners. For example, in the murabaha method — one of the principles of participation banking — a customer requesting financing purchases the goods on behalf of the bank via the agency granted to them by the bank, and repays over the agreed profit, divided across the agreed term. The profit generated by this trade model is shared among the fund owners.
Participation banks were established to bring idle funds into the economy and to secure and utilise savers’ funds. These institutions utilise the funds they collect from those with a surplus in industry and trade through interest-free financing, operating on a system based on distributing the profit to fund owners.
Why Participation Banking?
Participation banks do not include interest in any of their transactions. In participation banking, besides the prohibition of interest, there are also prohibitions on uncertainty and on excessive risk and speculation. In purchasing goods and services, the money is paid to the seller against an invoice rather than to the customer. Financing is always provided against a good or service. All these matters are of great importance in terms of financing real trade, supporting transactions that add value to society, and meeting the needs of people who wish to adopt the interest-free principle.
For more detailed information about the products and services whose interest-free banking principles and standards are determined by the TKBB Advisory Board, please click here.
Participation Banking Products
Murabaha (Cost-Plus Sale Upon Order)
Murabaha is a sale transaction in which the profit margin is disclosed. In modern participation banking practices, based on the customer’s instruction and promise to purchase, the participation bank purchases an asset from the original seller, generally on a cash basis and often through an agency arrangement granted to the customer. The bank then sells the asset to the customer on a deferred-payment basis by adding a predetermined profit margin to the purchase price.
Murabaha may refer either to the entire set of transactions or to the final sale contract within this structure. It is also referred to as financial purchase and sale and is one of the most important financing methods used in participation banking.
Salam (Advance Payment Sale)
Salam is a contract whereby a company or individual in need of liquidity sells a standardized commodity that has not yet been produced—such as grains, pulses, or cement—for an advance cash payment, with delivery scheduled for a future date.
Although Salam contracts are commonly used in agriculture and farming, their application is not limited exclusively to these sectors.
Tawarruq (Deferred Purchase and Spot Sale)
Tawarruq is a transaction in which a commodity purchased on a deferred-payment basis is sold to a third party for cash, generally at a lower price, in order to obtain liquidity.
In this transaction, participation banks purchase commodities such as platinum, grains, or other raw materials from organized markets on a cash basis upon the customer’s request and subsequently sell them to the customer on a deferred-payment basis. The customer then sells the commodities purchased from the participation bank to another buyer through organized markets, either directly or through an agent, for immediate cash payment.
As a result, the customer obtains the required liquidity while assuming a deferred payment obligation. When the transaction is carried out for the purpose of providing liquidity to the participation bank itself, it is referred to as reverse tawarruq.
Istisna (Manufacturing/Construction Contract)
Istisna is a contract under which one party undertakes to manufacture or construct a specified asset in return for an agreed price. It applies to products or projects that require manufacturing or construction.
The specifications and quantity of the product, the scope of work, the payment terms, and the delivery date must be clearly determined in the contract.
Participation banks may use Istisna contracts to finance the completion of unfinished housing cooperative projects, mass housing developments, construction and contracting projects, and large-scale assets such as vehicles, ships, and aircraft.
Ijarah (Lease and Service Contract)
Ijarah is a contract whereby the usufruct of an asset—that is, the right to use and benefit from the asset—is transferred to another party for a specified period in return for an agreed rental payment.
In participation banking, Ijarah is used for products and services such as leasing, subleasing, service financing, safe-deposit box rental, and fee-based banking services including money transfers, collections, and bill and tax payments.
Financial Leasing (Lease Ending with Transfer of Ownership)
Financial leasing is a financing arrangement whereby the right to use and benefit from a non-consumable asset is transferred to the customer for a specified period.
There are three parties involved in this transaction: the investor (customer), the participation bank, and the manufacturer or supplier. The investor selects the asset required and enters into a financial leasing agreement with the participation bank for its purchase. The participation bank purchases the asset and makes it available to the investor.
The investor pays rent to the bank according to the agreed payment schedule. Once all payments have been completed, ownership of the asset is transferred to the investor either for a nominal amount or free of charge. During the term specified in the financial leasing agreement, ownership of the asset remains with the participation bank.
Mudarabah (Labor-Capital Partnership)
Mudarabah is a labor-capital partnership in which one party provides the capital while the other contributes labor, expertise, and management. The profits generated from the business are shared between the parties according to a pre-agreed ratio.
In participation banking, a customer with surplus funds may invest those funds for a specified period in Mudarabah pools managed by the participation bank. The profit-sharing ratio is agreed upon in advance between the parties.
Funds accumulated in these pools are directed toward various investments. Profits generated from these investments are allocated to the relevant pools, and the capital provider receives their share of the profit according to the agreed profit-sharing ratio.
