List of Abbreviations
List of Figures
2 Literature Review
3 Developments of the Islamic Banking Sector of Turkey
3.1 Market Size and Sectoral Developments
3.2 Market Participants
4 Sukuk – Islamic Capital Market Securities
4.2 Securitization in Sukuk
4.2.1 Issuance of Sukuk
4.2.2 Contracts Underlying Sukuk – Types of Sukuk
4.2.3 Structures of Sukuk
5 Developments of Global Sukuk Markets
5.1 Global Sukuk Issuance
5.2 Sovereign, Quasi-Sovereign, and Corporate Sukuk Markets
5.3 International and Domestic Sukuk Markets
5.4 Global Sukuk Market by Underlying Contract
6 Developments and Current State of Sukuk Applications in Turkey
I Turkey’s Economy and Banking Sector
I.I Turkey’s Economy At A Glance
I.II Developments and Current State of The Overall Banking Sector
II Contracts Underlying Sukuk: Basic Types of Islamic
List of References
List of Abbreviations
illustration not visible in this excerpt
List of Figures
Figure 1 – Functional Distribution of Assets in the Banking Sector of Turkey
Figure 2 – Sukuk Structure in an Ijarah Sukuk transaction
Figure 3 – Total Global Sukuk Issuance, 2001 – 2010, All Currencies
Figure 4 – Total Global Sukuk Issuance by Country and Targeted Market, 2001 – 2010, All Currencies
The Islamic finance industry as one of the most rapid growing segments within the financial services industry worldwide has been on the rise with the Islamic banking sector, throughout crises, witnessing growth rates of 10- 15% p.a. over the past decade.1 Turkey’s Islamic banking sector that con- sists of four banks and coexists with the country’s conventional banking sector is credited with an unsatisfactory growth compared to its potential and global developments. Disregarding general issues of Islamic banking mainly concerning legal, regulatory and standardization / harmonization challenges, Turkey’s Islamic banks are said to grow further depending on whether they’re able to improve investments in the face of falling interest rates, and to satisfy their thirst for sources of medium- to long-term funding – besides short-term deposits – in order to finance investment activities.1
Meanwhile, Sukuk markets have become one of the main sections of the Is- lamic finance industry. Since the legitimization of Sukuk, a form of Shariah - compliant securitization, in 1988, and after the international breakthrough in 2001, sovereign and corporate, domestic and international Sukuk certificates have been increasingly issued in various jurisdictions such as Malaysia, the United Arab Emirates (UAE), Saudi Arabia, Sudan, Bahrain, Pakistan, Qa- tar, Kuwait, the USA, the UK, Singapore, and Turkey while innovation in Sukuk structures pushed product diversity. These Islamic capital market se- curities emerged as a viable form of finance for both sovereign and corpo- rate entities that seek for long-term financing sources and diversification of their investor basis – investors from both Muslim and western countries en- joy greater diversity in their portfolios through these Islamic investment cer- tificates, and Islamic financial institutions can use Sukuk as money market instruments or liquidity facilities in terms of short-term investments for li- quidity management purposes. In fact, the upward rise in Sukuk issuance represents the need of Islamic financial institutions for longer-term funding sources in Islamic finance to overcome short-term liquidity constraints through the limitation of the maturity disparity between funding sources and investment activities.2
Given the problem statement – as stated above – on the prospective growth of Turkey’s Islamic banks, the scientific objective of this paper is a compar- ative analysis of developments and the current state of applications of Sukuk financing in Turkey and the global Islamic finance sector, and to lay a ground for further evaluation / research. The paper doesn’t concentrate on legal, regulatory or Shariah compliance challenges that may exist.
This paper is a descriptive study. As such, it is finalized through both a quantitative analysis (Islamic banking sector of Turkey, and global Sukuk markets) and a qualitative analysis (securitization in Sukuk, and Sukuk ap- plications in Turkey) by conducting desk research, i.e. using information and data that were collected and published by others in the first place.
