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Secular Turkey Turns to Sukuk

Published: 29/02/2012 05:22:08 PM GMT
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ANKARA - Overcoming sensitivities about Islamic finance in the secular republic, Turkey plans to issue the first-ever sukuk (Islamic bonds) this year. It will be like ringing a bell and attracting all the attention, Murat (more)

ANKARA - Overcoming sensitivities about Islamic finance in the secular republic, Turkey plans to issue the first-ever sukuk (Islamic bonds) this year.

"It will be like ringing a bell and attracting all the attention," Murat Cetinkaya, deputy chief executive for treasury at Kuveyt Turk, an Islamic bank that has been a trend-setter for corporate sukuk issues in Turkey, told Reuters on Wednesday, February 22.

"Other issuances will follow the sovereign and Turkey will be on the agenda in this market a frequent issuer."

The Turkish government announced last month that it plans to issue a sovereign sukuk this year, using legislation already in place.

"Turkey could very easily issue a couple of billion dollars worth of sukuk,” said Osman Akyuz, secretary general of the Participation Banks' Association of Turkey.

“It will probably issue $500 million or $1 billion at first and see how it goes.

"Other issuances will follow the sovereign and Turkey will be on the agenda in this market a frequent issuer," he said.

Despite espousing Islamic values, Prime Minister Tayyip Erdogan's government shied away from issuing sukuk out of fear of giving ammunition to critics who accuse the ruling AK Party of seeking to roll back state secularism by stealth.

In 2008, the Supreme Court came close to shutting down the AK party after ruling it was a centre of Islamist activity.

But since then, the government has won the upper hand over old foes in the military and judiciary.

Few Turks question the AK Party's economic management, and having overseen a near tripling in per capita income, the party was re-elected for a third term in office last June.

Moreover, even borrowers outside the Islamic world have entered the sukuk market in the last few years, giving less reason for Turkey to hold back.

"Now the sukuk has become an instrument that even Germany and France are using," said a deputy chief executive at a leading Turkish bank, who declined to be named because of the political sensitivity of the subject.

"And in domestic politics, Erdogan is much stronger."

Sukuk, which conforms to Islam's prohibition of usury, typically work as profit-sharing vehicles.

Firms that issue sukuk make payments to investors using profits from the underlying business, instead of paying interest.

The money, however, can't be invested in alcohol, gambling, tobacco, weapons or pork.

Sukuk for Development

Economists predict that the sukuk issuance will lure billions of dollars in investments into the Turkish economy

"The market is potentially big - guess the sovereign could easily raise several billion," Timothy Ash, Royal Bank of Scotland economist and a Turkey watcher told Reuters.

Sukuk have often proved to be more stable than conventional bonds during the global financial crisis.

The sukuk market has reached $111.9 billion in the eight years to 2008, according to the International Islamic Financial Market.

Global sales of sukuk have reached $6.6bn in 2012, from $2bn a year earlier, according to data compiled by Bloomberg.

Because of secular sensitivities, Islamic banks in Turkey are called "participation banks" and sukuk are referred to as "participation certificates".

Turkey has used Islamic finance methods since the late 1980s through private financial institutions that were recognized as participation banks in 2006.

There are four participation banks now operating in Turkey: Albaraka Turk, Bank Asya, Kuveyt Turk and Turkiye Finans.

Kuveyt Turk, a unit of Kuwait Finance House, issued the country's first sukuk in 2010.

Last October, following legislative changes to accommodate Shari`ah-compliant transactions, Kuveyt Turk issued another sukuk for $350 million, and the strong demand demonstrated Turkey's potential to become a major fresh source of sukuk for investors keen to diversify their portfolios.

Albaraka Turk, the Turkish unit of Bahrain's Albaraka Banking Group, and Bank Asya have formulated plans for sukuk issues of as much as $500 million, but have so far held back because of weak market sentiment globally due to the European debt crisis.

Despite that, the Turkish economy's buoyancy, which produced growth of over 8 percent last year, and high yields compared to other emerging markets have increased investor appetite for Turkish assets, including sovereign debt issues.

Ratings agency Fitch said last month that plans by sovereign borrowers outside the Middle East and other largely Islamic regions to tap the sukuk market could meet pent-up demand from Islamic institutional investors and banks to diversify their bond holdings.

That is good news for Turkey as it needs backing for huge infrastructure projects, having run into difficulties due to an international financing crunch.

The government was forced to cancel a tender in January for the North Marmara Motorway Project, which involves a highway looping north of Istanbul and includes construction of a third bridge across the Bosphorus strait dividing Turkey's European and Asian sides.

"Turkey needs investments and the sovereign sukuk could be used for financing of some projects, especially the third Bosphorus Bridge and highway projects," Akyuz of the Participation Banks' Association told Reuters.

Sukuk issuance could also help lure investors who want to avoid international capital market volatility.

"A sovereign sukuk issue which is indexed to revenues to one of the Bosphorus bridges, or to some highway revenues, could be both attractive for investors and for the Turkish Treasury doing its first issue," said strategist Ugur Kucuk.

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