What Is a Participation Fund?
"Katılım fonu" has two separate meanings. In banking law it is the name for the money sitting in special current accounts and participation accounts at participation banks. In everyday speech it refers to an investment fund that holds no interest-based instruments and is bought and sold on TEFAS. A fund in this second sense holds assets such as lease certificates, shares from the participation indices, and precious metals. This page covers the second meaning.
Two different "participation funds"
The confusion comes from the legislation itself. Banking Law No. 5411 defines katılım fonu as follows: the money held in special current accounts and participation accounts opened at participation banks, belonging to natural and legal persons. So in banking, a participation fund is not a product the customer buys — it is the legal name for the money the bank collects. What "deposit" is for deposit banks, "participation fund" is for participation banks.
Under the same law, a special current account (özel cari hesap) is an account that can be withdrawn partly or in full on demand and pays the account holder no return in exchange. A participation account (katılma hesabı) gives the holder a share in the profit or loss arising from the bank's use of the funds; no predetermined return is paid, and repayment of the principal in full is not guaranteed.
The second meaning belongs to the capital markets: an investment fund managed according to participation principles and subject to Capital Markets Board (SPK) regulation. A list of these funds is on the participation funds page.
The participation umbrella fund
The SPK's Communiqué on Principles Regarding Investment Funds (III-52.1) sorts funds into umbrella fund types. The definition of the Participation Umbrella Fund is explicit: funds whose portfolio consists entirely and on a continuous basis of lease certificates, participation accounts, equity shares, gold and other precious metals, and other non-interest-based money and capital market instruments deemed appropriate by the Board.
Two phrases are decisive: "entirely" and "on a continuous basis". Not part of the portfolio but all of it, and not only at launch but continuously. Interest-based instruments such as bonds, bills and repo fall outside this definition.
The legislation grants participation funds different limits in some areas. For example, at most 10% of a fund's total value may be held in bank deposits and participation accounts, and the amount at any single bank may not exceed 3%; for participation funds these ratios are applied as 25% and 10%. For money market participation funds, the ceiling for participation accounts is 50%, and 20% for a single bank.
What the portfolio typically holds
- Lease certificate (sukuk). A financing instrument tied to the rental or profit-share income of an underlying asset instead of interest. In Türkiye it is issued through asset-leasing companies (VKŞ).
- Equity shares. Shares whose compliance with participation principles has been approved.
- Gold and other precious metals.
- Participation accounts. The fund may place part of its cash at participation banks.
How compliance is checked
The SPK's Guide on Investment Funds contains a separate section for funds with "katılım" in their title. Equity shares to be added to the portfolio must either be selected from an index whose compliance with interest-free/participation finance principles has been approved, or be approved by an advisor or advisory board. The Guide cites as examples the Katılım 30 and Katılım 50 indices calculated by Borsa İstanbul, and the Ziraat Portföy Participation Index. The same condition also applies to money and capital market instruments other than lease certificates, participation accounts, gold and other precious metals, and vaad (undertaking) contracts.
If an advisor or advisory board is engaged, then who sits on the board, the members' knowledge and experience in interest-free finance, and the board's working principles are disclosed in an annex to the fund's prospectus or on the fund's KAP page. Assessing a fund's compliance with participation principles is that board's job, and the criteria can differ from fund to fund.
The participation index
Borsa İstanbul's participation indices (Katılım 30, Katılım 50, Katılım 100 and Katılım Tüm) put companies through a two-stage screen. First, business activities that are not deemed appropriate are excluded. Then financial ratios are checked: revenue from the activities listed in the Standard may not exceed 5% of total revenue, interest-bearing assets may not exceed 33% of total assets, and interest-bearing debts may not exceed 33% of total assets. Eligibility is decided within the framework of the standard of the Advisory Board within the Participation Banks Association of Türkiye (TKBB).
Purification and impermissible income
Participation funds work with the concept of "impermissible income" (mahzurlu gelir): income arising from a source not deemed appropriate. The Guide permits this amount to be met from the fund's assets or from the fund management fee, provided that information about it is included in the prospectus and that approval (icazet) is obtained from the advisor or advisory board. Within 5 business days following the periods in which purification is carried out, the calculated amount and the institution to which it was transferred are disclosed on KAP. That amount is not taken into account when calculating the fund's total expense ratio.