The remainder of this paper is divided into six chapters and organized as follows: Chapter 2 comprises a review of significant publications in the field outlined in this paper. Chapter 3 by giving insight into Turkey’s Islamic banking sector covering developments from 2000 till 2010 and Chapter 4 by taking a closer look at securitization in Sukuk lay the ground for further analysis. Chapter 5 analyses global Sukuk markets covering developments from 2000 till 2010, and Chapter 6 analyses Sukuk applications in Turkey. The paper closes with a conclusion in Chapter 7.
2 Literature Review
Recent scientific publications about the Islamic finance / banking sector or developments of Islamic finance applications in Turkey are remarkably few in number. This literature review focuses on the field of securitization in Islamic finance and Sukuk, and highlights (in a logical order) significant and accurate publications that are worth guiding research in this field.
Wilson (2004) highlights the potential of Sukuk becoming a viable financing method for companies in Islamic / western countries and underlines the im- portance of Sukuk adding further diversity and reduced risk to investors’ portfolios. The author gives insight into structuring and issuing Sukuk by presenting cases about sovereign Sukuk issuances that highlight the rapidly developing interest in Sukuk, evaluates the potential for corporate Sukuk, takes a look at the tax / legal environment for Sukuk issuances and finally states that: “It is likely to be sukuk issues, rather than simply the growth of Islamic bank assets, that will account for most of the development in the Is- lamic finance industry in the coming decade.”3
Al-Bashir / Al-Amine (2008) state that there are many issues despite the remarkable growth and development of the Sukuk market and call for a close cooperation among financial experts and scholars as well as among Shariah boards in order to find proper solutions that sustain further devel- opments of the Sukuk market. The authors concentrate on Shariah, legal and economic issues that came up with innovations in Sukuk structures in terms of product diversity: The issues are concerning capital guarantee, contractu- al structures, pricing, and asset substitution in Sukuk as well as rating of Sukuk, the harmonization of Shariah rules, and the definition of the govern- ing law for Sukuk issuances. The authors highlight a legal dilemma concern- ing Sukuk issuances in conventional finance sectors / western economies – as might be the case in Turkey – and its impact on the development of an Islamic capital market:
“A properly functioning financial market depends on the en- forceability of the contracts concerned. However, looking at the governing laws of sukuk in the market it is clear that many con- tracts forming these transactions are governed by conventional laws such as the English law. This is despite the fact that all contracts are supposed to be based on Shari’ah principles and should not contradict its general principles.”4
Jobst (2007) presents the essential economic characteristics behind Shariah - compliant securitization by means of Put-Call Parity and asset pricing. The author presents developments of securitization in Islamic finance, and by examining legal and economic implications of Shariah compliance on secu- ritization transactions shows the central benefits and challenges (legal, eco- nomic, structural) of Islamic securitization. The author highlights the en- couraging effect of leading sovereign Sukuk issuances such as in Malaysia on corporate issuances, but at the same time points to various issues going forward:
“[W]ithout efficient and transparent capital markets and banka- ble legal frameworks to operate within, Islamic securitization will not continue to grow meaningfully in the near future. Cer- tain inalienable economic, regulatory, and infrastructural condi- tions are universal to any evolving and sustainable securitization market […]. One of the longstanding barriers […] is associated with legal uncertainty caused by regulatory disparity among na- tional supervisors, with each regulator working independently […]. […] [C]onsistency of shariah interpretations by religious boards and enhanced market practice, […] the retention of con- ventional finance documentation standards and the supremacy of bankable governing law as a matter of form remain essential to further growth of Islamic securitization.”5
1 Cf. Sole 2007, unpag.; Hasan / Dridi 2010, unpag.
2 Cf. Boustany et al. 2005 in: Jobst et al. 2008, p 8.
3 Wilson 2004, p. 16.
4 Al-Bashir / Al-Amine 2008, p. 4.
5 Jobst 2007, p. 32.