The Arabic term for Islamic securities,
'sukuk', is commonly used to refer to the Islamic
equivalent of bonds. Such Islamic financial instruments provide the
investor with a share of an asset and its cash flows and the risks
involved without contravening the Islamic ban on interest payments.
Although many well-known firms in Southeast Asia and the Middle
East exploit such Islamic financial instrument markets in order to
provide the necessary funds for their operations, until recently
companies in Turkey have been slow to show an interest.
Although a relative newcomer, Turkey is proving to be a strong
entrant to the sukuk market. In September 2012 the
Treasury issued $1.5 billion-worth of sukuk, which
attracted an order worth $1.9 billion from 95 investors worldwide.
According to HSBC Holdings Plc, the world's biggest underwriter
of sukuk, sales in Turkey had reached $1 billion by May
2013 and are expected to triple by the end of the year.
Turkey's main aim is to gain access to one of the world's
largest pools of investors, whose holdings amount to $100 billion,
and to rival the top sukuk issuer in the Muslim world,
Malaysia, within the next 10 years.
As part of its strategy to gain access to this growing and
lucrative market, Turkey has begun to empower its participation
banks, which deal with the sale of Islamic financial instruments in
the country. During the last decade, the total banking asset share
of such banks grew from 2% to 6%; it is expected to reach 15%
during the course of the next 10 years. In line with this trend,
two of Turkey's public banks – Halk Bank and Ziraat Bank
– are planning to set up their own participation banks in
order to deal with such Islamic financial instruments. In line with
this growing interest in the market, the government has introduced
regulatory and legislative changes that aim to assist with the
development of a sound and stable sukuk market.
In April 2010 the Capital Markets Board issued a
communiqué on the principles regarding lease certificates
and asset lease companies that allows for the introduction of lease
certificates in the Turkish market, including the lease-backed
sukuk – the sukuk al ijarah. Aside from
enabling the trade of lease certificates on the exchange market,
the communiqué also regulates the structure of the special
purpose vehicles (SPVs) that can be established by banks,
intermediaries or originators, which can be incorporated only as a
joint stock company and will grant them the authorisation to issue
and sell ijarah certificates in Turkey. A new bill was
issued on June 29 2012 that enables the Treasury to issue sukuk
al ijarah. A June 2013 regulation further diversifies the use
of Islamic financial instruments in Turkey and enables the use of
istisna, murabaha, mudaraba,
musharaka and wakala bonds. Further legal
regulations have introduced significant tax exemptions to
facilitate the growth of the sukuk market in Turkey.
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 corporate tax, which amounts
to 20% under the existing tax regime. Both the lease certificate
and the sale and leaseback transaction are exempt from value added
tax. Corporate earnings from ijarah certificates issued
onshore and earnings from Treasury sukuk al ijarah
certificates issued offshore are not subject to income tax.
Earnings from ijarah certificates issued onshore will be
subject to only 10% 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.
Alongside the regulatory framework and tax incentives, a number
of other factors are expected to facilitate interest in investors
from Gulf countries and create new opportunities for the recently
expanding sukuk market in Turkey. These include:
the fast-growing and resilient economy;
the size of Turkey's population;
the low level of public debt as a proportion of gross domestic
the diversified export markets;
the strong banking system;
the wide range of infrastructural projects investments;
the strengthening of political ties with the Arab Gulf
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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