In this memorandum, the mechanics of Sukuk Issuance is broadly
outlined and some key information is provided about the regulations
on sukuk issuance in TR.
Sukuk in general
In essence, Sukuk issuance is an asset based securitization. In
our article about murabaha, it is mentioned that the Islamic
financial institutions particularly deal with murabaha financings,
in that they purchase goods and services from vendors on spot basis
and then sell those commodities to their clients on deferred
payment basis. As a result of these transactions, the banks
accumulate receivables from its clients arising out of the murabaha
contracts. Likewise, similar receivables arise out of financial
leasing agreements. As is the case with other asset backed
securitizations, it is possible for the banks (originator) to
transfer these receivables to third parties (special purpose
vehicles) in return for a consideration (the capital raised from
the sukuk investors). Sukuk issuance steps in the scheme at this
Once the Islamic banks (originator) or other entities decide to
raise fund through sukuk issuance, they establish a separate legal
entity (issuer) and then sell and transfer the ownership and rights
of the underlying assets and/or receivables to that special purpose
vehicle. The consideration in return for these assets are paid by
the special purpose company with the funds raised against sukuk
certificates. By segregating the assets and transferring them to
another company, the risk of bankruptcy and possible adverse
effects of the liabilities of the bank (originator) is avoided.
However, the management of the transferred assets (portfolio
assets), collection of the receivables and distribution of the
revenue shares to redeem the certificate holders are being
conducted by the bank (originator). The bank (originator) also
guarantees the obligations of the Issuer Company against sukuk
holders, which is an important security for corporate investors and
individual sukuk holders.
Conservative Islamic scholars prefer tangible assets over sole
receivables of murabaha contracts as the revenue producing asset
pool. For this reason, a portfolio consisting of receivables from
leasing contracts is preferable over receivables from murabaha
contracts. Because, a bank has only right to receivables (personal
right) out of murabaha financings whereas the title (ownership) of
the asset subject to financial lease contract stays vested in the
bank (right in rem), which is considered an asset of more definite
nature. (Considering that the receivables from murabaha contracts
are usually backed by other security agreements and collaterals, in
practice, there will be no much difference in terms of soundness of
the rights of the bank. But these theoretical discussions are out
of the scope of this article.)
Sukuk issuance in Turkey
After recent debates on the development of Islamic finance
industry in Turkey and around the globe, some attempts were made to
regulate and facilitate Sukuk issuance but such early regulatory
framework fell short in satisfying the expectations of the market.
Following the major regulatory change and enactment of the new
Capital Market Law in 2012, secondary legislation also introduced
by Capital Markets Board ("CMB") comprising comprehensive
arrangements on Sukuk issuance.
Sukuk issuance in Turkey is basically regulated under the
Capital Market Law numbered 6362 and dated December 6, 2012 (the
"Law") and Communiqué on Lease Certificates
published by the Capital Markets Board on June 7, 2013 (the
General framework about Sukuk issuance (Lease certificates) is
provided under Article 61 of the Law. As per the provision, lease
certificates are to be issued by asset leasing companies
("Issuer"); the special purpose vehicles to own and
administer the segregated portfolio assets from which revenue is
generated to redeem outstanding lease certificates. Under the Law,
until full redemption of certificates, portfolio assets are
privileged against seizure or attachment for public or private
debt, and Issuer is banned from pledging such assets or
establishing on them in rem rights in favor of third parties. Even
though Issuer is not completely bankruptcy proof under law,
certificate holder's rights are superior to those any other
creditors in case of dissolution of issuer and winding up portfolio
assets. In practice, corporate guarantee is sought to secure the
transaction and redeem sukuk certificates.
The Communiqué defines 5 types of lease certificates
based on the structure and purpose of the issuance. In all
issuances, the fees determined under Art. 19, based on the maturity
period of the certificates, must be paid to the CMB. The income tax
ratios to be applied to the revenues derived from the lease
certificates also differ based on the maturity of the
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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A trustee in bankruptcy's rights to obtain a possession order and order for sale against a bankrupt's property will not be suspended indefinitely even where there are exceptional circumstances.
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