Istanbul: Turkey is fast approaching to become a major Sukuk issuer which was once unthinkable when Turkish Prime Minister Tayyip Erdogan came to power a decade ago.
Now, as Turkey seeks to boost political and commercial ties with the Gulf and diversify its borrowing, one of the Muslim world’s most dynamic economies is developing an Islamic finance industry which could rival current volumes in Malaysia — the world’s top sukuk issuer — within 10 years. Turkey has a strong secular identity. Its Islamic banks are known locally as participation banks. But nervousness about Islamic finance has eased in recent years, helped by growth of the sector in Western economies.
Just over a year after its debut dollar-denominated sukuk issue, Turkey’s Capital Markets Board is finalizing regulations on five new types of sukuk as the country aims to become a major issuer of Islamic debt.
The new rules, which were sent to Erdogan’s office for approval this week, will allow Turkish corporates and banks, as well as the Treasury, to issue the world’s most widely used types of sukuk, giving them access to a wider pool of investors via a global market estimated at more than $100 billion.
“Islamic finance is just like halal food, there may be two reasons to choose it,” said Mustafa Cetin, Head of financial institutions at the Turkish arm of Bahrain-based Islamic lender Al-Baraka.
“Either you prefer interest-free products or you find the cost of borrowing, the taste, attractive,” he added.
As part of plans to celebrate the 100th anniversary of the founding of the modern republic in 2023, Turkey aims to turn its economic and cultural capital Istanbul into a major financial center. It foresees $ 350 billion of infrastructure spending on the project, with Islamic finance expected to be one of the major sources.
Construction company Agaoglu, which will build the Istanbul Finance Center, has said that it plans to borrow $2 billion through Shariah-compliant instruments, topping the total value of Turkey’s existing sovereign dollar sukuk issuance.
Turkey’s Islamic lenders have enjoyed rapid growth in recent years but remain a small part of the banking system.
The share of participation banks has risen to 6 percent of total banking assets from 2 percent a decade ago, when Erdogan’s Justice and Development (AK) Party first came to power.
As part of efforts to develop the sector, the government wants to see that share increase to 15 percent over the next decade and is determined to support this through regulation, as well as by encouraging unbanked rural residents to open accounts with Islamic lenders.
“Turkey’s 2023 financial services vision could see the Islamic banking industry tripling in size to more than $100 billion, approximately where Malaysia is today,” accounting firm Ernst & Young said in its latest World Islamic Bank report.
Turkey’s two largest state-run banks, Ziraat and Halkbank, look set to help achieve that target, with both about to establish their own participation banks.
Turkey’s Islamic banking sector may be small given the country’s population of 76 million is 99 percent Muslim, but its conventional capital markets are much more developed than many other Muslim nations.
Turkey’s new regulations, which will allow the use of more instruments including Istisna, Murabaha, Mudaraba, Musharaka and Wakala bonds, and stronger local Islamic banks should help the country attract more funding from the Gulf, where appetite for Islamic products far outstrips supply.
The country’s recent upgrade to investment grade status by major rating agencies Fitch and Moody’s will also make international borrowing easier for Turkey.
Kuveyt Turk, a subsidiary of Kuwait Finance House, was the first Turkish company to issue a sukuk when it borrowed $100 million in 2010. It then tapped the market in 2011 for a $350 million sharia-compliant issue.