Evolution and Current Landscape of Takaful

Türkiye’s insurance sector has undergone significant transformation over the past century, shaped by both domestic reforms and global developments. The origin of regulated insurance activities dates back to the late Ottoman period, when foreign companies dominated the market, especially in port cities like İstanbul and İzmir. Early attempts to regulate the industry began with Law No. 1149 in 1927, followed by Law No. 3392 in 1938, which addressed supervision and licensing.

A turning point came in 1959, when Insurance Supervision Law No. 7397 was enacted in response to post-war reconstruction and the need to assert national oversight. This law governed Türkiye’s insurance operations for nearly five decades, providing the foundation for solvency standards, licensing procedures, and market supervision. It also reflected broader economic trends, as Türkiye shifted toward modernization and liberalization in the latter half of the 20th century.

In 2007, the sector underwent a major overhaul through the enactment of Insurance Law No. 5684, aligning domestic regulations with the European Union acquis. This legislation granted enhanced powers to regulatory authorities, introduced insurance arbitration systems, and mandated membership in industry associations to promote transparency and consumer protection.

Complementing these reforms, the Turkish Commercial Code No. 6102 and the Turkish Code of Obligations No. 6098 came into effect in July 2012, providing a comprehensive legal framework for insurance contracts. According to these laws, all insurance, reinsurance, and private pension companies must be incorporated as joint stock companies (Anonim Şirket; AŞ)—akin to Private or Public Limited Companies in the UK.

Further institutional development occurred with the establishment of the Insurance and Private Pension Regulatory and Supervisory Agency (SEDDK) through presidential decree on 17 October 2019, introducing a modern regulator responsible for overseeing both conventional and participation insurance activities.

The emergence of Islamic finance in Türkiye—particularly after the AK Party government took office in 2002—has been closely linked to state priorities for inclusive economic growth and ethical financial alternatives. Despite the increasing visibility of Islamic finance globally, Türkiye lacked a dedicated regulatory framework for takaful (participation insurance) until recent years. Conventional insurers often operated takaful windows, but without legal standardization, practices were inconsistent and vulnerable to criticism.

The first major step came with the Regulation on Working Procedures and Principles of Participation Insurance, issued in December 2017. This regulation initiated the formal recognition of takaful models and introduced guidelines consistent with Islamic finance principles, including selective underwriting and interest-free investment mandates.

In December 2020, this was superseded by the more comprehensive Regulation on Insurance and Individual Pension Activities within the Framework of Participation Principles, which:

• Mandated the closure of window operations by 31 December 2021
• Prescribed mudaraba, wakala, and hybrid models as permissible structures
• Required the establishment of Advisory Committees and Participation Compliance Units
• Allowed flexibility in the application of qard and surplus distribution mechanisms

Notably, however, the primary legislation—Insurance Law No. 5684, Commercial Code No. 6102, and Code of Obligations No. 6098—does not include specific provisions for participation insurance. Thus, participation insurance is governed solely through secondary legislation, raising questions about rulemaking consistency and long-term legal durability.

To address this gap, public authorities drafted a Universal Participation Finance Law, but its legislative progress has been repeatedly delayed. In the meantime, market participants have relied on internal models and global standards to guide practice.

While many participation insurers in Türkiye adhere to AAOIFI standards, others claim to operate under the so-called Taysir Model, which emphasizes:

1.   Selective underwriting guidelines aligned with Islamic finance principles
2.   Prohibition of riba (interest)
3.   Establishment of advisory and compliance governance

However, these operators often lack rigorous engagement with recognized Shariah governance standards. This divergence in approach means there is currently no unified or standardized model for Türkiye’s participation insurance market—a gap that risks undermining consumer confidence and operational coherence.

The 2000s were marked by deliberate state efforts to develop a robust Islamic finance infrastructure such as Ziraat Katılım Bankası AŞ (2014), Vakıf Katılım Bankası AŞ (2016) and Türkiye Emlak Katılım Bankası AŞ (2018)

These were followed by the creation of participation insurance companies under the Türkiye Wealth Fund, such as Türkiye Katılım Sigorta AŞ and Türkiye Katılım Hayat AŞ, launched in 2022, began operations in 2023 and the establishment of Türk Reasürans AŞ (Türk Re) in 2019, and its subsidiary Türk Katılım Reasürans AŞ in 2021, signaled a government-led commitment to support retakaful (Islamic reinsurance)

Retakaful placements may also be facilitated through foreign operators, highlighting Türkiye’s openness to global capital flows and expertise.

Private financial institutions have likewise responded to market demand, launching Islamic finance subsidiaries and expanding product offerings.

As of 2024, Türkiye hosts seven active participation insurers (four non-life, three life and private pension). The sector’s market share currently stands at 5%, accounting for US$1.3 billion of the total US$25.8 billion in annual premiums. With increasing public sector engagement, private innovation, and evolving regulatory frameworks, this figure is projected to double in the coming years.

Pending legislation—especially the Universal Participation Finance Law—will be crucial in formalizing standards and resolving inconsistencies. Türkiye’s experience reflects both the promise and the complexity of embedding ethical finance principles within conventional legal and economic systems.