The activities of internal audit, internal control, compliance and risk management in our Bank are carried out respectively by the Supervisory Board, Directorate of the Internal Control and Compliance Department and Directorate of the Risk Management Department, under the Audit Committee.

The following is aimed with the organization that is established in a way to include all units and branches:

• To continue banking operations in a secure manner in line with the legislation, policy, principles and objectives,
• To achieve sustainable profitability targets, to perform the financial and administrative reporting in a timely and secure manner,
• To define Ziraat Katılım’s legal, nominal and financial risks, to measure, report, and monitor the risks and to minimize the concerned risks by controlling them.

The Functioning of Internal Audit

The Supervisory Board audits whether the operations carried out by the Bank’s all units and branches are in accordance with the law and other relevant legislation and the Bank’s strategies, policies, principles and objectives; the effectiveness of internal control and risk management systems within the framework of risk‑based audit approach.

In line with the BRSA’s Regulation on Internal Systems and Internal Capital Adequacy Assessment Process of Banks, the Regulation on Audit of Bank Information Systems and Banking Processes to be Performed by Independent Audit Organizations, the Regulation on Information Systems and Electronic Banking Services of Banks, the Communiqué on Compliance with the Principles and Standards of Interest‑Free Banking, especially the Law on Banking, and other relevant external legislative provisions and the Bank’s in‑house regulations, the Bank’s activities, transaction steps and work processes, which constitute the primary and secondary processes, were evaluated by the Board of Auditors in terms of accuracy, effectiveness and efficiency.

The audits of the Branch, Head Office unit, banking processes, information systems (COBIT), support service companies, which were included in the internal audit plan, were completed. The audit results were also shared with our Senior Management and the Banking Regulation and Supervision Agency in accordance with the periods stipulated in the relevant legislation provisions. The 2021 Internal Audit Plan preparation works are still ongoing by taking into consideration the risks carried by the branches and units and in a manner compliant with the Bank objectives and policies.

The Management’s Declaration pertaining to the 2020 operations, which is prepared in order to present assurance about the effectiveness, adequacy and compliance of internal controls on the Information Systems and Banking processes, was prepared by adding the reports regarding the audits of the companies from which information systems processes audits and support services are procured.

Due to the lockdown measures put in place to tackle the coronavirus pandemic, which started to be implemented in March 2020, branch audits, which we had aimed to carry out in the field, were kept on hold until the lockdown measures were relaxed. In this process, a focus was placed mainly on spot (immediate) audit activities (the work we do throughout the Bank regarding a specific issue/transaction/process). Subsequently, in the summer months when the restrictions were loosened, a significant portion of the branches included in our audit plan were audited locally.

Our remaining branch audits, banking processes audits and information systems audits were carried out without disruption thanks to the convenience brought about by the remote working model that was put into use at our Bank. According to the course of the pandemic period, there was an obligatory transition in our working models in terms of the on‑site audit and remote audit methods. Nevertheless, these transitions did not prevent us from continuing each of our audit activities with professional diligence and attention, which is one of our basic principles.

The web‑based audit module, which is used in some of the subsidiaries within the Ziraat Finance Group, was adapted to our Bank and further developed, and has been actively used in the end‑to‑end audits of our branches as of the beginning of 2020.

The project of commissioning the audit module at our Bank was divided into more than one part. In the first phase, audits have been started over our audit module as of the beginning of 2020 and audit reports were produced over the system and the finding tracking mechanism was established. The second phase, which was commissioned in 2021, is aimed at expanding the scope of access to the audit module, to create findings analysis and reporting, to develop the finding tracking mechanism, to add the banking processes and information systems findings and control matrices into the audit module and to include the findings of these audits in the tracking mechanism.

With its activities, the value it generates and its recommendations, the Audit Board aims to contribute positively to the decision making processes of the Bank’s Senior Management.

The Supervisory Board closely monitored the changes stipulated by the legislative regulations, the Banking Regulation and Supervision Agency decisions, the Bank’s Senior Management and the Headquarters units, and regularly revised the audit points.

The Functioning of Internal Control and Compliance System

The purpose of Internal Control activities is to ensure the protection of the Bank’s assets, effective and efficient conduct of the operations, unity and reliability of the accountancy and reporting system and timely access to the information.

