Kemal Ataturk, the founder of modern Turkey, was famously no fan of his country’s Muslim roots and culture, and once reportedly wished “all religions at the bottom of the sea”.
One wonders what he would have made of news that a Turkish bank that adheres to sharia, which prohibits interest, is about to sell the country’s first Islamic bond, known as sukuk.
A smattering of Islamic banks – known as “participation banks” in Turkey to assuage secularists – have popped up in recent years, many of them owned by large Gulf-based Islamic financial institutions. But they remain miniscule in size compared to their conventional counterparts.
However, a $100m three-year sukuk about to be sold by Kuveyt Turk Katilim Bankasi will be a big boost to the country’s Islamic finance sector, and is likely to pave the way for other Islamic debt sales in Turkey, according to a statement from Norton Rose, the law firm that advised Kuveyt Turk.
Rizwan Kanji, a senior debt capital markets lawyer at Norton Rose (Middle East) LLP, said:
This is a key transaction for two reasons. First, it sets a benchmark for future sukuk issuances from Turkey; [second] it is hoped this will generate interest within the wider Turkish corporate community to consider raising finance through sukuk issuances in the international markets.
Kuwait Finance House, the large Islamic bank that owns Kuveyt Turk, this week predicted that the issuance of sukuk could rise to $30bn this year, despite a series of financial and ecumenical shocks over the past couple of years.
Malaysia, home to the largest and most vibrant Islamic financial sector, has led the way, but there are signs that nascent Islamic debt markets are developing in new countries.
Indonesia, Singapore and General Electric issued their first Islamic bonds last year. Nomura, the Japanese investment bank, and International Innovative Technologies, a maker of industrial milling machines in England, have sold small but symbolically important sukuk this year.
In a report published in late July, rating agency Standard & Poor’s predicted that sukuk issuance would continue to spread to new regions and countries:
On the heels of the sukuk market’s sharp upturn as of midyear 2010, we foresee sustained growth for the second half, given issuers’ interest in tapping the market, both in historical locations like Asia, especially Malaysia, and in other regions newer to sukuk.
However, lawyers caution that existing tax codes and legal frameworks make sukuk difficult to issue in many countries. Even in Turkey, Kanji acknowledged that legislation is only conducive to “certain, but very limited, Islamic finance structures”.
For predominantly Muslim countries – or hubs as London and Singapore, which harbour ambitions to become centres for Islamic finance – it has made sense to change laws to facilitate domestic Islamic finance industries and transactions.
But progress has been slow in countries such as France, Russia and China, which have all expressed intentions to do the same. The Gulf and Malaysia are likely to remain the dominant Islamic debt hubs for some time.