To expand the range of interest-free instruments, Turkey is preparing to introduce Islamic insurance into the financial system where members contribute money into a pooling system to guarantee each other against loss or damage.

In the interest-free insurance system, also called Takaful, policyholder premiums, which are considered donations, form the general fund from which any claims are met. At the end of the year, any remaining cash surplus (after deduction of expenses) is not kept by the company or its shareholders but returned to policyholders in the form of cash dividends or distributions.

Thus, the interest-free Islamic insurance system is different from the conventional form, in which shareholders, rather than policyholders, benefit from profits generated by the sale of insurance products and services and by insurance investment assets.

According to Deputy Prime Minister Mehmet Şimşek, they have started to work to bring Islamic insurance into the financial system for citizens who are not inclined to using traditional insurance products due to interest sensitivity and the Treasury has reached the last stage of its legislative work.

Şimşek told Anadolu Agency that Islamic insurance, based on the principles of common risk sharing and solidarity, has recently shown significant developments worldwide.

He said that the system, which is regarded as one of many new financial instruments for Turkey, has been followed closely in the context of diversification and depth acquisitions in the insurance market and that the Treasury also started work to bring this application into the financial system.

The deputy minister noted that the Islamic insurance system provides an alternative model for citizens who do not prefer traditional insurance products due to interest and participation principle sensitivity and for those who want to exercise insurance activities within the framework of common risk sharing and solidarity principles, stressing that Islamic insurance has an important potential in Turkey in terms of financial inclusion.

Suggesting that Islamic insurers and traditional insurers are concerned about the existence of an insurance market that focuses on complementarity rather than competition, Şimşek said that the legislative work, which regulates Islamic insurance activities and protects the development of this system, proper control and the rights and interests of the insured, issued by the Treasury has reached the final stage.

Şimşek said that in the Islamic insurance system, insurers contribute to a fund established to meet compensation claims by participants, highlighting that the fund is managed by an insurance company that can carry out insurance activities based on common risk sharing and solidarity principles.

He pointed out that in the Islamic insurance system is based on contributions paid by participants do not belong to the insurance company, unlike a traditional insurance system which is based on the principle of risk transfer.

He also underlined that premiums are collected in a risk fund belonging to the participants and the remaining amount is returned to participants at the end of the period.

"In the event of a risk, the loss of the participant concerned is covered by the risk fund. The Islamic insurance company is responsible for the management of this risk fund belonging to the participants in accordance with insurance and participation policies and the service charge that it offers receives an administration fee over the pre-determined amount," Şimşek added.

"If there is a substantial residual in the risk fund after compensation claims have been met at the end of the period, the said balance will be returned to participants on the basis of certain rules. While such a balance is registered directly as revenue to the company in a traditional insurance system, distribution of the balance to participants is foreseen in the framework of Islamic insurance policies."

Expected to reach TL 30 billion by 2023

Saying that eight insurance companies are currently offering participation products in Turkey, where Islamic insurance practices have recently gained momentum, Şimşek added that the appetite of many domestic and foreign investors for Islamic insurance is being monitored at the moment.

Şimşek pointed out that the largest share in the Turkish financial sector belongs to the banking sector and that the asset size of participation banks corresponds to about 5 percent of the total size of the banking sector.

Recalling that the goal of participation banking is to reach 15 percent market share by 2025, Şimşek said, "In parallel with this target, we expect Islamic insurance to increase its market share in the upcoming period. We target the share of Islamic insurance to be 10 percent by 2023. While expecting the sector to create a fund of TL 180 billion in the Private Pension System (BES) and Auto Enrollment System (OKS) in 2023, we expect premium production in insurance products to reach TL 120 billion."

He added that approximately TL 30 billion in premium and fund size, which totals around TL 300 billion, is estimated to consist of products of Islamic insurance and retirement in 2023. He suggested that the Istanbul Financial Center will have a positive impact at this point.

Indicating that participation banks have an important role in terms of increasing product diversity as well as promoting and generalizing Islamic insurance products, Şimşek said, "Closer cooperation between participation bankers and Islamic insurers will provide significant benefits for Turkey's development along with all elements of the interest-free finance sector in this respect."