Almost unnoticed, the Turkish National Assembly in Ankara passed the Finance Bill 2011 in February 2011 which includes tax neutrality measures for Sukuk Al-Ijara (leasing certificates) thus paving the way for a spate of corporate Sukuk issuances in the country.
Murat Haholu, head of the Surveillance Group, Corporate Finance Department, Capital Markets Board of Turkey, confirmed that the tax neutrality measures for the Sukuk Al-Ijara were published in the Official Gazette at the end of February 2011, which he stressed is an important development in the participation banking sector in the country.
In January this year, the Istanbul Stock Exchange also launched the first Participation Bank Index paving the way for Islamic equity funds and products to be launched in the Turkish market.
However, developments on a debut sovereign Turkish sukuk, according to participation (Islamic) banking sources in Istanbul, remains uncertain, although the legislation and measures are all in place. It is a question of timing, pricing and politics.
“It is unlikely that there will be any progress towards a debut sovereign sukuk this side of the general election which will be held in January 2012. The ruling AK (Justice) Party of Prime Minister Recep Tayyip Erdogan, according to the latest polls are well ahead of the opposition parties which are weak,” explained one banker.
Last year, Kuveyt Turk Participation Bank (KTPB) became the first Turkish Islamic bank to issue a sukuk, raising $100 million of which the proceeds are being used to finance the trade of Turkish clients and for other balance sheet purposes. Ufuk Uyan, chief executive officer of KTPB, confirmed to Arab News in Istanbul that the bank plans to go to the market either at the end of this year or early next year to raise further funds, most likely a $500 million issuance, but on a longer tenor, maybe through a five-year issuance.
“There is a major problem for participation banks in terms of long-term borrowing requirements. The conventional banks can borrow through bond issues on a three-year or five-year basis and the taxation side was cleared a long time ago. The same is needed for the participation banks and there is only one way this can be done which is the sukuk route. Recently, the government covered the tax neutrality issues for Sukuk Al-Ijara, but for other sukuk products there is a need for legislation development,” maintained Uyan.
Another major problem for participation banks is the complete absence of participation instruments for central banking funding requirements, especially reserves. There are no participation-based instruments such as government certificates, sukuk, MTNs and private debt securities issued by the Turkish government. The governor of the Central Bank of Turkey (CBT), Durmus Yilmaz, in an earlier interview ruled out the issuance of any such instruments by the government.
Instead, the CBT seems to be relying on the recently-established International Islamic Liquidity Management Corporation (IILM) in Kuala Lumpur to provide liquidity for Islamic financial institutions including participation banks in Turkey. The CBT in fact is a founding member and equity subscriber of the IILM, which started operations on Feb. 1.
The nearest the CBT came to issue such instruments is through its income-sharing certificates, although they are not purchased by all the participation banks. “There is still a need to develop a mechanism that is acceptable to all. The Central Bank of Turkey is working on this through the IILM, whereby all central banks will buy and provide the liquidity and sell to Islamic banks. But I don’t know how it will develop,” stressed Uyan.
He agrees that the amendments to the law in terms of tax neutrality for Sukuk Al-Ijara “will enable Turkish corporates to issue sukuk. Corporates need financing and a good way could be to raise funds through project and other sukuk. The change in the law is a good step forward. But the market should be in a position to absorb any corporate sukuk issuances. There are many companies with a lot of good assets. The new law would allow Turkish participation banks to borrow for longer tenors instead of the current short-term three years. In this way sukuk origination can help finance the growth of the Turkish economy, especially investment in industry.”
There are four participation banks in Turkey including KTPB, in which Kuwait Finance House has a majority equity stake; Asya Bank, which is wholly Turkish-owned; Turkiye Finans, in which the National Commercial Bank of Saudi Arabia has a controlling stake; and Albaraka Türk Participation Bank, a member of the Albaraka Banking Group, headed by Saleh Kamel of Saudi Arabia.
Albaraka Turk Participation Bank also plans a debut sukuk, most likely to be a $100 issuance during this year.