Bloomberg News

Turkey’s Tax Change Paves Way for Sukuk Sales: Islamic Finance

November 02, 2011

Nov. 3 (Bloomberg) -- Islamic bond sales from Turkey are picking up pace after the government changed its tax law to apply the same rates to sukuk as non-Islamic debt.

Two banks, Asya Katilim Bankasi AS and Albaraka Turk Katilim Bankasi AS, plan to sell as much as $500 million in Shariah-compliant debt after Kuveyt Turk Katilim Bankasi AS, a unit of Kuwait Finance House KSC, offered $350 million of five- year sukuk Oct. 20.

The tax measures passed in two stages this year will attract more issuers in Turkey to sell sukuk, said Ali Sanver, partner at Istanbul-based law firm Pekin & Pekin, which was among firms that advised the government. The ruling Justice and Development Party is pushing to assert the country’s Islamic identity and revive historical ties to Arab countries after almost eight decades of secularist control.

Abdul Kadir Hussain, chief executive officer at Mashreq Capital DIFC Ltd. in Dubai, said his company bought Kuveyt Turk and is “looking at another one.” The changes may lure investors from the six-member Gulf Cooperation Council, home to a fifth of global proven oil reserves, he said by e-mail yesterday.

Sales Rise

Global sales of sukuk climbed to $18.9 billion this year, compared with $13.5 billion in the same period in 2010, according to data compiled by Bloomberg. Islamic debt returned 6.9 percent in 2011, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index, compared with 7.6 percent for securities in developing markets, JPMorgan Chase & Co.’s EMBI Global index shows.

Asya Katilim, known as Bank Asya, said Oct. 20 it hired Citigroup Inc. and UBS AG to advise on the sale of as much as $300 million in five-year sukuk. Albaraka Turk will promote a $200 million issue to investors this month, Adnan Ahmed Yousif, chief executive officer of its Bahrain-based parent company Albaraka Banking Group, said in interview Oct. 24. The bank picked Deutsche Bank AG, Emirates NBD, QInvest LLC and Noor Islamic Bank to manage the sale, it said in a filing to the Istanbul Stock Exchange Oct. 21.

The offering by Kuveyt Turk, which is rated the lowest investment grade at Fitch Ratings Ltd., was the nation’s second after it sold an international Islamic bond last year, data compiled by Bloomberg show. The sukuk carry a coupon of 5.875 percent. The sale “was well distributed geographically targeting investors throughout the Middle East, Asia, and Europe,” the company said.

Legislation Changes

The government passed a law in February reducing the withholding tax on sukuk to 10 percent and exempted sales from value-added, stamp and corporate taxes, Osman Nihat Yilmaz, assistant secretary general of the Participation Banks Association of Turkey, said by phone. The law applies only to Ijarah sukuk, which are based on a sale and lease agreement, Sanver said.

Legislation two months later exempted sukuk certificates with a minimum tenure of five years from taxes on revenue, Sanver said. Notes with shorter maturities are subject to a tax rate ranging from 3 percent to 10 percent, putting them on par with non-Islamic bonds, he said.

“Turkey is a rapidly growing emerging market, and it’s attracting attention,” Jarmo Kotilaine, chief economist at National Commercial Bank in Jeddah, Saudi Arabia, said by phone Oct. 31. Gross domestic product may expand 6.6 percent this year, more than any emerging economy in central and eastern Europe, according to the International Monetary Fund.

Exchange-Rate Risk

Dollar-denominated sukuk will receive wider demand than debt offered in lira because foreign investors may be “deterred by the exchange rate risk,” Kotilaine said.

The lira has lost 13 percent this year against the dollar, the second-worst performance after South Africa’s rand, among more than 20 emerging-market currencies tracked by Bloomberg.

The constitution, drawn up after a military coup in 1980, mandates that religion be kept out of politics. Turkey, which has no Shariah-complaint sovereign bonds, allowed companies in April 2010 to sell sukuk. The country joins nations including Egypt, Libya and Tunisia in a push for Shariah-compliant banking.

Improving Ties

Three sovereign issuers in the Middle East, including Dubai, have Shariah-compliant debt denominated in foreign currencies.

The yield on Dubai’s 6.396 percent dollar sukuk due November 2014 tumbled 87 basis points, or 0.87 percentage point, this year to 5.61 percent yesterday, according to data compiled by Bloomberg. The extra yield investors demand to hold Dubai’s sukuk over Malaysia’s 3.928 percent bonds due in June 2015 declined 44 basis points this year to 294 yesterday, data compiled by Bloomberg show. Malaysia is home to the world’s biggest Islamic bond market.

Turkey’s improved ties with the Arab world are encouraging more investors to seek a foothold in the country with a population of about 80 million people, almost all of whom are Muslim. Sharjah Islamic Bank, a United Arab Emirates lender, may buy or establish a unit in Turkey, Deputy Chief Executive Officer Ahmed Saad, said in an interview on Oct. 25.

Turkey’s trade with the Middle East and North Africa has surged six-fold since Prime Minister Recep Tayyip Erdogan’s party came to power in 2002, reaching $30 billion last year.

“I don’t think this will turn into a campaign but the share of the Middle East and Africa in Turkish exports will definitely increase,” Yarkin Cebeci, a JPMorgan Chase & Co. economist in Istanbul, said in response to e-mailed questions yesterday.

--Editor: Claudia Maedler, Inal Ersan.

To contact the reporters on this story: Dana El Baltaji in Dubai at; Selcuk Gokoluk in Istanbul at; Alaa Shahine in Dubai at

To contact the editor responsible for this story: Claudia Maedler at

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