Participation Banking

Profit and Loss Participation Accounts represent the outcomes of profit and loss participation resulting from funds deposited in participation banks. These accounts constitute funds for which no predetermined returns are provided to account holders, and the repayment of the principal is not guaranteed. Opened based on the mudarabah (labor-capital partnership) principle, customers depositing funds into these accounts engage in a profit-loss partnership with the Participation bank. They share the obtained profits according to the initially determined profit-sharing ratio.

Private Current Accounts, a type of account offered by participation banks, consist of funds that can be partially or entirely withdrawn upon request. No returns are paid to account holders. These accounts can be denominated in Turkish lira or foreign currency and can be opened in the name of either individuals or legal entities. Importantly, there are no limits associated with these accounts.

It is a labor-capital partnership, a type of collaboration where one party contributes capital, and the other provides labor to undertake and manage a business, based on the principle of sharing the resulting profits. It is an instrumental partnership utilized by participation banks for fundraising and fund deployment. Among the fundraising instruments employed by participation banks, Mudarabah participation accounts hold the largest share. In the Mudarabah process, the party with surplus funds (the customer) entrusts their surplus funds to Mudarabah pools of the participation bank for a specified period, allowing the bank to invest them. The profit-sharing ratio is predetermined through an agreement between the two parties. The accumulated funds in these pools are directed towards various investments, and the profits generated from these investments are transferred back to the respective pools. The bank then disburses the share of profits to the capital provider based on the agreed-upon profit-sharing ratio. Additionally, Mudarabah is used as a financing instrument on the fund deployment side

Investment agency transactions are conducted based on agency principles. It involves authorizing an individual or legal entity, whether for a fee or free of charge, to manage one's capital on their behalf. In this process, the party providing the capital is referred to as the principal, and the authorized party is called the agent, empowered to manage the capital for investment purposes. The agent utilizes the funds in financing specific projects, transferring the resulting profits and losses back to the capital provider. There is no guaranteed return in the investment agency utilized by participation banks for liquidity management, and agreements are reached based on estimated returns for the transactions. It serves as a method of fundraising in participation banks.

It denotes a form of consumption lending, where money or an equivalent commodity is lent without requiring any surplus. This practice is employed in participation banking within private current accounts, benevolent loan credits, and benevolent loans associated with credit cards.

This is a sales arrangement with a stated profit. In modern participation banking practices, it involves the acquisition of a commodity by the participation bank from the primary seller, usually in cash and subsequently selling it to the customer with a specific profit added, often on a deferred basis, based on the customer's instructions and purchase commitment. This transaction or the final sale contract within this set is also known as financial buying and selling, representing a significant method of fund deployment in participation banking.

It is a contractual arrangement that facilitates the transfer of the benefits of an asset (rights of use and enjoyment) to the party committing to pay the lease fee for a specified period. In the context of participation banking, Ijarah finds application in various products and services such as leasing, sub-leasing, service financing, safe deposit leasing, and lease-based banking services (including money transfers, collections, invoice, and tax payments).

This process involves transferring the benefits of a non-consumable asset to the customer for a specific duration to fulfill the purpose of providing financing. The three key entities in this arrangement are the investor (customer), the participation bank, and the manufacturer. The investor chooses the desired goods and enters into a financial leasing agreement with the participation bank for their acquisition. The participation bank acquires the goods and delivers them to the investor. The investor makes lease payments to the bank at predetermined intervals. Upon completion of the payments, ownership of the asset, from which the investor derives benefits, is transferred to the investor for a nominal amount or at no cost within the agreed-upon period outlined in the financial leasing agreement.

The term "selem" refers to the pre-sale of a standard commodity (such as grains, legumes, cement, etc.) by an entity or individual in need of cash, with delivery scheduled for a future date. Although not widely used in participation banking products, selem can be a method particularly applicable in financing agricultural products.

Istisna, also known as a contract of work, refers to contracts designed to have a specified work manufactured for a predetermined fee. The istisna contract focuses on products requiring production or manufacturing. These contracts necessitate determining the specifications, quantity, work, and payment term for the manufactured product. Participation banks can leverage istisna contracts in completing unfinished cooperatives, financing mass housing projects, construction projects, and financing large structures like vehicles, ships, and aircraft.

Transactions involving foreign exchange trading are categorized as sarf contracts within the framework of participation banks.  In accordance with this, the exchange of real or symbolic currencies, either amongst themselves or with other currencies, is executed subject to specific conditions. Participation banks facilitate cash transactions for customers intending to buy or sell currencies. Such cash-based foreign exchange transactions are denoted as spot foreign exchange transactions, wherein both amounts are reciprocally delivered at the time of the contract. Additionally, participation banks offer the option to establish precious metal accounts. Through these accounts, investors can engage in precious metal investments, with gold and silver commonly available as investment choices. In precious metal accounts where legal delivery occurs, physical delivery may also be arranged under specified conditions. These accounts can function as either special current accounts or participation accounts.

Guarantee, in the context of fulfilling a debt, involves a third party pledging to the creditor by assuming responsibility alongside the primary debtor. The cornerstone of various guarantees in participation banking, including surety bonds, acceptance, aval, and letters of credit.

Sukuk is a form of financial certificate, categorized as an investment certificate. Issued to finance diverse assets and/or rights, it grants holders proportional ownership in the generated revenues from these assets and/or rights. Based on the underlying agreement, sukuk is classified into types such as lease sukuk, mudarabah sukuk, musharakah sukuk, hybrid sukuk, etc. Due to its capacity to provide consistent rental income and the option for secondary market resale, lease certificates (lease sukuk) are more commonly favored. While the term "sukuk" in Turkey is often synonymous with "lease certificates" due to their initial preference in the country's early sukuk issuances, sukuk fundamentally represents only those formed through lease agreements

Takaful, recognized as participation insurance, is an interest-free insurance system fostering mutual support and cooperation among participants against potential risks. In this system, participants contribute premiums that, on one hand, resemble donations and, on the other hand, represent shared capital in the organizer company's management. Essentially, it involves a risk fund formed by participants' contributions to ensure the fulfillment of compensation and/or accumulation payment claims for themselves and other participants. This fund is managed in accordance with participation finance principles by an insurance company authorized for insurance activities, representing a type of insurance grounded in joint risk-sharing and solidarity principles.

An investment fund is a collective pool of money or assets, encompassing securities, valuable metals like gold, gathered from individual or institutional investors in return for participation shares. Operating on the trust ownership principle, the fund is managed as a portfolio containing various capital market instruments such as stocks, bonds, lease certificates, private sector debt instruments, repo-reverse repo transactions, and gold. When established and operated in adherence to interest-free finance principles, it is denoted as a "participation investment fund."