Sukuk (Lease Certificate), New Locomotive of Global Islamic Finance. A Comparison with Sukuk Market of Turkey (2010-2018)

Essay, 2019

32 Pages




1. Concept of Sukuk and Its Development Process
1.1. What is Sukuk ?
1.2. Differences Between Sukuk and Conventional Bond
1.3. Development of Sukuk Market
1.4. Sukuk Structures






With the new products emerging in Islamic finance, the dynamics of the industry have begun to change. The sukuks were initially issued to attract the funds of the gulf countries and but it has become known all over the world over time. The aim of this paper is to intruduce Sukuk that has become one of the most important and popular products of today's Islamic finance industry. With this study, we will also investigate to look at differences between Turkey and Global sukuk market in terms of theirs volume, market share, the total amount of issuances and market structures. This paper has been divided into two parts. The first part deals with how the global sukuk market had been established and developed. The second part begins by laying out the Turkish sukuk market and its development process, and investigates the similarities and differences between Turkish and global sukuk market. The result of this paper shows that sukuk market of Turkey have a large number of structural problems. Nevertheless, it is seen that growth rate of Turkish Sukuk Market is higher than growth rate of global sukuk market. This paper can be used as a guide by sukuk investors. It was also aimed to detect obstacles in the growth of sukuk in Turkey, compared to global sukuk market and made a suggestion to whom it may concern.

Key words: Sukuk, Lease Certificate, Islamic Finance, Interest Free Banking, Islamic Banking

* Corresponding Author


In addition to conventional financing methods, Islamic finance techniques have become very popular among Muslim countries, especially due to the increasing population and wealth of the Middle East and some Far Eastern countries. Unlike Islamic finance techniques that prohibit interest (riba), conventional financing instruments are based on interest systems. Many financial institutions and Muslim investors that holding religious sensitivities have recently tended to use new financing techniques in line with Islamic law. As a result of similar needs, the concept of Islamic finance has emerged in order to carry out financial transactions in accordance with Islamic law.

Investors and financial institutions operating in Islamic finance are obliged to comply with certain rules. Trade with interest (riba) is forbidden by Islam. At the same time, it is not permitted to mediate and invest in the trading of religiously prohibited activities such as alcohol and gambling. According to the Turkish Language Association, interest is defined as a rental price of money. In the capitalist system, interest can be accrued on the principal loaned to profit. In the Islamic system, riba is forbidden but profit is not prohibited in a commercial or financial transaction. İt is examined what the root of the profit in this transaction. The institutions that are examining of this basis are different from country to country. While some countries have established their Islamic finance committees, in some countries, including Turkey, there is no roof unit for Islamic rules. Each institution has a board called the "fatwa board". The Islamic finance market is tried to be regulated by the decisions of these boards. One of the best known of Fatwa Boards is Bahrain-based “Accounting and Auditing Organization for Islamic Financial Institutions” (AAOIFI). According to the Latham and Watkind (2015), AAOIFI, established in 1991, plays an important role in harmonising İslamic standards relating to finance. AAOIFI’s Fatwa Board consist of scholars representing various Muslim countries and it is therefore considered as an industry-level representative body of Islamic scholars.

1. Concept of Sukuk and Its Development Process

1.1. What is Sukuk ?

Sukuk is an Arabic term meaning certificates and it is the islamic bond. Islamic bonds, also known as sukuk, are asset-based tangible securities that pay a profit rate to investors to comply with Sharia’s prohibition of interest and speculation. Standard 17th of AAOIFI defines Sukuk as being: “Certificates of equal value representing after closing subscription, receipt of the value of the certificates and putting it to use as planned, common title to shares and rights in tangible assets, usufructs and services, or equity of a given project or equity of a special investment activity” (Dar Al İstithmar, 2006).

Defined as follows by the Participation Banks Association of Turkey (2018); Sukuk is a sale of a commercial asset that is converted into securities through a certificate. Investors who receive these certifications become partners in this asset at the rate of their certificates in their hands. Therefore, the income of this asset also belongs to them. In the simplest form, we must state that the sukuk transactions that we can explain in this way can be used with different procedures for different contracts. For example partnership, mudaraba, murabaha, salam etc.

