Crisis prompts embrace of sukuk

Hürriyet:The Justice and Development Party government is working on laying the ground for the sovereign issuance of Islamic bonds, Hürriyet Daily News has learned. Declining to name the bonds 'Islamic,' a top official says 'this market' will grow to $200 billion globally by 2010, and 'Turkey wants its share.' The issuance will be based on leasing state-owned properties

The government has shown Turkey the path to spare the country from the effects of the global credit crunch - the diversification of export routes from crisis-hit Western markets to other locations, such as the Middle East. However, diversification has taken on a whole new meaning, as plans to issue "sukuks," or Islamic bonds, are underway, a top official told the Hürriyet Daily News & Economic Review.

Due to the possibility of political controversy or a backlash from the secularist camp, this new means of foreign financing will not be described openly as Islamic.

"Until now, we have created finance mainly through exporting bonds," said Selim Yeşilbaş, the head of the international finance markets department at the Turkish Undersecretariat of Treasury. "Now we will introduce a new method based on rent certificates."

The department has examined various models and developed two of its own, "head-lease/sub-lease" and "selling and re-letting." Both models employ the same idea, Yeşilbaş told the Daily News. "A state-owned property will be leased to a private company for a long period, say, 30 years. Then, the company will lease the same property to other companies for a shorter period. It will then issue rent certificates to investors, who may prefer these bonds as they are not based on standard interest procedures."

Traditional Islamic rules do not permit interest-bearing bonds. Sukuks, or Islamic bonds, comply with Islamic law and its investment principles.

"By the year 2010, it is estimated this market will be as big as $200 billion and Turkey wants a share," Yeşilbaş said, without mentioning the ’I’ word.

Legislation to implement the new financial scheme has been developed by experts in the Treasury and will be submitted by the government to Parliament shortly, he added.

'No, not Islamic'

Declining to use the word Islamic, Economy Minister Mehmet Şimşek said the government was "working on the lease of every type of asset." Şimşek said this means of financing could not be described as Islamic bonds, and would be "understood when it is made public."

"No, you cannot call it that," said Şimşek, when asked by the Daily News whether the scheme included Islamic bonds. "This is a scheme to lease every type of asset. It could include [them] or not. One cannot call it such."

Rumors were circulating from as early as 2003 that the government was working on sukuk issuance, but simmering political tension over the last few years prevented it surfacing.

The global financial crisis, however, seems to have created a suitable basis for this initiative, as Turkey strives to lure foreign capital to help finance its growth which ground to a halt in the third quarter as gross domestic product only recorded a 0.5 percent growth.

Work to enable Islamic bonds to be issued continue at the Privatization Administration and the State Planning Agency, according to sources in Ankara who requested anonymity. Sources confirmed Yeşilbaş's statement that the plan is to draw in Gulf capital using state-owned property as security. Rent from properties will be distributed among purchasers of bonds instead of interest payments. The same sources said a participation bank - the legal name for Islamic banks in Turkey - was cooperating with the government in the process.

At least one foreign bank active in Turkey is also waiting for the legal framework to be finalized. Hüseyin Özkaya, deputy general manager of HSBC Turkey, told Reuters in August they were expecting a change in the law. "The government must carry out legislative changes in connection with Islamic bonds... We have undertaken serious work on this matter for when these (legislative changes) are complete," he told the agency.

Not everyone is ready to embrace sukuks. Only a handful of Turkish asset management firms are interested in offering Islamic bonds to customers, a Turkish fund manager said, speaking on condition of anonymity. "I would not consider introducing Islamic bonds to our product range because it might put off our investors who may then transfer their assets to another asset manager with a more secular outlook," he told the Daily News.

"Given the challenging external financing outlook and foreign exchange liquidity strains, it makes sense for the Treasury to borrow as much as it can externally and introduce new instruments to do so," said Emre Deliveli, an economist. "Increasing the variety makes sense if you think global sovereign bond issuance is likely to swell next year, as developed and developing countries alike, start enacting expansionary fiscal policies to counter the slowdown."

