Ijara under Turkish Law: Bridging Islamic Finance and Legal Frameworks

Islamic financial products are becoming increasingly prominent and versatile in Türkiye, with Ijara emerging as a key example. As a secular country with civil law tradition, Türkiye provides a robust legal foundation, complemented by additional frameworks and guidance notes that facilitate the application of Sharia requirements to Islamic financial products. Islamic financial products enable financial institutions to attach funds from sensitive investors, diversify the financial market and access a wider range of international capital markets. The Islamic financial market is also supervised by the Banking Regulation and Supervision Agency (the BRSA) and the Capital Markets Board.

The rise in development and prosperity levels in regions with significant Muslim populations, coupled with the growing preference to avoid interest in compliance with Sharia principles, have accelerated the demand for alternatives to conventional interest-based financial products. In this context, the search for interest-free financial alternatives has led to the emergence of financial institutions operating in compliance with Islamic law, contributing to the widespread adoption of these alternatives, particularly in Islamic countries but also across in Europe, the U.S.A. and East Asia. Within this context, Ijara (leasing) has emerged as a pivotal instrument in interest-free banking. In this article, we examine how Ijaras are being structured and utilised in Türkiye.

Definitions and criteria

According to the “Interest-Free Finance Accounting Standard No. 8” (the Standard No. 8) published by the Public Oversight, Accounting and Auditing Standards Authority, Ijara is defined as a type of agreement that entails the transfer of the ownership of a service in exchange for an agreed fee. As referenced by the Standard No. 8, according to Islamic jurists, Ijara is based on three fundamental elements: (i) a contractual form consisting of an offer and acceptance; (ii) the parties involved, namely the lessor (the owner of the asset or service being leased) and the lessee (the party benefiting from the leased asset or service); and (iii) the objective of the contract, which specifies the rental fee and defines the asset or service transferred to the lessee. There are also additional requirements, such as general compliance with Sharia principles, for a valid Ijara transaction.

Turkish law does not specifically regulate Ijara. Instead, Ijara is treated as a form of financial leasing transaction governed by the Law No. 6361 on Financial Leasing, Factoring, Financing, and Savings Financing Companies (the Financial Leasing Law). While not being exclusive to Islamic financial instruments, the Financial Leasing Law establishes the general framework for, among other things, financial leasing products, which share certain attributes with Ijara.

According to the Banking Law numbered 5411 (the Banking Law) and the Financial Leasing Law, the entities authorized to conduct financial leasing activities are: (i) participation banks; (ii) development and investment banks; and (iii) financial leasing companies. Deposit banks, on the other hand, are not permitted to directly carry out financial leasing activities within their structure.

Financial leasing is a financing method in which a lessor, authorized under the Financial Leasing Law or relevant legislation, retains ownership of an investment asset and transfers its possession to the lessee in exchange for a specified rental fee during the contract period. In this arrangement, the lessee is entitled to fully benefit from the leased asset in accordance with the purpose outlined in the financial leasing agreement for the duration of the contract.

Financial leasing shall meet at least one of the following conditions:

• the ownership of the relevant assets should be transferred to the lessee at the end of the lease period;
• the lessee should be granted the right to purchase the assets at a price lower than the market price at the end of the lease period;
• the lease period should cover a period longer than 80% of the relevant assets’ economic lifetime; or
• the current value of the sum of the lease payments to be made in accordance with the financial leasing agreement constitutes a value higher than 90% of the market value of the assets.

Formal requirements

A financial leasing agreement is structured to be executed either in writing, remotely through communication tools or whether remote or not, via methods determined by the BRSA as substitutes for a written form. These agreements can also be established using an information or electronic communication device that facilitates customer identity verification.

Registration and notification procedures

Agreements related to real estate are registered in the annotations section of the land registry where the property is recorded and notified to the Financial Institutions Union (the Union) by the lessor. Similarly, agreements for movable properties with specific registries are recorded and annotated in those registries and notified to the Union. For movable properties without a specific registry, the agreements are directly recorded in a special registry maintained by the Union.

Conclusion

Ijara serves as a significant instrument in the Islamic finance market, offering a Sharia-compliant alternative to conventional financial products. Although Turkish law does not specifically regulate Ijara, the Financial Leasing Law and related regulations provide a comprehensive framework for its implementation.

Türkiye’s ability to integrate Ijara into its existing financial and regulatory systems demonstrates the flexibility of Islamic finance within a civil law legal framework. By aligning legal oversight with Sharia principles, Türkiye is strengthening its position as a hub for Islamic finance, attracting investments and supporting economic growth.