1.2. Differences Between Sukuk and Conventional Bond

If we make a comparison between conventional bonds and Sukuk, it is important to understand that there are certain fundamental differences. First, Sukuks indicate ownership of an asset but bonds indicate a debt obligation. Sukuk securities are structured to comply with Sharia by paying profit, not interest. The return of the bond is called interest and it represents capital. The return of the sukuk is called profit and it represents the tangible asset.

In any sukuk transaction, assets must be Sharia compliant in their nature. A tangible underlying asset can be a stock, commodity and, Sukuk assets can not finance businesses involved in non-Sharia-compliant activities like gambling , alcohol, pork, etc. Assets backing bonds may include products or services that are against Islam.

Sukuk are priced according to the value of the assets backing them. Bond pricing is based on credit rating. Sukuk can increase in value when the assets increase in value. Profits from bonds correspond to fixed interest, making them Riba. When you sell sukuk, you are selling ownership in the assets backing them. The sale of bonds is the sale of debt.

The bonds are based on loans and are issued certificates to find borrowed money. However, sukuk are certificates based on existence and representing the right of ownership over the entity. Contrary to bonds, sukuks give the right to get a share from the use of the existence. When the bond represents issuer's debt, sukuk represents the ownership in an asset.

In Arabic, while interest-bearing securities are called bonds, interest-free securities are called sukuk. The most notable difference between bond and sukuk is while the bond is the securities representing the capital, the sukuk is the securities representing the right of ownership in tangible assets. Sukuk can also be called as an interest-free securities.

According to the Islamic Development Bank, Sukuk not only represents the cash flow, but also represents the right of ownership. In other words, while bonds represent interest bearing securities, sukuk is a certificate that represents the ownership of assets that are represented with equal value shares.

1.3. Development of Sukuk Market

The dynamic market structure in the developing Islamic finance market is not satisfied with the existing products but demand innovative products. Therefore, the Fatwa councils and religious scholars who have been directing the sector have started to work on new financial products. The sukuk, which emerged in the last period of Islamic finance and perhaps the most important and the most popular of these products, started to become in this market. The sukuk, which started to be issued especially in the early 2000s and became the biggest driving force in the last decade of Islamic banking, has reached 17 percent the market share of world interest free banking in 2016 (see in Table 1). The issuance of sukuk rose from 14 million dollars in 2005 to 98 billion dollars (see in Table 3) in 2017, indicating that this investment product has grown rapidly and become a huge sector in a short time. This development also gives us clues about the future growth potential of the sukuk industry. Having emerged as an interest-free instrument to provide funds to sovereign[1], corporates and financial institutions, sukuk has drawn the attention of the world as an alternative investment instrument. It has created a new tendency in the market of national and international capital movements.

Table 1: Sectoral Composition of the Islamic Finance Industry (2016)

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Source:Sectoral Composition of the Global IFSI (2016)

The main reason why investors are interested in Sukuk market is because the rapid growth rate of this sector. Governments have become a main locomotive of this growth after entering the sukuk market. It is seen that after starting with sovereign issuances, global sukuk[2] market became a market dominated by sovereign. As can be seen in Table 2, 67 percent of sukuk was issued between 2001-2016 by sovereigns and quasi-sovereigns[3]. It shows that a large number of sovereign and quasi sovereign have chosen to finance their investments via sukuk. With the new countries and new companies that participating in sukuk market, the market continues to grow up. We see in the same table, on a global scale, corporates rank third with a 28 percent market share and islamic financial institutions rank fourth with a 7 percent share of market.

As can be seen in Table 3, the total amount of global sukuk issuances in 2017 reached 98 billion dollars. As indicated in the Sukuk report of the International Islamic Financial Market (IIFM) 6th edition report, the global sukuk issuance, which had seen the peak in 2011, entered a rapid downward tendency between 2012-2014 with the dramatic drop in oil prices. However, the global sukuk market, which started to accelerate after 2015, started to increase again and saw a new peak in 2017.

Table 2: Distribution of Global Sukuk Issuance by Issuer Status (Jan 2001- Dec 2016)

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Source:IFM Sukuk Database

The first sukuk was issued in 1990 by Malaysia ironically not for a domestic[4] company but for Shell, a multinational energy and oil company. After the first issuance, no sukuk was issued for 10 years in a global scale. The second sukuk was issued by Bahrain for the amount of 250 million dollars as sukuk al-Ijarah in 2001. After 2002, a large number of sukuk issuances have started to be carried out by Malaysia and the following countries (Alhabshi, 2013). Two years later, in 2016, the global sukuk market, with the new sukuk issuances, rose to 34 billion dolars.