Mudarabah may also be used as a financing instrument on the fund-utilization side of participation banking.
Musharakah (Profit and Loss Sharing Partnership)
Musharakah, also known as a capital partnership or profit-and-loss sharing partnership, is an arrangement in which two or more parties contribute a specified amount of capital to conduct a business jointly and share the resulting profits or losses.
In participation banking, Musharakah is used as a financing method particularly for project financing, where the participation bank becomes a partner in the relevant project.
Since banking institutions are not primarily established to operate businesses and may lack sector-specific operational expertise, participation banks generally do not take a direct role in managing the business. Instead, management is usually entrusted to the other partner, who has expertise in the relevant project area.
Under this financing method, the participation bank assumes the risk of project losses as well as risks arising from the project partners. At the same time, it may benefit from potentially higher returns while contributing directly to economic activity and employment.
Investment Agency
Investment agency transactions are carried out on the basis of an agency agreement, with or without a fee. In such transactions, the principal authorizes the agent to invest the principal’s funds on their behalf.
The agent uses the funds to finance predetermined projects and transfers the profit and loss generated from these investments to the principal. Participation banks may use investment agency as a fund-raising method by providing a return guarantee through the participation of the Savings Deposit Insurance Fund (SDIF) in the transaction.
Participation Account
Profit and Loss Participation Accounts are accounts consisting of funds deposited with participation banks, where account holders participate in the profits and losses arising from the utilization of these funds by the bank. No predetermined return is paid to the account holder, and the repayment of the principal is not guaranteed.
Participation Accounts are opened based on the Mudarabah (labor-capital partnership) principle. Customers who deposit funds into these accounts enter into a profit-and-loss sharing partnership with the participation bank and share the profits generated according to the profit-sharing ratio agreed upon at the outset.
Special Current Account
Special Current Accounts are a type of account offered by participation banks. Funds held in these accounts may be withdrawn partially or entirely upon request, and no return is paid to the account holder.
These accounts may be opened in Turkish lira or foreign currency and may be held in the name of individuals or legal entities. There is no specific limit applicable to these accounts.
Participation Insurance (Takaful)
Participation Insurance (Takaful) is an interest-free insurance system in which participants, under the management of an operator company, pay contributions that have the characteristics of both donations and partnership capital. Through these contributions, participants provide mutual assistance and solidarity against potential risks.
In other words, participants contribute to a risk fund established to meet compensation and/or savings payment claims of themselves and other participants. The fund is managed by an authorized insurance company in accordance with participation finance principles and is based on mutual risk sharing and solidarity.
Investment Funds (Participation Fund)
An investment fund is a pool of assets created from money, securities, precious metals, or other assets collected from individual or institutional investors in exchange for participation units. These assets are managed on behalf of investors, based on the principle of fiduciary ownership, by investing in capital market instruments such as shares, bonds and bills, lease certificates, private-sector debt instruments, repos and reverse repos, as well as gold and other precious metals.
When such a fund is established and managed in accordance with interest-free finance principles, it is referred to as a Participation Investment Fund.
Sukuk
Sukuk is a type of financial or investment certificate issued to finance various assets and/or rights. It entitles its holders to a proportional share of the income generated from the underlying assets and/or rights.
Depending on the underlying contractual structure, Sukuk may take various forms, including Ijarah Sukuk, Mudarabah Sukuk, Musharakah Sukuk, and Hybrid Sukuk.
Lease Certificates (Ijarah Sukuk) are more commonly preferred because they provide investors with fixed rental income and can be traded in the secondary market. Since this type of Sukuk was also used in Türkiye’s first Sukuk issuances, the term “Sukuk” has become closely associated with “Lease Certificates” in Türkiye. However, a Lease Certificate specifically refers only to Sukuk structured on the basis of Ijarah.
Certificates of Authorization
- Murabaha/Usuary Authorization Certificate
- Certificate of Activity
- Participation Account Authorization Certificate
Participation Banking Information Forms
- Investment Mandate Client Information Form
- Power of Attorney / Investment Power of Attorney – Customer Information Form
- Tawarruq Customer Information Form
- Special Current Account (Qard) Customer Information Form
- Musharaka Customer Information Form
- Murabaha Customer Information Form
- Mudarabah Customer Information Form
- Labor Leasing Customer Information Form
- Customer Information Form for Contract for Work (Construction/Service Contract)
- Financial Leasing Customer Information Form
- Customer Information Form for Fund Disbursement via Loan Contract (Karz)
- Vaat Customer Information Form
- Guarantee Agreement Customer Information Form
- Continuous Supply Contract Customer Information Form
Frequently Asked Questions
The profit to be distributed to term-based participation accounts depends on the profit level generated through the utilization of the funds held in these accounts. These funds are pooled according to currency type—specifically TL, USD, and EUR. Financing is provided to customers seeking funds from the relevant pool—based on their requested currency and maturity term—by purchasing the required goods for cash and selling them on a deferred-payment basis; the profit arising from this transaction is distributed to the participation accounts on a daily basis. The accumulated amount of these daily distributed profits is paid to the customer as a profit share at the end of the term.