Sukuks have remained relatively unscathed during the crisis, said Deliveli, who is also a Daily News columnist. "In the current environment, for a country with an external financing gap, every penny counts."

Although rapidly expanding over the last few years, Islamic banking assets account for less than 0.5 percent of the world's total, according to a study by Rodney Wilson, from the Institute for Middle Eastern and Islamic studies at Durham University in Britain. Corporate sukuk issuance rose from $400 million in 2000 to $24.5 billion in 2006, according to figures from the International Islamic Financial Market.

The popularity of Islamic finance strengthened with the global financial crisis, as this method of financing bans the trading of toxic debt contracts, profit-sharing and leasing without underlying tangible assets. According to the Islamic Finance Information Service, over $43 billion in sukuks were issued in 177 deals last year. The figure stood at $5.71 billion in 2003.

Faith-based investing

Faith-based investing does not apply only to Islam. Predominantly in Christian countries, numerous funds already exist that use moral screening processes to choose their stock. Christian funds, such as Ave Maria Mutual Funds, will not invest in companies involved in abortion, contraception, pornography, or companies that offer non-marital partner benefits to employees.

Faith-based investing can be classified as a subset of socially responsible investing, or SRI, which has become a major trend in the West over the past decade. Numerous pension funds have also adopted an SRI approach to portfolio management. An example of this is the Norwegian Government Pension FundĞGlobal, one of the largest pension funds in the world. It has established its own advisory council on ethics and excludes companies from the fund's portfolio it finds breach ethical standards.

More than $31 billion in assets are invested in faith-based funds today, while SRI funds have assets totaling $2.2 trillion.

Taylan Bilgiç, Mustafa Akyol and Reeta Paakkinen in Istanbul, and Serkan Demirtaş and Göksel Bozkurt in Ankara contributed to this report.

Gov’t poised to launch interest-free instruments to attract Gulf capital

Today's Zaman:The Turkish government is set to take another step to stave off the adverse effects of the ongoing global financial crisis on the economy after having introduced incentives to encourage Turkish expats living abroad to bring their money into the country and households to contribute their personal savings to the economy.

The projected plan aims to attract Gulf capital to Turkey by creating interest-free instruments such as rent certificates, real-estate partnership bonds and participation certificates -- known as sukuk in Islamic finance terminology. Anonymous sources from the government informed Today's Zaman that the Treasury has already started working on these instruments and has sent a draft of a bill to the prime minister's office. The same sources stated that the details will probably be publicized in a week's time.

The idea of creating Shariah-compliant financial tools to attract capital owners with religious sensitivities against interest-yielding instruments has been on the current administration's agenda since it first came to power in 2002. But to avoid fierce rejection by secular powerhouses, it had to shelve its intentions despite the fact that even centers of capitalism like the US and Britain have taken a great interest in interest-free finance. But global financial turbulence and the concurrent liquidity squeeze made the establishment of these interest-free tools urgently necessary.

After the prime minister's office completes its review of the draft, it will send it to the Cabinet for approval. Finally, the draft must be approved by Parliament to become law.

According to information provided by the sources, the Treasury will first issue YTL 1 billion in bonds. These Islamic bonds will also help money in the coffers of participation banks -- Islamic financial institutions in Turkey that provide interest-free banking services - remain within the Turkish financial system. These banks usually invest their excess capital in Shariah-compliant fund management instruments abroad since there have until now been no such instruments in Turkey. Therefore, the Treasury's ability to garner wealth from the domestic market will also increase.

The new instruments will be based on the revenue of wealth-generating assets such as highways, bridges and dams. Since these notes do not promise a set profit -- unlike interest-yielding Treasury bills -- the government hopes Gulf capital will flow into Turkey to purchase them.

Thanks to high oil prices -- which rose as high as $140 a barrel a few months ago -- the oil-rich nations of the Middle East have enjoyed a great accumulation of wealth, especially over the last year. Suffocated by the lack of liquidity needed to break free of the current bottleneck, the whole world is eyeing this capital nowadays and pondering new means to attract it.

