Turkey: Rise In Sukuk Market Offers New Investment Opportunities

Last Updated: 11 October 2013
Article by Safak Herdem


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.

Expanding market

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.

Regulatory framework

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.

Tax exemptions

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 product;
  • the diversified export markets;
  • the strong banking system;
  • the wide range of infrastructural projects investments; and
  • the strengthening of political ties with the Arab Gulf states.

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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Safak Herdem
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