Turkey steps up sukuk push

ISTANBUL: When Turkish Prime Minister Tayyip Erdogan came to power a decade ago it would have been almost unthinkable for his government to issue a sukuk, given accusations it was seeking to erode Turkey’s secular status.
Now, as it seeks to boost political and commercial ties with the Gulf and diversify its borrowing, one of the Muslim world’s most dynamic economies is developing an Islamic finance industry which could rival current volumes in Malaysia — the world’s top sukuk issuer — within 10 years.
Turkey has a strong secular identity. Its Islamic banks are known locally as participation banks, in part reflecting public sensitivities.
But nervousness about Islamic finance has eased in recent years, helped by growth of the sector in Western economies.
Just over a year after its debut dollar-denominated sukuk issue, Turkey’s Capital Markets Board is finalyzing regulations on five new types of sukuk as the country aims to become a major issuer of Islamic debt.
The new rules, which were sent to Erdogan’s office for approval this week, will allow Turkish corporates and banks, as well as the Treasury, to issue the world’s most widely used types of sukuk, giving them access to a wider pool of investors via a global market estimated at more than $ 100 billion.
“Islamic finance is just like halal food, there may be two reasons to choose it,” said Mustafa Cetin, head of financial institutions at the Turkish arm of Bahrain-based Islamic lender Al-Baraka.
“Either you prefer interest-free products or you find the cost of borrowing, the taste, attractive.”
Unlike the economies of the Gulf, whose Islamic debt issuance is primarily sovereign, Turkey has a powerful private sector which is increasingly eager to finance international projects using sharia-compliant products.
As part of plans to celebrate the 100th anniversary of the founding of the modern republic in 2023, Turkey aims to turn its economic and cultural capital Istanbul into a major financial center. It foresees $ 350 billion of infrastructure spending on the project, with Islamic finance expected to be one of the major sources.
Construction company Agaoglu, which will build the Istanbul Finance Center, has said it plans to borrow $ 2 billion through Shariah-compliant instruments, topping the total value of Turkey’s existing sovereign dollar sukuk issuance.
Turkey’s Islamic lenders have enjoyed rapid growth in recent years but remain a small part of the banking system.
The share of participation banks has risen to 6 percent of total banking assets from 2 percent a decade ago, when Erdogan’s Justice and Development (AK) Party first came to power.
As part of efforts to develop the sector, the government wants to see that share increase to 15 percent over the next decade and is determined to support this through regulation, as well as by encouraging unbanked rural residents to open accounts with Islamic lenders.
“Turkey’s 2023 financial services vision could see the Islamic banking industry tripling in size to more than $ 100 billion, approximately where Malaysia is today,” accounting firm Ernst & Young said in its latest World Islamic Bank report.
Turkey’s two largest state-run banks, Ziraat and Halkbank, look set to help achieve that target, with both about to establish their own participation banks.
Turkey’s Islamic banking sector may be small given the country’s population of 76 million is 99 percent Muslim, but its conventional capital markets are much more developed than many other Muslim nations.
“In Malaysia, whose population is 75 percent Muslim, the Islamic banking share ... is 35 percent while in Turkey it is only a 6 percent share,” Albaraka Turk’s Cetin said.
“Albaraka Turk is growing 20 percent yearly in assets and branches. That means we are doubling in size every 4-5 years.”
The bank will be one of eight primary dealers for a debut sukuk issue, set for June, by the Malaysia-based International Islamic Liquidity Management Corp. (IILM), formed to boost global liquidity in Islamic instruments. Turkey’s support for the IILM is seen as further evidence of its commitment to the sector.
Turkey’s new regulations, which will allow the use of more instruments including Istisna, Murabaha, Mudaraba, Musharaka and Wakala bonds, and stronger local Islamic banks should help the country attract more funding from the Gulf, where appetite for Islamic products far outstrips supply.
The country’s recent upgrade to investment grade status by major rating agencies Fitch and Moody’s will also make international borrowing easier for Turkey.
Kuveyt Turk, a subsidiary of Kuwait Finance House, was the first Turkish company to issue a sukuk when it borrowed $100 million in 2010. It then tapped the market in 2011 for a $350 million sharia-compliant issue.
The Turkish government entered the market in September 2012 with a $ 1.5 billion Ijarah sukuk — an asset-backed leasing structure in line with Islamic principles — followed by two more domestic issues totalling more than 3 billion liras ($ 1.6 billion).
The Treasury aims to issue lira-denominated Ijarah sukuk at least twice a year, one each February and the other each August or September, to build a healthy lira-denominated sukuk curve. Each issue is expected to be around 1.5 billion lira.
Turkey was technically ready to take part in Islamic finance a decade ago but chose not to for political reasons.
In March 2008, a state prosecutor asked Turkey’s top court to shut down the ruling AK Party for anti-secular activities, even though it had won two successive elections with large majorities. He also sought to ban Erdogan from politics.
“The main reason we are behind the curve is political. There was no room in the late 2000s for Shariah-compliant government borrowing while the AK Party was being charged with being anti-secular,” said one senior banker who declined to be named because of the sensitivity of the topic.
The AK Party has always denied any secret religious agenda and has vigorously promoted market reforms.
The banker said government efforts to boost Islamic finance were important, although he questioned whether Turkey had already left it too late to catch up with the rest of the world.