The Arabic term for Islamic securities Sukuk , commonly refers to the Islamic equivalence of bonds. The Islamic ban on interest payments is the root cause of the Islamic financial instruments such as Sukuk that provides the investor a share of an asset and its cash flows and involved risks. Many of the well know firms in South Eastern Asia and the Middle East have already been exploiting such Islamic financial instrument markets in order to provide the necessary funds for their operations. After decades long neglect Turkey's interets towards Islamic compliant financial instruments has recently awakened.

Expanding Market

Turkey is relatively a new, however a strong comer to the Sukuk market. In September 2012 Turkish Treasury issued a 1.5 billion dollars worth of Sukuk which attracted a 1.9 billion dollars worth order from 95 investors all around the world. The Sukuk sales has already reached 1 billion dollars as of May 2013 and it is expected to treble that amount to reach 3 billion dollars by the end of this year according to HSBC Holdings Plc, the world's biggest underwriter of Sukuk. Turkey's main aim is to gain access to one of the largest pools of investors whose holdings amounts to 100 billion dollars and to rival the top Sukuk issuer in the Muslim world, Malaysia in ten years time. As part of its strategy to gain access to this growing and lucrative Sukuk market, Turkey has been empowering its participation banks which deals with the sale of such Islamic financial instruments in Turkey. During the last decade the total banking assets share of such banks grew from 2 to 6% and it is expected to reach 15% during the course of the next ten years. In line with this effort to increase Turkey's share in the Sukuk market, two of Turkey's public banks, Halk Bank and Ziraat Bank, are planning to set up their own participation banks dealing with such financial instruments. Together with the growing interest, the regulatory and the legislative pillars of a sound and stable Sukuk market are being developed by the Turkish government.

Regulatory Framework

The Communiqué on the principles regarding lease certificates and asset lease companies issued by the Capital Markets Board of Turkey and dates back to April 2010 allows the introduction of the lease certificates to the Turkish market including the lease backed Sukuk, the Sukuk al Ijarah. The same communiqué aside from enabling the trade of lease certificates at the exchange market also regulates the structure of the Special Purpose Vehicles (SPV'S) which can be established by banks, intermediaries or originators that can only be incorporated as a joint stock company and grant them the authorization to issue and sell Ijarah certificates in Turkey. As of June 29, 2012 the Treasury Sukuk al Ijarah issuance was enabled by a new bill. The recent regulation that dates to June 2013 even further diversifies the Islamic financial instruments in Turkey and enables the use of Istisna, Murabaha, Mudaraba, Musharaka and Wakala bonds. Further legal regulations included significant tax exemptions to facilitate the growth of the Sukuk market in Turkey.

Tax Exemptions

The earnings generated through the sale of an asset by the originator to the Sukuk SPV and its sale back to the originator by the SPV are exempt from the corporate tax which amounts to % 20 under current tax regime. Both the lease certificate and the sale and lease back transaction are exempt from the Value Added Tax. Neither the corporate earnings from Ijarah certificates issued on shore nor the earnings from Treasury Sukuk al Ijarah certificates issued offshore are subjected to any amount of income tax and the earnings from Ijarah certificates issued onshore will only be 10% for individual income tax. Sukuk al Ijarah transactions are also exempt from red tape related costs such as registry fees, cadastral surveys and notary public fees.

Future Prospects

Alongside the regulatory framework and tax incentives Turkey's fast growing and resilient economy, the size of its population, its low level of public debt to GDP ratio, its diversified export markets, its strong banking system, its wide range of infrastructural projects investements and its strengthening political ties with the Arab Gulf states might facilitate interest of the investors from the Gulf countries and create new opportunities for the recently expanding Sukuk market in Turkey.

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