Long regulated by banking laws, interest-free finance recently became subject to insurance laws as well. Thanks to the growing interest in interest-free finance and the Turkish government's incentivizing approach, the Banking Regulatory and Supervisory Authority (the "BRSA") issued a draft bill for interest-free finance (the "Draft Bill") and shared it with sector players for their feedback.
- The Draft Bill will affect the Interest-Free Finance Standards Board (the "Board"); Turkish interest-free finance institutions; Turkish branches of interest-free finance institutions established abroad; interest-free finance holding companies; and companies providing services for compliance with interest-free finance principles and financial services.
- The Board will determine the principles of interest-free finance. The Board will be an independent regulator and could be established under the BRSA or the Prime Ministry.
- Interest-free finance institutions will include participation banks; investment banks; insurance companies; private pension companies; micro finance companies; other financial institutions (finance companies, factoring companies and financial leasing companies); capital markets institutions; and interest-free financial holding companies operating in accordance with the interest-free finance principles.
- The Draft Bill will regulate the operations of interest-free finance institutions, as well as the interest-free finance operations of non-financial institutions (such as interest-free finance compliant shareholder loans).
- To establish an interest-free finance institution in Turkey: (i) the share capital must originate from sources compliant with interest-free finance principles; (ii) the areas of operation, assets, income and costs of the founding shareholders and the rights and the privileges granted by the founding shareholders to their own shareholders must be compliant with the interest-free finance principles; and (iii) the Board must confirm to the relevant regulator that the conditions above have been satisfied.
- To establish the branch of a non-resident interest-free finance institution in Turkey: (i) the parent must qualify as an interest-free finance institution in its own jurisdiction and (ii) the three conditions in the previous point above must also be satisfied.
- Persons with operations, assets, incomes and costs that are not compliant with the interest-free finance principles cannot have qualified shares or control in interest-free finance institutions.
- The Board and the relevant regulator must approve any qualified shares transfer or transfer of control. The purchase price must be paid from sources compliant with interest-free finance principles.
- An existing company can convert into an interest-free finance institution immediately or gradually. An interest-free finance institution cannot turn into a non-interest-free institution.
- The financial subsidiaries of an interest-free finance institution must also be an interest-free finance institution. The assets, income and costs of other subsidiaries must be compliant with interest-free finance principles.
- Interest-free financial services cannot be associated with interest, gambling, abuse, ambiguity, ignorance or any commodities that cannot be the subject matter of a contract pursuant to the interest-free finance principles. The Board will determine the other elements an interest-free financial service cannot be associated with.
- Participation banks will need to follow this new law for their operations.
- Interest-free insurance companies; private pension companies; micro finance companies; other financial institutions (finance companies, factoring companies and financial leasing companies); and capital markets institutions must follow this law for their operations permitted under their own laws.
- These institutions must establish an internal interest-free compliance committee to monitor compliance with the interest-free finance principles.
- The failure to comply with interest-free finance principles may ultimately lead to monetary fines and license cancellation of the concerned institution.
The targets of the Istanbul Financial Center program included turning Turkey into a regional hub for interest-free finance and one of the world's centers for interest-free banking. The growing demand for interest-free financial services paved the way for new regulations, such as introduction of takaful insurance. This new law will determine the general standards applicable to all interest-free financial services and monitor compliance with these standards, creating a sound foundation for Turkey's leadership in interest-free finance.