Speaking to Today's Zaman about the government's intentions to create interest-free financial tools, Bank Asya General Manager Ünal Kabaca said this would do a great deal to open doors to the inflow of Gulf capital. Türkiye Finans General Manager Yunus Nacar was also jubilant upon hearing about the government's project. "Participation banks were not able to lend to the Treasury, but now it will be possible for them to invest their funds with more options," he said.

Turkey to attract investment at Islamic forum

Select Property: The Islamic finance industry’s leading global event, the twice-yearly International Islamic Finance Forum next takes place in Turkey from 13th -17th October 2008 in Istanbul. The International Islamic Finance Forum is a global event attended by companies, organisations and individuals from across the world. International Islamic finance practitioners and the world’s leading Islamic finance scholars will meet at the Istanbul forum for the most important networking event in the Islamic finance industry calendar.

Turkey will aim to attract investment to the country at the forum. Levels of Middle East investment in Turkey have been significantly increasing in recent years. The Islamic banking sector in particular has been on the receiving end of large investments but other sectors are starting to attract Middle East interest too, including insurance, energy and real estate.

Middle East poised to invest in Turkey

Renewed interest in Turkey by Islamic investors from the Middle East is expected with the ending of a legal stand-off between the country's ruling party and secular fundamentalists.

'Turkey was plunged into political and economic uncertainty by the court case over an attempt to ban the AK Party over allegations that it had been trying to create an Islamic state by stealth,' said Swati Taneja, conference director of the Islamic finance industry's leading global event, the twice-yearly International Islamic Finance Forum that next takes place in Istanbul from 13 -17 October 2008.

'Turkey, at the crossroads of east and west, is an overwhelmingly Muslim but avowedly secular state,' she added.

'The 1.5 billion strong Islamic world has been watching closely to see if Turkey has been able to balance accommodating religion and secularism.

'The AK Party narrowly escaped being dissolved by the constitutional court but, had the court accepted the request for a ban, it would have been difficult to have seen a substantial increase in investor confidence from Islamic and Middle East countries, with potentially disastrous effects for the economy.'

Levels of Middle East investment in Turkey have been significantly increasing in recent years.

The Islamic banking sector in particular has been on the receiving end of large sums but other sectors are starting to attract heavy Middle East interest including insurance, energy and real estate.

'Internationally Sukuk - referred to in Turkey as participation certificates - is one of the fastest growing asset classes in the financial industry,' Taneja added.

'The Turkish market is in need of such instruments and investor groups from the Arabian Gulf are ready to inject more into the Turkish economy provided the right regulatory regime is put in place.'

Banks operating on Islamic principles in Turkey are known as participation banks. They are a small but rapidly expanding segment of the Turkish financial sector.

The participation banks - Albaraka Türk, Bank Asya, Kuveyt Türk and Türkiye Finans - administer about $21.5bn in assets, representing 5% of the Turkish banking system and the sector aims to double its share within the next 10 years.

Public offerings and mergers and acquisitions are already part of the landscape in the sector

Participation bank Albaraka Türk, with Bahrain's Albaraka Banking Group as major shareholder, successfully went public recently and valuations of Turkish participation banks are relatively attractive compared with the valuations of similar banks in the Gulf region.

Earlier this year, Saudi Arabia's National Commercial Bank completed its acquisition of a 60% equity stake in Turkish Islamic bank Türkiye Finans for approximately $1.08bn.

Türkiye Finans has 124 branches and had assets at the end of last year of $2.9bn.

Meanwhile, Kuwait Finance House aims to become one of the top bankers in Turkey.

It wants to boost branches of Kuveyt Turk, in which it holds a majority stake, to 113 from about 100 now by year-end and become one of the top ten lenders by organic growth.

Kuveyt Turk, which had assets worth $3.18bn at the end of 2007, is the third-largest Islamic bank in Turkey by assets, according to the Turkish Participation Banks Association.

The underlying Turkish economy remains strong, Taneja added.

