About the Interest-free System

How does the Interest-free System work?

In the interest-free system, funds collected by personal current accounts or participation accounts (profit-loss sharing accounts) are returned to the real sector through such techniques of making funds available as the Financing Support, profit-loss partnership, Leasing and Trading of Documents against Goods. 80% of profits derived by these methods is distributed to account holders pro rata to their participation rates, and 20% thereof retained as the share of the organization.

  • Financing Support:
    A transaction where a bank obtains any type of raw materials, semi-finished goods, products, real property, machinery or equipment, required by a business (customer), locally or from overseas, paying the cost by immediate payment to the seller on behalf of the customer and debiting it to the customer to be payable within a certain term.
  • Profit-Loss Partnership:
    A partnership allowing for participation in the profit or loss from a certain operation or from trading of a lot of certain goods at rates set out in the agreement made previously between the bank and the customer.
  • Leasing:
    A transaction where the right (risks and benefits) to use a personal or real property is granted by the holder of that right (lessor) to a tenant (lessee) in exchange for a certain rent for a certain period.
  • Trading of Documents Against Goods:
    A transaction where, within the framework of foreign trade and exchange regulations, participation banks purchase documents against goods by immediate payment and resell them to the fund user at a higher price due payable within a certain term, based on a written agreement made between participation banks and the fund user.

May I withdraw my money before expiration of its term? If yes, may I also get the profit share to date?

Money may be withdrawn before expiration of its term by giving 30-day prior notice, but arising profit will not be paid to the account holder, but transferred to the pertinent term group (pool). If not all of the deposits is withdrawn, profit share will accrue over the remaining balance at expiration of the term.

How can I open a current or participation account with Türkiye Finans?

You can open a current or participation account, free of charge, at Türkiye Finans Branches, or, in places with no such branch, at branches of our correspondent banks, T. Garanti Bankası, Akbank and Finansbank by specifying the account type, term, and Türkiye Finans Branch.

How can I withdraw money from my accounts?

You can withdraw money, free of charge, with the passbook and your identity document at Türkiye Finans Branches, or, in places with no such branch, at branches of our correspondent banks, T. Garanti Bankası, Akbank and Finansbank.

To what places and how can I transfer money from my accounts with Türkiye Finans?

You can transfer money in FX or Turkish Liras from your current and participation accounts with Türkiye Finans to any place in the world.

You can instantly make Turkish Liras and FX transfers to the account or name on line from any Türkiye Finans branch to another.

You can make your Turkish Lira transfers to all other banks’ branches through EFT (Electronic Fund Transfer).

You can send your transfers in any FX of your choice to any place of your choice in the world through SWIFT.

You can also make any type of money transfers to your accounts with Türkiye Finans, using our local and oversea correspondents.

Is there any other example for the interest-free system throughout the world?

Today there are over 100 interest-free banks throughout the world. Four thereof are in Turkey and operate under the name of “Participation Banks”. Switzerland, Luxemburg, Denmark, the Philippines, the United States of America, the United Kingdom, South Africa and the Bahamas can be listed as examples for countries where there is an interest-free bank. However, there are countries such as Afghanistan, Iraq, Syria, Yemen and Libya with no interest-free banks though being Muslim. Citibank, Union Bank of Switzerland, Kleinwort Benson, ANZ Grindlays, Goldman Sachs, United Bank of Kuwait and Arab Banking Corporation can be listed for banks having established an interest-free banking department within them.

In fact, in Turkey common belief is that interest-free financial institutions come from Arab countries. However, the Articles of Association of an institution operating in this manner in the United Kingdom was translated in building the legal framework for such institutions.

What are the contributions of participation banks to the country economy?

Participation Banks has many contributions to the economy. Earnings provided to savings otherwise staying away from, but brought to, the financial system; effects regulating income distribution; contributions to economic growth by fund transfers to the reel sector; registration of informal economic operations; contributions to public finances by paying corporation tax, VAT, KKDF and BSMV; stability and increase of employment through direct funding of the reel sector; and contributions to socio-cultural activities can be listed.

Is there any guarantee for deposits with Participation Banks?

Banking Law No.5411 provides SDIF guarantee for up to TL 50,000 part of any deposit with any banks. The same conditions are also effective for us, as participation banks, too, are included in the banking system.

