The agency theory considers the problems between agents and principal and aims to reduce the agency costs arising from these problems. The theory could be applied in various fields and in many different areas where principal-agent relations occur. Participation banks in Turkey operating banking services based on Islamic principals are able to implement many different banking facilities. They could be regarded as supplementary alternatives to the conventional banks and thus, participation banks provide depth and financial product range in the banking sector. There are many different studies on several fields and subjects about participation banks and Islamic banks both in national and in international literature. However, the studies discussing the fatwa structure in the context of agency theory are very rare especially for the participation banks in Turkey. Thus, this study examines the Sariah advisory board mechanism of the participation banks in particular within the scope of agency problems and it focuses on a model proposal that could resolve agency cost. In Turkey, there is not a nationwide nor a Shariah agency or institution which control, regulate and/or supervise the services, operations, and activities of the participation banks, in accordance with Islamic concepts. In this context, the establishment of an independent Islamic Supervisory Council will help to reduce agency costs. Furthermore, sustainability and stability of Islamic financial markets will increase together with issuing appropriate financial products in compliance with Shariah principles and thus the Council will help Istanbul to achieve the goal of being the financial center.
Participation Banks, Interest-Free Banking, Agency Theory