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Chirag a veteran in Digital Marketing, Currently working with SJS Group.
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  • Sukuk Issuances In Turkey 0 comments
    May 6, 2013 8:24 AM

    The investors in Islamic finance market of Turkey will soon find a new avenue of retail bond trading in the form of Sukuk, which are expected to be issued by the Islamic banks. It does make a lot of sense for Islamic banks to issue Sukuk in Turkey because 99.8% of the population follows Islam. The TRY 800 bn banking system of the country has only four banks operating as per Islam's Sharia principles. These Participation banks, as they are called, operate on profit-sharing basis, which is considered interest-free. Their banking franchise has gradually gained strength in the recent years and currently these banks contribute to ~6% of the systemic loans. Though the share of Participation banks is quite modest, their growth during the past few years has been faster than the traditional commercial banks.

    Currently there are only four such banks - Asya, Al Baraka, Kuveyt Turk and Turk Finance. Of these, only Kuvyet Turk has issued two Sukuk. The first Sukuk issuance in Turkey was done in 2010, by Kuvyet Turk which issued USD 100 mn three-year bond at 5.25% coupon. In 2011, the bank issued another USD 350 mn five-year bonds at 5.875% coupon. These bonds being similar to the conventional bonds traded in line with other Turkish Bank bonds. It was not until Sep-2012, when the Turkish Government issued USD 1.5 bn Sukuk at yield as low as 2.8%, that Participation banks started to consider Sukuk as a low-cost funding source. Recently, Asya Bank, an Islamic bank, has announced to issue 10-year USD 300 mn bonds. Apart from banks, Agaoglu Group, a Turkey-based construction company also intends to raise USD 2 bn debt as per Islamic principles.

    The high yields earned by credit investors in Turkish bonds during 2012, has also drawn the attention of Islamic investors who want to share the profit from Turkey's success story. Demand could also stem from the pension fund to be launched jointly by Kuveyt Turk and Al Baraka, in order to mobilize savings in the country. The domestic savings rate in Turkey is at the lowest since 1980 and the Government has sanctioned many incentives to encourage savings. The main step towards this has been the increase in the Pension contribution and the reduction in withholding tax levied on the income. This is expected to boost the inflow into private pension funds. For pension funds investors, who want to comply with the Islamic principles, the joint venture between Kuveyt Turk and Al Baraka provides a good investment opportunity. This not only mobilises savings in the country but also help popularizes Islamic banking in the country. Due to the growth in the Islamic banking system and Islamic private pension funds, the Sukuk market will grow further. Investors adhering to Islamic principles could diversify from traditional corporate bond trading by investing in these Sukuk opportunities.

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