Does this system have any basic risks seen with banks, such as interest, short position, exchange risks?

Due to their operating principles, participation banks do not place the funds, collected thereby, in the interbank market and the treasury note-bond market which involve interest-bearing transactions. Therefore they are not affected by abnormal rises in interests during crisis times. As Participation Banks where an overwhelming part of collected funds consists of FX accounts let such funds be used in FX or as FX-indexed, that is, they let funds collected thereby in USD or EURO be used again in USD or EURO, and let TL funds be used in TL, they hold no short position and thus carry no exchange risk. This creates an actual guarantee for savings in Participation Banks owing to their underlying interest-free financing principles.

What is the benefit to participation banks of being subject to the Banking Law?

With these amendments made to the Law, participation banks have gained the status of BANKS operating on an interest-free basis. With the new regulation in the Banking Law, the term “Bank” specified in the Laws other than the Banking Law and providing various means and facilities for operations will be effective for Participation Banks, as well. Thus, letters of guarantee and checks issued by these institutions were rendered to be equivalent of those issued by banks and Participation Banks were vested with various authorities such as tax collection.

What is the difference between interest and profit share?

Interest can be defined as yield derived by a certain amount of principal at a certain rate for a certain term, meaning that there is an agreement where the lender (bank or natural person) sets and the borrower agrees to the term and the rate. In interest-bearing applications, both parties know how much he will pay or receive besides the principal when the agreed-upon term expires.

Profit share based on interest-free operations is, however, such part of profit derived by the principal used in a commercial or industrial economic activity until a term set by the parties which are distributed to the parties at agreed-upon rates when the term expires. Savings deposited with Participation Banks are made available thereby to investors to be used in sound and effective projects, against profit rates arising on market conditions, for a certain term. Yield, which is profit, derived at end of the term is distributed, 80% being to owners of savings, 20% being to the institution. Apparently, unlike in an interest system, how much the principal will bring at expiration of the term is not definite in the system operating on a profit share basis. In fact, loss is likely to be incurred from projects, to which loans are extended. In the system involving interest, this is impossible; the previously guaranteed amount must definitely be paid to the owner of the principal at expiration of the term. To put shortly and simply, the basic difference between profit share and interest is that with interest, one guarantees the earning of the principal at end of the term while with profit share, earning forms according to the efficiency of the supported projects.

What are the factors for participation banks to distribute profits consistently?

No Participation Bank in the country suffered loss within 17 years of operation. This does not mean they will never. Participation Banks support many projects of various natures in any period. Considering yields of the extended loans, that is, supported projects at end of the period, it may be seen that some projects have brought profits higher than expected, some as expected, and others less than expected and even loss has been incurred from some. If profit is derived from most of the projects funded, naturally the institution will distribute no loss to participation accounts. However, it must not be disregarded that, on extraordinary conditions such as poor management or global crisis in markets, these institutions may distribute loss to customers’ accounts. In fact, these are institutions operating and investing on a profit/ loss sharing basis.

For example, it is known that despite its profit of USD 8 million at end of 1982, Dar ül Mal El İslami announced a loss of USD 28 million on its record six months later, that the loss resulted basically from investments in low-yield valuable metals and that thus Dar ül Mal failed to distribute profits to the fund holders (its partners) in 1983.

What is the reason of the fact that profit rates distributed by participation banks are parallel to interest rates?

It is out of question that rates of profit distributed by participation banks may be the same as bank interest rates. Rates of profit distributed are different even across participation banks, themselves. Even small differences in profit rates lead to large-amount results in total. Participation banks operating in the country let a large part of funds collected thereby be used by a method of providing manufacturing support, that is, meeting requirements for raw materials, products or semi-finished goods used by businesses in manufacturing operations or trade. 70 to 80% of funds extended by participation banks operating in Turkey is for manufacturing support, and 5 to 10% thereof for profit-loss (mudarebe). In operations for manufacturing support, applying a profit rate in higher than those effective in the market is not possible, because interest banks having a 95% share in the total loan volume are more effective in creating market prices. For this reason, placement instruments applied by Participation Banks can be substituted by bank loans, that is, a customer finding the rate offered by Participation Banks high can use interest-bearing loan from banks or sellers at lower cost. If loan rates higher than those effective in the market arises, funds in Participation Banks may remain idle or otherwise Participation Banks will suffer loss. Considering this, it can be seen more clearly why profit shares derived and therefore distributed to owners of savings by Participation Banks tend to be close to the interest rates given by banks.