The Internal Control system was designed in a way to cover the Head Office Units, domestic branches, foreign branches and the subsidiaries subject to consolidation as per the provision of the Article 9, paragraph 3 of the “Regulation on Internal Systems and Internal Capital Adequacy Assessment Process of Banks “, which is the “Internal Control system is designed to cover the domestic and foreign branches, headquarter units, the subsidiaries subject to consolidation and all activities of the bank”.

The branch control activities are carried out remotely and on‑site within the framework of the control programs prepared according to the opening dates of new branches, most recent reporting dates and periodical risk situations of current branches.

In order to increase the risk and control awareness during the internal control activities of the branch and to prevent the losses arising from operational risks, the branch personnel were continuously informed.

Control activities in branches are conducted in line with main goals and strategies of the Bank in terms of scope and methods used. In addition to this, a proactive structure is adopted to provide compliance with changing strategy, risk perception and conditions on a timely basis.

In order to make control activities in branches more effective and efficient, they are performed over a web‑based Control Module. Thanks to the Control Module, the Bank contributed to compliance of the Bank’s operations with external legislation and competitive conditions.

Internal Control activities carried out at the Headquarters units were conducted in compliance with the Bank’s main goals and strategies within the framework of law, other relevant legislation, the Bank’s internal policies and rules, and common banking practices. Moreover, while carrying out the activities, a proactive approach was adopted to make sure that the compliance to changing strategy, risk perception and conditions is provided without wasting time.

Internal Control system contributed to the carrying out of the Bank’s operations in compliance with the domestic and international legislations and competition conditions through the control matrixes that are prepared pursuant to the adopted proactive manner and regularly revised based on the possible changes.

The control periods of Headquarters units were determined by taking into consideration of the functions of the units, the risks they carry, job descriptions and the units’ effect on the Bank’s balance sheet and were revised in accordance with the needs.

Within our Bank, Internal Control activities were carried out on the following topics: functional segregation of duties; division of responsibilities; establishment of the accountancy and reporting system, the information system and the Bank’s internal communication channels in a manner that they will operate effectively; the creation of work flow charts in which the controls on the Bank’s work processes and work steps are indicated.

R&D studies are conducted in order to carry out technology‑focused, central, and real‑time internal control activities, and to help the relevant business units to take a rapid action against the common shortcomings.

The findings revealed as a result of all these activities were periodically conveyed to the Bank’s relevant business units and to the Senior Management.

Information Notes were prepared for the issues which are identified during the Internal Control activities carried out in the Headquarters units and the branches and which are considered being in need of rapid action taken and the notes were quickly shared with the relevant units and/or the Senior Management.

In 2020, Recommendation Reports were continued to be prepared for the improvement of processes regarding the operations carried out in the Bank and the establishment of control points on these processes, which will be complied and implemented by the personnel from all levels, increasing the effectiveness of the controls on the processes, prevention of possible risks, ensuring customer satisfaction and taking cost reducing measures.

In addition to these issues, the compliance of all the activities, which are realized or planned to be realized by the Bank, and new transactions and products of the Bank with the Law and other relevant legislation, the Bank’s in‑house policies and rules and banking practices and customs is controlled within the framework of the Article 18 of the Regulation on Internal Systems and Internal Capital Adequacy Assessment Process of Banks. Moreover, the legislation issued or amended is also examined within the Bank within the scope of compliance controls and the opinions formed are shared with the relevant work units.

Internal Control staff attended numerous trainings during the year for their professional development. In order to increase company‑wide awareness for internal control activities, various trainings were organized for Bank employees and Internal Control staff has provided support for those trainings.

Within the framework of 18th article of Assessment Processes of the Banks’ Internal System and Intrinsic Capital Adequacy, compliance controls were carried out under the compliance function. In this context, all the operations that the Bank performs or plans to perform with the new transactions and products were controlled in terms of their compliance to law and other relevant legislation, the Bank’s internal policies and rules and the banking practices.

The compliance program for the Liabilities Regarding Prevention of Laundering Proceeds of Crime and Financing of Terrorism was formed in accordance with the “Communiqué on Compliance with Measures Regarding Prevention of Laundering Proceeds of Crime and Financing of Terrorism”. Activities aimed at preventing the laundering of proceeds of crime have been carried out in line with national and international regulations and standards. Accordingly, the Compliance Service Unit performs the functions of inspection, monitoring, reporting, analysis and control.

