Turkey’s government plans its first-ever issue of Islamic bonds this year, overcoming sensitivities about Islamic finance in the secular republic as it seeks to tap a rich pool of investors flush with oil money.
A sovereign sukuk issue from an economy regarded as one of the most progressive and successful in the Muslim world would signal intent on Turkey’s part to play a bigger role in Islamic finance. The size of the global sukuk market is estimated at more than $100 billion.
“It will be like ringing a bell and attracting all the attention,” said Murat Cetinkaya, deputy chief executive for treasury at Kuveyt Turk, an Islamic bank that has been a trend-setter for corporate sukuk issues in Turkey.
“Other issuances will follow the sovereign and Turkey will be on the agenda in this market constantly…as a frequent issuer.”
Despite espousing Islamic values, Prime Minister Tayyip Erdogan’s government shied away from taking the plunge with a sukuk issue during its first decade in power, out of fear of giving ammunition to critics who accuse the ruling AK Party of seeking to roll back state secularism by stealth.
“For a few billion dollars of funding there could be negative results in domestic politics,” said a deputy chief executive at a leading Turkish bank, who declined to be named because of the political sensitivity of the subject.
In 2008, the Supreme Court came close to shutting down Erdogan’s AK Party after ruling it was a centre of Islamist activity. But since then, the government has won the upper hand over old foes in the military and judiciary.
Few Turks question the AK Party’s economic management, and having overseen a near tripling in per capita income, the party was re-elected for a third term in office last June.
Moreover, even borrowers outside the Islamic world have entered the sukuk market in the last few years, giving less reason for Turkey to hold back.
“Now the sukuk has become an instrument that even Germany and France are using,” the banker said. “And in domestic politics, Erdogan is much stronger.”
So there was hardly a murmur of dissent when Deputy Prime Minister Ali Babacan, who oversees the economy, announced last month that the government planned to issue a sovereign sukuk this year, using legislation already in place.
“Turkey could very easily issue a couple of billion dollars worth of sukuk. It will probably issue $500 million or $1 billion at first and see how it goes,” said Osman Akyuz, secretary general of the Participation Banks’ Association of Turkey.
“An issuance by the Treasury would provide depth to the instrument and it will be sold with confidence.”
Royal Bank of Scotland economist Timothy Ash, a Turkey watcher, was also upbeat. “The market is potentially big – guess the sovereign could easily raise several billion.”
Islamic finance bans the use of interest, so theoretically, investors in a sukuk acquire partial ownership of an asset and share in its returns rather than receiving a stream of coupon payments.
By any other name
Although the sukuk market is tiny compared to the trillions of dollars of conventional international bond issuance, sukuk have been a relatively stable source of funding during the global financial crisis because of their conservative Islamic investor base.
Because of secular sensitivities, Islamic banks are called “participation banks” in Turkey and sukuk are referred to as “participation certificates”.
The country has used Islamic finance methods since the late 1980s through private financial institutions that were recognized as participation banks in 2006. There are four participation banks now operating in Turkey: Albaraka Turk , Bank Asya, Kuveyt Turk and Turkiye Finans. Kuveyt Turk, a unit of Kuwait Finance House, issued the country’s first sukuk in 2010.
Last October, following legislative changes to accommodate sharia-compliant transactions, Kuveyt Turk issued another sukuk for $350 million, and the strong demand demonstrated Turkey’s potential to become a major fresh source of Islamic bonds for investors keen to diversify their portfolios.
Albaraka Turk, the Turkish unit of Bahrain’s Albaraka Banking Group, and Bank Asya have formulated plans for sukuk issues of as much as $500 million, but have so far held back because of weak market sentiment globally due to the European debt crisis.
Despite that, the Turkish economy’s buoyancy, which produced growth of over 8 percent last year, and high yields compared to other emerging markets have increased investor appetite for Turkish assets, including sovereign debt issues.
Possible prop for bridge project
Ratings agency Fitch said last month that plans by sovereign borrowers outside the Middle East and other largely Islamic regions to tap the sukuk market could meet pent-up demand from Islamic institutional investors and banks to diversify their bond holdings.
That is good news for Turkey as it needs backing for huge infrastructure projects, having run into difficulties due to an international financing crunch. The government was forced to cancel a tender in January for the North Marmara Motorway Project, which involves a highway looping north of Istanbul and includes construction of a third bridge across the Bosphorus strait dividing Turkey’s European and Asian sides.
In April, the government will launch a fresh tender, and some bankers see the sukuk market providing a possible solution to the financing problem.
“Turkey needs investments and the sovereign sukuk could be used for financing of some projects, especially the third Bosphorus Bridge and highway projects,” said Akyuz of the Participation Banks’ Association.
Not only could a sukuk be specifically designed for the project, according to Is Investment Strategist Ugur Kucuk, it would also pull in investors who want to avoid international capital market volatility.
“A sovereign sukuk issue which is indexed to revenues to one of the Bosphorus bridges, or to some highway revenues, could be both attractive for investors and for the Turkish Treasury doing its first issue,” said Kucuk.