Partly fuelled by a flood of petrodollars resulting from the record high of global oil prices, the demand for international Islamic financial assets has increased rapidly during the last few years. Sukuk has developed as one of the most significant mechanisms for raising finance in the international capital markets through halal (Islamically acceptable) structures. As an alternative to conventional bonds, multinational companies, as well as governments, use international sukuk issuance whenever they wish to borrow money from financial markets.

In 2003, as part of a strategy to attract foreign direct investments from the Gulf, the Turkish government announced its interest in implementing a legal framework for the issuance of ijara sukuk, a type of sukuk based on leased assets. The Undersecretariat of the Treasury was instructed to prepare a draft sukuk law and a first draft (draft law) was presented to the prime minister's office in 2004 and re-presented in 2005. Although the draft law has not yet been made available to the public, market rumours indicate that almost any publicly owned property will be made subject to an ijara lease.

Ijara sukuk are securities representing ownership of well-defined, existing and known assets tied to a lease contract. The rental income is the return payable to the sukuk-holders. As with most types of sukuk, ijara sukuk require the creation of a special purpose vehicle (SPV). An SPV is the usual vehicle used for asset acquisition on behalf of the individual sukuk-holders. It is typically a restricted independent entity, domiciled in a tax-efficient jurisdiction, and is bankruptcy remote (in the event of the issuer's bankruptcy, the creditors cannot claim the assets held in the SPV or otherwise interfere with the rights of the sukuk-holders with respect to the underlying assets).

Within an ijara sukuk transaction, the SPV enters into a purchase agreement where the SPV buys the underlying assets (under the draft law, this would be any kind of tangible asset owned by the government) from the obligor (in our case, this would be the governmental body using the tangible asset) and undertakes to sell the asset to the obligor at the end of a predetermined term. The SPV issues the ijara sukuk with a fixed maturity date (typically parallel with the term determined for the sale-back), raises funds from the investors (sukuk-holders) and provides the obligor with the funds. Meanwhile, the SPV leases the assets to the obligor. In return, the obligor pays periodic rentals, which are then distributed to the sukuk-holders as coupon payments. At maturity, or on a dissolution event, the SPV sells the assets back to the obligor at a predetermined value. That value should be equal to any amounts still owed under the terms of the ijara sukuk. The SPV passes on the sukuk proceeds to the sukuk-holders.

The Turkish financial markets and local investors are eagerly awaiting the finalisation of the laws enabling sukuk and sukuk investments. When one considers the pace at which Islamic investment has been growing throughout the world, it will only be a matter of time before we see the first issuance of sukuk in Turkey.

Umut Gürgey and Emre Keki