December 2017



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Lara Sezerler
Senior Associate, Istanbul

Beliz Zorlu
Legal Intern, Istanbul

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T +90 (212) 280 90 91

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Launch of the Legislative Framework for Interest-Free Insurance Systems

Within the context of the 10th Development Plan of the Ministry of Development and the 64th Government Program, aiming to develop interest-free finance mechanisms, the Banking Regulation and Supervision Agency is currently working to finalize a draft bill regulating the interest-free financing principles under a single roof. As part of such initiative, the Regulation on Principles and Procedures relating to Participation Insurance (the “Regulation”) was published in the Official Gazette on September 20, 2017. The Regulation has entered into force 3 months following its publication; i.e., on December 20, 2017.

Overview of the Regulation

The Regulation mainly sets forth the legal framework applicable to interest-free insurance (takaful) systems provided by insurance companies, acting in accordance with the participation insurance principles.

The “participation insurance” is based on a risk-sharing and cooperation mechanism. Under this mechanism, a risk fund managed by an insurance company in accordance with the participation insurance principles, is established as a pool to reimburse claims by participants (persons paying the contribution premiums) and other participants. This mechanism differs from conventional insurance in the respect that the participants are similar to shareholders instead of insurance policy holders. The risk is shared between the participants and the insurance company, rather than transferred to the insurance company as in conventional insurance. Even if (i) no risk occurs or (ii) risk occurs but the losses incurred are less than the contribution premiums collected, as opposed to conventional insurance the remaining balance is not kept by the insurance company or its shareholders, but may be used:

  • to decrease the contribution premium amount,
  • to allocate a contingency fund for unforeseen risks,
  • to distribute to the participants completely or partially, without allowing any equity distributions to the insurance company, or
  • for other alternatives to be approved by the Advisory Committee (defined below).

The provisions applicable to conventional insurance shall remain applicable where the Regulation is silent.

Return of the Remaining Balance

If the risk fund fails to satisfy legal and administrative obligations and the re-insurance or contribution re-insurance protections are not sufficient to cover the same, then the insurance company undertakes to offset the deficiency with its excess liquidity. The insurance company further undertakes to pay all insurance related fees (including but not limited to indemnity and re-insurance/contribution payments, agency commission fees and other legal fees) from the risk fund on behalf of the participants.

At the end of each insurance period, the insurance company will calculate the remaining balance in accordance with the generally accepted actuarial and participation financing principles and will disclose the results on its website. The remaining balance shall be used for the purposes listed above and if the remaining balance is distributed to the participants, then it may be distributed:

  • to all participants, regardless of whether they have received compensation during the insurance term,
  • to all participants who have not received any compensation during the insurance term,
  • to all participants who have made positive contributions to the fund, regardless of whether they have received compensation during the insurance term, or
  • in another method to be approved by the Advisory Committee,

provided that the selected method is indicated in the insurance agreement and the actuary of the insurance company approves that the insurance company satisfies adequate capital requirements.

The insurance company, following the approval of the actuary of the insurance company and consent of the Advisory Committee, shall determine when the remaining balance will be distributed by taking the scope of activity and specifications of the product into consideration.

Participation Insurance Models

The insurance companies may use different models for participation insurance, depending on the calculation methods used relating to its fees for management of the risk fund and for other technical and legal services rendered. These models are:

  • the proxy model, where a retainer fee is paid to the insurance company,
  • the mudarabah model, where a management fee calculated in accordance with profit and loss sharing mechanism within the scope of an equity based partnership is paid to the insurance company,
  • a hybrid model set up with the combination of the proxy and the mudarabah model, where (i) a retainer fee is paid to the insurance company and (ii) all of the technical profit is distributed to the participants but (iii) the investment profits are shared by the participant and the insurance company in accordance with a pre-determined ratio, or
  • a model that is approved by the Advisory Committee.

The participation insurance model and the retainer fee (for the proxy model) and/or the contribution ratio (for the mudarabah model) must be determined prior to execution of the relevant insurance agreement and shall be disclosed either on the website of the insurance company or in disclosure forms. Pre-determined ratios and fees cannot be changed during the applicable insurance period, unless the changes are to the benefit of the participant.

Advisory Committee

As per the Regulation, insurance companies engaging in participation insurance activities, shall either (i) establish an Advisory Committee to ensure compliance with participation insurance and financing principles, or (ii) outsource a third party for the same purpose and to directly report to its board of directors.

For proper supervision of participation insurance activities, all insurance companies collecting premium within the scope of participation insurance principles, shall provide monthly reports to the Undersecretary of Treasury and the Association of the Insurance and Reinsurance Companies.

Transition Period

This Regulation does not provide any principles relating to incorporation of insurance companies which will solely engage in participation insurance practices. However, the Regulation permits insurance companies (established in accordance with the Insurance Law numbered 5684) to engage in participation insurance services, without incorporating a new company for such purpose, for a period of three years until December 20, 2020. The Undersecretariat of Treasury is entitled to extend such period for an additional term of two years.


This information is provided for your convenience and does not constitute legal advice. It is prepared for the general information of our clients and other interested persons. This should not be acted upon in any specific situation without appropriate legal advice. This information is protected by copyright and may not be reproduced or translated without the prior written permission of Ergün Avukatlık Bürosu.