19 Nov

Sharia compliant non interest paying Islamic instruments, Sukuk is on the rise throughout the global financial markets. The volume of the global Sukuk market which is currently led by Malaysia, has already reached a volume of 1.5 trillion dollars and this financial instrument has recently expended to reach non-Muslim markets as the latest decision taken by David Cameron for Britain to establish an Islamic financial instruments index inside the London Stock Exchange and the British Treasury to issue 300 million dollar worth of Sukuk demonstrate.

The Safer Instrument

Sukuk should not be seen only as a financial instrument that bans interest payments but it is of critical importance to analyze this instrument in a wider context that it operates which is the Islamic Law; Sharia. This is an important aspect of the Sukuk instruments due to the fact that they all have to be compliant with the Sharia which’s understanding of financial transactions is closer to traditional banking. That means that the toxic assets which are the products of extremely complicated credit and lending practices where neither the creditor nor the lender anymore knows whom one lends the credit and from whom the credit comes, are not seen favorably by the Islamic Law. So the kind of high risk instruments that involve high leverage levels which have devastated the global economy during the latest financial crisis are out of the picture in Sukuk markets. For some this might be perceived as too risk averse but this prevents such instruments to have such destabilizing effects neither for the financial markets nor for the holders. Hence the Sukuk instruments obviously offer a safer opportunity for financial investments by not entirely clearing off but minimizing the risks.

Alongside predictability Sukuk also offers the much needed advantage on the part of the investors of providing easy liquidation. The tradability of the instrument assures easy liquidation in case of dire cash need by the investors. Moreover, the imperative to channel the resources to productive real life projects rather than interest paying financial or speculative activities, contributes to the financial stability as a result of aversion from high risk uncertainties and activities that have no real economic benefits. However since Sukuk instruments are based on the principle of risk sharing by the investor and the issuer, the investors should pay attention to the projects that the Sukuk instruments are based upon and which their real investments lie.

Turkey: A New Emerging Sukuk Market

As the Turkish economy continues to strengthen its macro-economic foundations its financial markets offer a wider range of financial instruments to a wider range of investors both from in and outside of Turkey. In line with such economic developments Turkey joined the growing global Sukuk market and the Turkish treasury issued 1.5 billion dollars worth of Sukuk in September 2012. This is followed by more than 1 billion dollars worth of Sukuk sales during the first half of the year 2013.

Regulatory bodies in Turkey have responded to this recent growth of global Sukuk market with positive steps that will encourage even more the demand for Islamic financial instruments. Tax exemptions constitute the most important part of these encouraging steps. Earnings generated through the sale of an asset by the originator to the sukuk SPV which have the official permission to to issue and sell ijarah certificates in Turkey (Special Purpose Vehicle) and its sale back to the originator by the SPV are exempt from corporate tax, which amounts to 20% under the existing tax regime. Both the lease certificate and the sale and leaseback transaction are exempt from value added tax. Corporate earnings from ijarah certificates issued onshore and earnings from Treasury sukuk al ijarah certificates issued offshore are not subject to income tax. Earnings from ijarah certificates issued onshore will be subject to only 10% individual income tax. Sukuk al ijarah transactions are also exempt from red tape-related costs, such as registry fees, cadastral surveys and notary public fees.

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