The primary purpose of participation banks is to enable savers who wish to avoid interest-based income to securely utilize their funds and channel them into the economy. Participation banks—whose numbers are steadily rising worldwide—contribute to development by financing various investments with the funds they collect. In Türkiye, nine participation banks, including Emlak Katılım Bank, offer interest-free banking services to their customers.
The underlying reason for this misconception is that the interest and profit (margin) rates charged to customers utilizing funds—as well as the interest and profit-share rates paid to savers—are very similar across both types of banking. We can explain the reason for this proximity as follows: Since both types of banking operate within the same market and economy and rely on short-term funds from savers (with an average maturity of 35 days), they largely meet the market's demand for short-term financing and credit. Credit, interest, and profit rates are determined by market conditions, and all conventional and participation banks allocate funds based on these prevailing market rates.
Because market-determined rates are similar, the financing revenues generated from credit customers are also comparable. Consequently, the profit-share and interest rates distributed to savers by both banking models end up being similar as well. Thus, both financing (credit) rates and participation fund (deposit) rates track closely with one another.
In participation banking, the focus should not be on the similarity of rates, but rather on the differences in methods for raising and utilizing funds—specifically, whether the principle that "trade is halal while interest is haram" is being observed. Furthermore, due to these methodological differences, the gap between the returns (profit shares vs. interest) distributed to savers by the two types of banking can sometimes widen. This divergence typically occurs during periods of entering or emerging from a crisis. Ultimately, the primary criterion for comparing the two types of banks should not be the interest and profit rates obtained from financing customers or the profit shares and interest rates distributed to savers, but rather their methods of raising and deploying funds.
The operating principle of participation banks is based on the absence of interest, and they derive the majority of their profits from financing activities involving the purchase and sale of goods. To incur a loss from such commercial activity, one would have to sell goods purchased upfront for less than their cost or fail to collect payment for the goods sold. Participation banks conduct financial analyses of the customer both before and after providing financing support, secure necessary collateral, and manage follow-up and collection processes, thereby ensuring the safety of the collected funds. Since the ratio of uncollected financing support does not exceed 2–3% of the total financing volume, actual losses do not occur. However, during periods of deep economic crisis, this ratio may rise and impact the funds.
By virtue of their operating principles, participation banks offer interest-free banking services. Since the fundamental principle of participation banks is the absence of interest, they raise funds based on profit and loss sharing and provide financing through trade, partnership, and financial leasing methods.
Like all banks, participation banks are subject to supervision by public authorities such as the Banking Regulation and Supervision Agency (BRSA) and the Central Bank of the Republic of Turkey (CBRT).
Participation banks contribute to bringing the informal economy—which remains outside the formal system due to interest-related sensitivities—into the formal economy.
Participation banking is a modern and robust financing model.
Because participation banks operate in direct connection with the real sector, they retain their status as sound and secure institutions even under adverse conditions. They are less affected by crises.
Participation banks provide financial support to SMEs.
Participation banks and deposit banks operate under the same market conditions. The primary source of income for participation banks is the profit generated from the financing support they provide, whereas for deposit banks, it is the interest earned on the loans they extend. Both profit rates and interest rates are determined by the market based on supply and demand. The fact that these income levels are comparable results in the profit shares distributed to savers and the interest paid out being similar as well.
To ensure that participation banks fully implement practices aligned with interest-free banking principles, "advisory committees" have been established within each participation bank, in accordance with the "Communiqué on Compliance with Interest-Free Banking Principles and Standards" issued by the BRSA (Banking Regulation and Supervision Agency). The products and processes of participation banks are subject to approval by these committees. Operating independently in their decision-making yet accountable to the boards of directors, these committees conduct the necessary reviews of participation banking products prior to their market launch and issue opinions regarding their compliance. Under the Communiqué, participation banks are required to carry out interest-free banking compliance and audit activities. Furthermore, a "Central Advisory Board" has been established under the Participation Banks Association of Turkey; the decisions made by this board are binding on all participation banks. This board sets standards for products to be used by participation banks and makes decisions on various matters concerning the sector. These decisions and standards are binding on the participation banks. Additionally, the "Implementation III Department" has been established within the BRSA to oversee the development of participation banking and ensure that operations are conducted in accordance with interest-free banking principles.