'According to government figures, the economy grew by 6.6% in the first quarter of 2008 and performed better than expected despite the uncertainties both global and local and could reach a 4.5% target by the end of the year,' she said.

A special session on Turkey at the crossroads will take place at the Istanbul forum which will also examine the status of Turkey's attempts to become a member of the European Union.

The session will be moderated by Dr Adnan Büyükdeniz, General Manager of Albaraka Türk Participation Bank, with panelists including Piraye Antika, Chief Executive Officer and Group General Manager of HSBC Bank, Turkey, and Michael Baldwin, Managing Director of D'Arblay Ltd., Turkey.

The results of a study on the impact of politics on the underdevelopment of Islamic finance in Turkey will also be presented by Dr Mehmet Asutay, Lecturer in Political Economy at the School of Government and International Affairs, Durham University, UK.

The forum will also identify new markets for Islamic finance as well as examine Sukuk structures and capital markets; emerging Takaful development; Islamic jurisprudence; alternative asset classes including private equity and real estate; and sustainability with the greening of Islamic finance.

Islamic banking 'in its infancy'

Turkish Daily News

As the U.S.-based credit crunch affects economies worldwide, there is a growing interest toward so-called “Islamic finance,” known by its strict prohibition of interest (riba) and “making money from money.”

The growing Islamic finance pie attracts non-Muslim countries too, as was seen by Britain's announcement in April that sukuks, or Sharia-compliant bonds, will be issued for the first time.

As London aims to be the leading Western center for Islamic finance, Istanbul hosted the “Leaders In Islamic Finance” conference last week. Speaking to the Turkish Daily News, Najib Fayyad from Unicorn Investment Bank compared Islamic banking in Turkey to “Malaysia in the early 80s.”

“The growth of Islamic finance globally is 15-17 percent year-on-year,” he said. “In Western markets, it is also attracting a lot of attention.”

Explaining the dynamics behind this growth, Fayyad pointed out to high oil prices and “phenomenal growth” in Gulf countries.

Islamic banking in Turkey:

“In Turkey, Islamic banking is in its infancy,” Fayyad said. “A lot of clients do not fully understand what it is about. Thus, we have to show the market the benefits of this new source of funding that could help support the growth of Turkish economy.

Answering a question on Turkey's participation banks – such as Bank Asya and Albaraka Türk – Fayyad said their share in the financial system is “basically negligible.”

“They have been trying to promote the sector, but are only focusing on the traditional Islamic product, which serves the niche,” he said. “To develop the market, you need to bring in the expertise and different financial products.”

The most popular of these products, sukuk, the Islamic bond, is not allowed in Turkey. Fayyad claimed Turkey should allow sukuks to be treated as conventional bonds. “The legislation [on participation banks] did not go anywhere,” he said. “Our duty is to try and educate the market about the benfits of Islamic finance.”The global volume of sukuks reached $2 billion a month in 2007.

Unicorn Investment Bank, centered in Bahrain, has “strategically invested in Turkey,” he continued. “We have offices in Dubai, Kuala Lumpur and Chicago. In January last year, we acquired Unicorn Capital and now have more than two dozen on the ground in Istanbul.”

Commenting on the global liquidity crunch, Fayyad said “the existing liquidity available in Islamic banking could create a new source of funding to support the growth of companies.

Turkish PM to address Islamic Finance Summit

By TradeArabia News Service
Turkish prime minister Recep Tayyib Erdoğan and leaders in Islamic finance from across the globe will address international delegates at the Leaders in Islamic Finance Summit.

The event will be held in Turkey from May 26 to 29.

This is the first time that such a significant conference on Islamic finance is being held in Turkey.

The gathering of high level government speakers as well as the most respected Shariah scholars, including Shaikh Nizam Yaquby, promises an agenda-setting conference that is sure to attract global attention.

The summit has been developed by the International Quality & Productivity Centre (IQPC), the global providers of tailored, industry-driven conferences in collaboration with an elite international advisory board that includes senior representatives from the European Union Commission to the Turkish Parliament, Dow Jones, Al Salam Bank, Credit Suisse, Heritage Fiduciary Services, GMD Global Advisors and HSBC Amanah.

“With substantial innovation, increasing competition and strong growth in key markets and products segments, the Islamic finance industry is becoming truly global, and increased interest and opportunities are emerging in non-Islamic regions,” said divisional director of finance IQ, IQPC Middle East Christianna Tsiterou.

Topics under discussion will include global expansion and implications on a geo-political level, opportunities for Islamic finance in emerging markets, exploring the potential in global markets (funds and new product developments) and the appeal of Islamic structures to investors.

Unicorn Investment Bank, Bahrain, will be leading an interactive workshop within the framework of the summit on ‘Innovations in Structuring Sukuk’.

The summit will also feature a special session on financing infrastructure projects in Turkey through alternative finance, to be moderated and attended by senior representatives of the Turkish government.

Ankara targets Gulf investors

Eighty five years after the fall of the Ottoman Empire, and in a sign of where financial power now lies in the Middle East, Istanbul's Ciragan Palace Hotel, once the residence of the Ottoman sultans, is now owned by Abu Dhabi Investment Authority (Adia).

The hotel will host an Islamic finance conference in late May, which will give GCC investors another chance to highlight the cash and expertise they can bring to the country.

Ankara is a willing recipient, seeing the Gulf as a natural source of much-needed funds. For Gulf investors, there is plenty of potential too. With a population of 73 million and strong links to both central Asia and Europe, Turkey is becoming a key market for GCC investors.

Overseas cash will ease the path of Ankara's privatisation plans, helping it to meet its job-creation targets and to sustain economic growth that has averaged 6.6 per cent a year since 2002, when the Justice & Development Party (AKP) came to power.

"Turkey is a large country and has a significant appetite for growth, and we need to finance that growth," says Turkey's Economy Minister Mehmet Simsek.

The AKP's economic reform programme began as Turkey started to recover from a severe recession, and selling state assets is just one part. The government is also revising the constitution, introducing social security and labour law reforms, and updating the commercial code to reduce income and corporate taxes.

These changes have coincided with a sustained period of record oil prices that has swamped the Gulf with funds. Increasingly, that capital is being put to work overseas. Of the $42bn invested in Turkey by overseas investors over the past two years, the Economy Ministry estimates a quarter has come from the Gulf.

"The GCC is critical," says Simsek. "It is in our neighbourhood and there are synergies. We are a major country that is growing and needs finance. The GCC is blessed with natural resources and finance.

"Turkey provides avenues for diversification. We do not have oil or gas, so we have developed an industrial base."

Since 2002, $40bn worth of state assets have been sold off by Ankara, compared with just $8bn worth in the previous 17 years. The sell-offs provide rich pickings for GCC investors.

Among the upcoming transactions that could entice Gulf investors is the sale of the government's remaining 75 per cent stake in Halkbank, which specialises in lending to small and medium-sized businesses. This is due to happen this year. An initial 25 per cent stake was offered in April 2007 and was 11 times oversubscribed.

"The bank is attractive to anybody, but particularly Gulf investors who want to invest in growth sectors," says Afa Boran, head of the Turkish liaison office of Dubai-based Shuaa Capital. "Gulf investors are looking at it."

More shares in Turk Telekom are also due to come to the market as the government sells its remaining 45 per cent holding. Oger Telecom, a subsidiary of Saudi Oger, bought 55 per cent for $6.6bn in November 2005. Up to 20 per cent of Ankara's remaining shares are expected to be sold in the second half of this year.

"Oger Telecom is an operator and does bring expertise," says Philip Khoury, Dubai-based head of research at Egyptian investment bank EFG-Hermes. "Oger Telecom was willing to pay a higher price than the other bidders and that is why it got the assets. But it is not fair to say that GCC investors are prone to overbid."

Ankara is trying to raise interest in several other sectors too. The country requires up to $125bn in investment in power generation over the next 20 years, according to the Economy Ministry. Next in line for privatisation are 20 electricity distribution networks and 12 power plants, as well as roads, railways, airports and ports. In addition, the government is looking to develop renewable and nuclear energy facilities.

"These are all things that we hope to get GCC investors interested in," says Simsek. "We have promoted these sectors [to GCC investors]. We are talking about big sums of money."

Ankara is also looking to foreign investors to help it meet the escalating demand for residential housing. Dubai's Emaar Properties made its latest investment in Turkey in February when it bought $400m worth of prime land in Istanbul, on which it will develop a mixed-used project covering 73,570 square metres.

Emaar is also looking for retail, commercial and hotel development opportunities with Atasay, its local joint venture partner in the Tuscan Valley residential project, that could require as much as $10bn in investment.

The Economy Ministry estimates that annual foreign investment in property stands at $3bn, although most of that currently comes from European buyers.

One of the factors restricting the interest of Gulf buyers has been land prices, which are more expensive in Turkey than in North Africa, where GCC investors have been more heavily involved.

In Egypt and elsewhere in North Africa, developers such as Emaar moved in early and have been able to purchase undeveloped land at low prices from governments keen to see it put to use. In Turkey, much of the land is privately owned and is sold at market rate.

In other areas of the economy, GCC investors already hold significant assets, however.

Dubai port operator DP World is developing the Yarimca container terminal at Izmit on the Asian side of Istanbul, where it also owns the land. The Riyadh-based Islamic Development Bank and Kuwait's Global Investment House both have stakes in TAV Airport Holding Company.

Such investments point to one of the most important aspects of the Turkish economy for investors, who see it as an access point to other markets. "Turkey is unique," says one Kuwait-based banker. "You have the European side and Asian side, and it really is a crossroads and a route into Europe that does not take you through London or Paris."

Kuwaiti banks have also bid for stakes in Turkish financial institutions, in competition with other investors, who entered the market at an earlier stage.

National Bank of Kuwait (NBK), which has outgrown its home market and is now expanding across the Middle East, bought a 40 per cent stake in Turkish Bank in mid-2007 for $160m. Commercial Bank of Kuwait bid for an Islamic bank with a view to establishing sharia-compliant services.

The appetite for Turkish assets is such that NBK Capital, the investment banking arm of NBK, sold its 100 per cent stake in Turkish edible oil company Yudum Foods to another Gulf investor, Saudi Arabia's Savola Group, for $71m after just six months.

For GCC investors, Turkey is a market that is near, familiar and one with which they have a cultural affinity, which makes it more attractive than other nearby emerging economies in Eastern Europe.

"The geographical and cultural proximity makes it easier for investors to understand the country," says Boran. "It is fairly easy to invest in Turkey. There are no restrictions and foreign investors are free from taxes on their capital gains."

Shuaa Capital has participated in Turkish stock market listings and also looks into private equity and real estate opportunities for its Gulf-based clients from its Istanbul base, as does Dubai's Abraaj Capital and NBK Capital, which also have teams on the ground.

In early February, Shuaa launched an Islamic hedge fund, which provides a new investment avenue for GCC investors who have previously avoided listed companies. Compared with European or US investors, GCC investors have limited experience in investing in emerging stock markets, and as a result have been wary of the volatile Istanbul Stock Exchange.

Instead, the bulk of GCC investment has been in private companies. "They go for industries that they can understand and manage," says Boran.

In this, GCC investors' strategy, like the sectors they are interested in, is in line with Ankara's. "It is more than money," says Simsek. "We are talking about partnerships. Property development, for instance, requires a lot of creativity. In Islamic banking, clearly there is a lot we can learn."

Turkey is just one of many destinations that GCC investors are exploring around the globe.

However, GCC investment in Turkey, although welcomed by Ankara, has been subject to public opposition that could make other markets more attractive. It is a problem the Turkish government recognises.

"Some deals get challenged, but this is not specific to GCC investors," says Simsek. "There are people [in Turkey] who want to continue to live in the 1930s. They don't realise globalisation has occurred. They don't want privatisation or reform. Globalisation is here and we are not afraid of it. We want to put our house in order and deal with it."