Insurance and guarantees
A participation fund at a bank falls within the TMSF's deposit and participation fund insurance; the upper limit per person per bank is set by regulation. A fund unit, by contrast, is not a deposit and is not the subject of that insurance.
A different protection applies instead: under Capital Markets Law No. 6362, the fund's assets are separate from the assets of the portfolio management company and the portfolio custodian; they cannot be attached, pledged, or included in a bankruptcy estate. That is protection against the founder company failing — not against the fund's value falling. A participation fund's unit price rises and falls with the assets in its portfolio. There is no principal guarantee.
Tax
Gains from investment fund units are taxed at source through withholding under provisional article 67 of the Income Tax Law. The rate varies by fund type and can be changed by presidential decree. For that reason the current rate needs to be confirmed from the fund's own information documents.
Frequently asked questions
are a participation fund and a participation account the same thing?
No. A participation account is a bank account opened at a participation bank; it shares in the profit or loss arising from the bank's use of the money it collects. "Katılım fonu" in the Banking Law is the collective name for the money held in those accounts and in special current accounts. In everyday speech, however, "katılım fonu" usually means a participation investment fund traded on TEFAS; that is a capital markets instrument, not a bank account.
is a participation fund halal?
That is a question of religious ruling, and we are not an authority on it. What can be said from a regulatory standpoint is this: a fund's compliance with participation principles is assessed and approved by the fund's own advisor or advisory board. Who sits on that board, and the method it uses in its compliance assessment, are disclosed in the fund's prospectus or on its KAP page. The criteria can differ from fund to fund.
what does a participation fund invest in?
Under the SPK's Communiqué III-52.1, a participation umbrella fund's portfolio consists entirely and on a continuous basis of lease certificates, participation accounts, equity shares, gold and other precious metals, and other non-interest-based money and capital market instruments deemed appropriate by the Board. Interest-based instruments such as bonds, bills and repo fall outside this definition.
what is the participation index?
They are equity indices Borsa İstanbul builds from companies deemed compliant with participation principles (Katılım 30, Katılım 50, Katılım 100, Katılım Tüm). First, business activities that are not deemed appropriate are excluded; then financial ratios are checked: interest-bearing assets and interest-bearing debts may not exceed 33% of total assets, and revenue from the activities listed in the Standard may not exceed 5% of total revenue. Eligibility is decided within the framework of the standard of the Advisory Board at the TKBB.
is there a principal guarantee in a participation fund?
No. A participation fund's unit price rises and falls with the value of the assets in its portfolio. On the banking side, repayment of the principal in full is likewise not guaranteed for a participation account under the Banking Law. Only the special current account is an account that can be withdrawn on demand and pays no return.
is a participation fund covered by tmsf?
The participation fund at a bank — that is, the special current accounts and participation accounts at a participation bank — falls within the TMSF's deposit and participation fund insurance; the upper limit is set by regulation per person per bank. An investment fund unit, however, is not a deposit and is not the subject of that insurance. Instead, the fund's assets are kept separate from the assets of the founder and the portfolio custodian under Law No. 6362.
where can you buy a participation fund?
Most participation funds are bought and sold through TEFAS. However, under the SPK Guide, money market participation funds and short-term lease certificate participation funds can be brought into TEFAS only if the founder requests it, so not every fund of these two types is necessarily on the platform.
is tax withheld on a participation fund?
Gains from investment fund units are taxed at source through withholding under provisional article 67 of the Income Tax Law. The rate varies by fund type and can be changed by presidential decree, so the current rate needs to be confirmed from the fund's own information documents.
In short
The question "what is a katılım fonu" has two correct answers: in banking, the money held in special current and participation accounts at a participation bank; in the capital markets, an investment fund that holds no interest-based instruments in its portfolio. For the latter, compliance is checked either through an approved participation index or through the fund's own advisory board — the body making that assessment is the fund's own, and the criteria can differ from fund to fund. Apart from carrying no interest, a participation fund sits within the same framework as other investment funds: there is no principal guarantee, and its value moves with its portfolio.