28 Apr

Islamic finance has been gaining ground in global markets as well as in Turkey throughout the recent years. In this regard what is especially important for the business world is the transformation of Islamic finance from simple financial tools to highly specialized tools for project finance. Specifically the real estate companies resort to the Islamic financing methods to finance their high capital investment requiring projects. A recent example is the USD$ 200 million worth Sukuk issuing by one of the giants of the Turkish real estate industry for the project finance purposes.

Given their interest free nature it is no surprise that such instruments of Islamic finance have increasingly been utilized for project finance purposes. The Islamic ban on interest payments had led to safer investments methods where the highly dubious activities of slicing up different kinds of subprime mortgages and combining them to create a whole new kind of , potentially toxic and risky,  assets are regarded anathema for the Islamic financing tools. Since interest payments and hedge fund formation are out of the question for such Islamic tools then project finance comes to the fore as a major area of interest both in Turkey and in the world.

Sukuk Market in Turkey

The growing numbers pertaining the Sukuk Market in Turkey obviously attest the increasing clout of the Islamic financing tools in the country. Recently a bid to issue Sukuk certificates had created a demand exceeding USD$ 750 million by a major Turkish bank which is planning to issue only a USD$ 500 million worth of Sukuk. Turkey’s declared goal to match the depth of the Malaysian Sukuk market seems quite feasible especially given its rapid economic growth which is heavily based  on large scale infrastructure and real estate projects that seek project finance opportunities.

Regulatory Framework

In line with the aforementioned target of transforming itself in to a strong global player in the world Sukuk market, Turkey has enacted the necessary laws.  The foundation for the Islamic lease certificates in which Sukuk is one of them, was laid in 2010 by the decision taken by the Capital Markets Board (SPK) of Turkey. 2010 regulation had led to the legal foundation of Special Purpose Vehicles (SPV’s) that the banks, intermediaries or originators can establish to issue and sell ijarah certificates which are the backbone of the Islamic financing models. A major legal cornerstone was laid in 2012 for the Islamic financing models in Turkey when the adopted regulation then gave the Treasury the capacity to issue sukuk al ijarah and that was followed by a regulation in 2013 that introduced even further options in Islamic financing tools to the Turkish market by enabling the use of istisna, murabaha, mudaraba, musharaka and wakala bonds.

Such regulations have been reinforced by new incentives for such Islamic financing tools. Especially some significant portions of taxes are either reduced or altogether revoked for such earnings. Not only the earnings generated through the sale of an asset by the originator to the sukuk SPV and its sale back to the originator by the SPV are exempt from corporate tax but also both the lease certificate and the sale and leaseback transaction are exempt from value added tax. Moreover, the incentives included directive that the corporate earnings from ijarah certificates issued onshore and earnings from Treasury sukuk al ijarah certificates issued offshore are not subject to income tax. Finally earnings from ijarah certificates issued onshore will be subject to only 10% individual income tax as well as Sukuk al ijarah transactions to be exempt from red tape-related costs, like registry fees, cadastral surveys and notary public fees.

The overriding concern for such incentives are foreign as well as domestic. The authorities had most probably acted to ensure a stronger Islamic financing market inside to provide the financial markets to deepen their capabilities to sustain high growth and to funnel the necessary resources to the kind of projects such as construction projects mentioned above. Internationally the aim to come up with such incentives must most probably involved the strengthening Turkey’s Sukuk market and to attract more resources from abroad to its bourgeoning Islamic finance market.

Conclusion

Islamic complaint project finance has recently been coming to the fore both in Turkey and in the world. Turkish investors and the business world , who have increasingly been competing in a global economy with increasing liquidity shortages, welcome the addition of a new method of project finance in to their disposals. The recent growth of the Sukuk based project finance in the country clearly attests to the strengthening of the Islamic compliant project finance in Turkey.


Herdem Law Firm, Istanbul Turkey

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