Turkey: R.O.T. Prime Ministry Undersecretariat Of Treasury Publishes New Circular On Islamic Insurance (Taqaful Insurance)

On, 20th September 2017 ,The Undersecretariat of Treasury of Turkish Prime Minister's Office published a circular on ''Working Principles and Operating Procedures for Participation Insurance'' ( hereinafter reffered as ''Islamic Insurance'' or ''Tekaful''). The circular sets out rules and working principles for the Insurance companies who practice Islamic Insurance (Taqaful) in Turkey.

With Islamic Law (Sharia'a) constituting the foundation of such financial activities , Islamic Insurance deviates from the Conventional Insurance practices by not employing methods such as interest, risk, qumar etc. Owing to the unique nature of Islamic Finance in general, Turkish insurance laws that are in force inevitably fell short on satisfying the needs with regards to Islamic Insurance practice. Therefore, a regulation in this area was much needed.

In parallel with the rising global demand for Islamic Finance practices (%17 average growth annually) financial institutions and investors have been quick to grasp the potential that Turkish insurance market possesses. With a muslim majority population, banks that operate according to Islamic Finance Principles called Participation Banks (''Katılım Bankaları'') have already been well established in the financial market and active in the market for more than a decade. In general, these banks owns insurance companies as subsidiaries and are operating in the insurance sector. However, these insurance companies refrain from identifying themselves as a participation insurance company (Katılım Sigortacılık Şirketi, Tekaful) or in other words Islamic Insurance. Although it is common practice amongst these Insurance companies to collect premiums from investors and market Tekaful Insurance products along with conventional insurance products. The rules laid out in the circular aims to regulate the Islamic insurance business and prevent the conventional insurance companies from selling Islamic insurance products without fully complying with the Sharia law.

Rules laid out in the circular will come into force 3 months after its publication date (20th December 2017) and Islamic insurance companies are expected to be fully compliant.

Participation Insurance (Islamic Insurance)

According to the definition found in the circular Participation Insurance is :

Art. 3 (f) ''Contribution into a risk fund created for ensuring the compensation of indemnity claims and/or savings payments regarding claims made by the participants themselves or by the other participants, an insurance type based on cooperation amongst its members by mutual participation of the risk and where the said fund is managed by an authorized insurance company according to Islamic finance principles.''

In Turkish financial market, participation insurance had not been regulated until the circular was published. In current practice, instead of forming a new company specifically designed for participation insurance, insurance companies have been employing the so-called ''window model''. Insurance companies that have been operating on the ''window model'' had taken advantage of the lack of legal framework by employing clever marketing methods where they could sell participation (Islamic) insurance products along with the conventional insurance products at the same stall to their clients.

However, as we mentioned at the beginning of this article Islamic insurance principles differ fundamentally from the conventional insurance practice, therefore these two different type of insurance must be traded separately in order for policyholders to know exactly which type of policy they are investing into. The main purpose of the circular is to regulate operating principles for those insurance companies who take Islamic law principles as a reference while conducting business within the market.

With regards to those insurance companies that are formed in line with the 5684 numbered Insurance Law and operating under the so-called ''window model'' are given a time period of 3 years to change their status and form a new company designed specifically for participation insurance activities.

Provisional Art. 1 (2) of the circular states that : '' Companies which are formed pursuant to the rules set out in 5684 numbered Insurance Law and using the window model are allowed to operate for a further 3 years from the date that this circular comes into force; the Undersecretariat could extend this period for a further 2 years''.

By this rule conventional insurance companies that collect premiums from its participants (policyholders) according to Islamic law principles are now forced to form a new entity where the sole practice would be participation insurance.

Also, according to the provisional Art. 1 (3) of the circular : '' Companies formed pursuant to 5684 numbered Insurance Law and who operate with the window model are required to notify the Undersecretariat of Treasury and the Union ( Turkish Union of Reassurors and Pension Companies) without any delay''. The said rule obligates the insurance companies who start operating in the market under the window model to notify the authorities regarding their status. However, as the circulate does not mention any sanctions for non-compliance it is vague as to what type of penalties will be applied in case an insurance company fails to do so.

Management Models

According to the new circular, participation insurance companies are required to choose one management model out of three and clearly communicate the chosen model of management to their policyholders under their insurance policies. According to Art. 4(2) these models are :

  •  Mudarabe : Mudarabe is an Islamic contract based on a financial partnership in which one party (an investor or policyholder) gives money to another (a fund manager) for the purpose of investing it in a business or economic activity. The investor puts up all the capital, and the fund manager provides expertise and know-how to help that activity to be successful. Both parties share the profits based on a predetermined ratio, but only the investor can lose the initial capital if the activity fails to be successful.
  •  Vekalet : In Islam, vekalet (wakala) is a contract in which one entity works as an agent for another entity or person. In the case of a wakala-based tekaful product, the tekaful operator works as an agent on behalf of the tekaful participants, who are also called the principals or the policyholders.
  •  Hybrid Model : Tekaful hybrid(Karma) model is a combination of Mudarabe and Vekalet models. Under this model the insurance company is indemnified on a predetermined rate by its participants in exchange for managing the risk fund and overseeing technical matters regarding the insurance investment. By this arrangement, an agency fee can be remunerated as upfront charges from the tekafül fund by the operator whilst at the same time the operator will have the right to profit-sharing on returns on the investment of the tekafül fund in accordance with the Mudarabe contract.

In addition to these 3 models, a new model could be employed by the participation insurance company with the condition that the new model is approved by the Danışma Komitesi (Sharia Board) of the said company.

Danışma Komiteleri (Shari'a Board)

The new circular stipulates that each company must have a Danışma Komitesi (Consulting Committee also called as Shari'a Board) to act as a compliance board. According to the Art. 8 (1) : '' Companies who operate in Participation Insurance area shall form a consulting committee which will oversee and ensure that the practices carried out are in line with the Islamic law principles and participation insurance rules.''

The purpose of the Danışma Komitesi (Shari'a board) is to oversee the policies and procedures employed by the company, buy reassurance and participation reassurance (retekafül) ,to approve and to evaluate whether the practices carried out by the insurance company comply with the participation insurance principles and Islamic finance principles. Art. 8 (5) of the circular makes it obligatory for companies to elect a sharia board and publish its members through their website.

Prior to the circular, such committee did not exist in the insurance companies. Foreign investment funds especially from the gulf countries who were eager to invest in participation insurance companies in Turkey were in doubt for investment due to the non-existence of such a committee as these committees constitute the main pillar of Islamic finance. Hopefully, with the circular coming into force the investors will feel more secure when considering investment options to the Turkish Participation Insurance companies.

Future of Participation Insurance in Turkey

With the positive changes that the circular imposes on the participation insurance companies, the Islamic insurance sector in Turkey is envisaged to reach the global standards in terms of business operation and market regulation. This approach shall be construed as a reassuring measure for the investors who are considering investing in the Turkish financial markets. Also it is important to remember that a new Reassurance system (Retekafül) would be an inevitable need for the participation insurance companies in the future to reinsure their risks according to the Islamic financial principles.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Pekin & Bayar
Kolcuoglu Demirkan Kocakli Attorneys at Law
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Pekin & Bayar
Kolcuoglu Demirkan Kocakli Attorneys at Law
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions