Crisis prompts embrace of sukuk

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 YeÅŸilbaÅŸ, 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."Â

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, YeÅŸilbaÅŸ 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.Â

'No, not Islamic'
Declining to use the word Islamic, Economy Minister Mehmet ÅžimÅŸek said the government was "working on the lease of every type of asset." ÅžimÅŸek 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 ÅžimÅŸek, 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 YeÅŸilbaÅŸ'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 FundÄžGlobal, 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.