Turkish sukuk debut to open new Islamic finance market

Author: Gemma Varriale | Published: 12 Sep 2012
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Turkey’s first-ever sukuk is expected imminently. The dollar-denominated sovereign issuance could open up the country’s Islamic finance market as Turkish investors look to tap the lucrative Middle East market.

In a press release on Wednesday, the Undersecretariat of the Treasury said that Citigroup, HSBC and the Kuwait Finance House subsidiary, Liquidity House, had been mandated to explore opportunities for a possible lease certificate issuance in the international capital markets.

Market participants expect Turkey’s Treasury to look to raise about $1 billion through the sukuk al-ijara, known in Turkey as a lease certificate. The debut sukuk should set a benchmark for anticipated future issuances by banks and corporates.

Many are hoping the deal will plug a funding gap in the booming economy’s infrastructure sector. Ümit Hergüner, senior partner with Hergüner Bilgen Özeke in Istanbul said Turkey was in constant need of financing for its infrastructure projects, as a high growth market. “People are looking around for sources of funding and the Gulf region looks very attractive,” he said.

The mega-projects that could benefit from the new source of funding include a third bridge over the Bosphorus, an airport in Istanbul and the country’s extensive motorway network.

A sovereign sukuk from Turkey has been in the pipeline for some years. The slow progress on issuing the instrument is thought to be partly because the AK Party of Prime Minister Recep Tayyp Erdogan did not want to be seen to be rolling back state secularism. However, the deal announcement has signalled a lessening of concerns about Islamic finance in Turkey.

Indeed, measures to develop Islamic finance in Turkey have received several boosts recently. In February 2011, the parliament in Ankarapassed the Finance Bill to pave the way for the issuance of sukuk al-ijara. This included tax neutrality measures for the leasing certificates.

The Capital Markets Board of Turkey has been spear-heading efforts to develop the regulatory system in line with a move towards Islamic finance, by establishing a working group to examine ways in which to trade the instruments on the Istanbul stock exchange. In April 2010, the regulator published a communiqué on the principles regarding ijara certificates and asset lease companies.

Turkey’s position as a gateway between several regions makes it an attractive investment destination. As well as the Middle East, countries such as Russia are looking to Turkey as a bridge into Europe.

“There are also increasing economic ties between Turkey and North Africa,” said Hergüner. “So Turkey is a hub for companies from all over the world to come and invest.”

According to the statement on the Treasury’s website, a series of investor meetings will be organised in important finance centres in the Middle East and Asia between September 10 and 13. Banking sources told Reuters that the sukuk will be denominated in dollars and issued in the week of 17 September.

Read about Turkey’s expanding Islamic bond market here.