The Bank’s Policy regarding the prevention of money laundering and financing of terrorism, to which the Bank’s subsidiaries, foreign branch and other subsidiaries are also obliged to adhere, has been reviewed. Moreover, the Bank’s employees are provided with face‑to‑face and online training regarding the prevention of laundering proceeds of crime and financing of terrorism to ensure they adopt compliance culture at global standards and implement this culture at their work and activities.

As a part of the Ziraat Finance Group, the units operating both in Turkey and abroad conduct their operations in accordance with the policies and procedures established by taking local and international regulations into account, in a manner which does not expose the Bank’s products and services to any operational and reputational risk in the areas of money laundering or financing acts terrorism in accordance with local and international regulations.

Regular information sharing is carried out within the framework of the coordinated strategy which is executed regarding the compliance activities of foreign branches.

In this vein, joint work was carried out to determine whether or not foreign branches comply with national and international obligations, whether there is any process and software requirement, by meeting the compliance officer of the foreign branch, and the joint work will continue to be carried out in the upcoming period.

Within the scope of sectoral activities, the Bank also participated a working group formed in OECD to prevent laundering of the proceeds of crime on an international basis during the process of National Risk Assessment Audits performed by Financial Action Task Force (FATF) which Turkey is also a member, along with sector representatives from 9 different banks.

The Advisory Committee Coordination Service carried out the Advisory Committee Secretariat and Compliance activities within the scope of the Communiqué on Compliance with the Principles and Standards of Interest‑Free Banking. The activities carried out within this scope were periodically shared with the relevant work units and Senior Management.

The Functioning of Risk Management System

The main purpose of Ziraat Katılım risk management system is to ensure the definition, measurement, monitoring and control of the risks, to which the Bank is exposed, through the policies and the limits determined to monitor, control, and when necessary to change the operations’ nature and level in relation to the risk‑return structure that the future cash flows will include.

The main approach in the risk management activities, instilling risk culture across the Bank in accordance with the provisions of “Regulation on Banks’ Internal System and Intrinsic Capital Adequacy Assessment Processes”, to execute the risk management function with best practices by continuously improving the system and the human resources. The activities carried out within the framework of risk management system are given care to be carried out simultaneously with the contributions of the units that are included in the business line with which each risk type is related.

The risk management activities cover the basic headings of credit risk, market risk, operational risk, liquidity risk and other risks. The final objective is to comply with the best practices.

Within the framework of credit risk management activities, the activities for the definition, measurement, monitoring and reporting of the credit risk by using the methods in compliance with Basel II. In this context, the calculation of the amount subject to credit risk, which began legally as of 1 July 2012, is monthly reported to the BRSA in solo basis.

Due to the fact that our Bank became operational in May 2015, there is not adequate data for the measurement of credit worthiness in relation to the advance measurement methods. The credit risk limits approved by the Board are monitored; the activities to carry out scenario analysis and stress test regarding the credit portfolios are ongoing. Also, the compliance activities with the Basel III regulations and the regulations revised by the BRSA within the framework of Basel are continuing.

Operational risk management activities comprise the definition, classification, measurement, and analysis of the operational risks.

These activities are carried out as part of the Bank’s “Operational Risk Management Regulation” that is prepared in accordance with the arrangements issued on 28 June 2012 by the BRSA to comply with Basel II. The compliance with the operational risk limits approved by the Board, which are determined in order to manage operational risks, is periodically monitored. The risks stem from information technologies and the actions taken are also monitored. The risk assessments are carried out for the companies from which support services are procured within the framework of the BRSA’s regulations that are currently in effect.

As part of operational risk, media analysis reports relevant to reputation risk and provided daily from the Bank’s Corporate Communication Service are examined.

Within the scope of market and liquidity risks management, measurement, analysis, limiting, reporting and monitoring activities are carried out pertaining to liquidity risk and dividend rate risk stemming from banking calculations. The analyses conducted are supported with stress test. The compliance to the market and liquidity risk limits, which are approved by the Board and determined to manage the concerned risks, is periodically monitored. Also, Value at Risk is calculated daily with the internal models regarding exchange risk as part of market risk and retrospective test analyses are carried out for these models.

The results of the analyses carried out within the scope of risk management activities and risk indicators are reported annually to the Board of Directors, at three months periods to the Audit Committee, at weekly and daily periods to the operational units.

In order to increase the internal systems personnel’s individual and occupational development, the personnel was ensured to attend internal and external training, conference and seminars, thus, their practical knowledge level is constantly being developed.