How are your applications involving checks?

Checks in FX or TL are issued to help our customers, who know risks of carrying cash, with such problems. In addition to the account number, and the number of checkbook pages requested, branches inform in writing to Fund Collecting and Banking Services Department the trade name, address and trade registration number for each company for which they make a request to issue a checkbook, and the father’s name, birth place and date, and address for each natural person for whom they do so.

Before issuing a checkbook, branches must require from any natural person:

  • Specimen Signature Declaration,
  • Copy of Identity Card,
  • Residence Certificate,
  • Copy of Tax Sign,
  • Copy of tradesmen registry.

From any legal person:

  • Specimen Signature Declaration,
  • Copy of Identity Card (of partners),
  • Residence Certificate (of partners),
  • Copy of Tax Sign and
  • Copy of Chamber of Trade Registration Certificate.
What should be done to open a participation account with your institution abroad?

To open a Participation Account with our institution, you can send your money to Türkiye Finans from a bank branch in the country where you are;

over American Express Bank- New York for US Dollar, and

over Commerzbank- Frankfurt for Franc (Euro).

Türkiye Finans' code used for correspondence in international transactions (SWIFT code) is AFKBTRIS. In addition, you must give us a message stating our branch and the term you choose to keep your money in our participation accounts, together with a copy of your identity card. You can give this message via mail, fax or electronic mail (e-mail).

Who are your customers? Do you generally work with a certain segment?

Participation banks have no ideology. Although a significant part of the people putting their savings to use at Participation Banks are people who do not want to use interest instruments for their savings, there are significant increases observed in the number of customers desiring to work with these institutions out of a high yield expectation. Since the foundation date of them, participation banks have worked with each segment of the society, whether they are included in the economic life or desirous of putting their savings to use instruments with interest-free yield, without making any discrimination based on religion, language, political preference, sect, or race, provided they are honest in their trade.

How does the profit distribution mechanism work?

In identifying the profit to be distributed to participation accounts, separate value measurements are used at the stages of account opening, operation by the institution, and withdrawal with the addition of profit or loss in the end. These value measurements are:

  • Unit value
  • Account value
  • Unit account value

Unit value

A weight unit changing when profit or loss arise as a result of participation accounts being operated by the institution. It reflects profit-loss development in the pool of participation accounts. The unit value considered as 100 for the first day the institution accepts funds into participation accounts will each day or weekend be recalculated with the addition of profit or loss arising during that day or week and will be announced to be effective until next day or weekend.

Unit value is found when the total value of assets in the fund after profit or loss is recorded is divided by the total account values existing a previous day or week.

If the fund is in profit, the unit value will rise or will fall in case of loss. High unit value shows the fund is profitable.

Unit values are calculated weekly at currently operating Participation banks.

Account value

The rate at which people depositing money in participation account funds participate in assets of such account. This is a coefficient increasing with each addition of money into the account or decreasing with each withdrawal therefrom. The account value of deposited money is found when it is divided by the unit value existing that day. This coefficient is shown on the profit-loss participation certificate where a new account value is written with each money deposit in or withdrawal from the account. The sum of account values of all people having accounts in the fund make the "total of account values".

Unit account value

...shows the amount found by multiplying the unit value with the account value and to which the holder of the participation account agreement is entitled.

Naturally, the unit account value is equal to the account itself on the day when the account is opened. Since the unit value rises when profit is derived from the fund operation, the new unit account value found by multiplying this new unit value with the account value will show the amount, to which the fund holder is entitled at end of the term, that is deposited money plus profit.

Example 1:
A customer deposits 1.000.000 TL in his/her participation account with the institution. If the unit value effective the day when the money is deposited is 100, then

Account value = 1.000.000 / 100 = 10.000
Unit account value = 10.000 * 100 = 1.000.000 TL

Example 2:
Let us assume the fund derived profit from its operation and the unit value became 105. In this case, at end of the term,

Account value = 1.000.000 / 100 = 10.000
Unit account value = 10.000 * 105 = 1.050.000 TL.
That is, the customer is in a profit of 50,000 TL at end of the term.


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