Table 3: Global Sukuk Issuance, All Currencies, In Usd Millions>

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Source: International Islamic Financial Market (IIFM) 6th Sukuk Report and S&P Global Sukuk Outlook 2018

It is seen that Islamic finance continues to gain additional footholds both within and outside of the Islamic world. In 2014, the UK government became the first non-Muslim sovereign to issue sukuk, followed by the governments in Hong Kong, South Africa and Luxembourg, tapping into the fast-growing global sukuk market (White&Case, 2016). Britain, which is trying to attract investment from Muslim countries in this way, tries to become a leader in the sukuk sector by entering this market early (

As can be seen in Table 5, Malaysia ranked first with a 47 percent market share during 2016 in the global sukuk market. With a 26 percent market share, the members of the Gulf Cooperation Council (Saudi Arabia, Kuwait, Oman, United Arab Emirates, Qatar) ranked second. With a 9.9 percent, İndonesia ranked third, with the amount of 5.5 percent, Turkey ranked fourth. Other countries’ transaction volumes ranked last with a four percent market share.

When we look at the market share of Islamic banking in 2016, it can be seen in Table 4, the market share of Islamic banks is still in its infancy in Muslim countries. According to the World Islamic Banking Competitiveness Report 2016; Saudi Arabia ranks first with 33 percent market share. Malaysia and United Arabic Emirates ranked second and third with the amount of 15 percent market share. With 10 percent market share, Kuwait ranks fourth. With eight percent market share, Qatar ranks fifth, Turkey ranks sixth, İndonesia ranks seventh, Bahrain ranks eighth and Pakistan ranks ninth. The Islamic banking market share in these countries, almost all of which are Muslim, compared to conventional (interest-based) banks, is quite low indicating that this market will have a growth potential in the future. It is certain that this potential will contribute to the development of the sukuk.

Table 4: Islamic Banking Market Share, Dec 2016

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Source:World Islamic Banking Competitiveness Report, 2016

As it can be see in Table 5, it is not a coincidence that Malaysia is the country with the largest volume of sukuk. Malaysia, which made its first attempt with a small number in 1990, did not issue sukuk for a while and made its legal regulation during this time. The first serious sukuk issuance was made by the Malaysian Government in 2001. In the beginning, 500 million dollars sukuk was issued by Malaysian Sovereign. 51 percent of these sukuks was bought by the Gulf Countries, 30 percent in Asia, 15 percent in Europe and four percent in the US. The structure implemented was as follows: The Federal Office of the Land of Malaysia a public institution has got lands. These lands is sold to a Special Purpose Vehicle (SPV) that has already been established. The SPV pays the monetary value of these stocks, that purchased before, by issuing sukuk to investors. Later this land is leased to the Malaysian Treasury. Then the lease income is transferred from Malaysian Treasury to the investor (Güngören, 201:98).

In 2016, the highest amount of sukuk was issued by the Malaysian sovereign with 34.7 billion dolar. In fact sukuk is a product that is exactly suited to the needs of Turkey. It can be financed Turkey's major projects with sukuk such as İstanbul third airport, that will be the biggest airport all over the world, big city hospitals, etc. In the future, financing these types of projects with sukuk will provide both resource diversity and easier financing.

Table 5: World Sukuk Market Share (January-December 2016)

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Thomson Routers, MİFC Estimates

The sukuk issuance, which started to be used not only in the world of Islam but also as a global investment instrument in international markets, were listed on the London Stock Exchange for the first time on July 20, 2006 after the Luxembourg Stock Exchange. The Dow Jones Index and CitiGroup started to calculate the "Dow Jones Citigroup Sukuk Index" in March 2006, which is used to measure the performance of sukuk (Küçükçolak, 2008:27). Development in the global sukuk market increase the liquidity opportunities of Islamic banking. At the same time, international mechanisms are being developed to solve the problems that arise in practice. In this context, in 2010, International Islamic Liquidity Management has been established. The purposes of this management are as follows; As first is to have a Sharia compliant international[5] asset pool. Second, to create assets that are simple in design, have international validity and have a secondary market, The third is to help the interest-free banking institutions (Islamic banks) to solve their liquidity needs and to be able to issue sukuk regularly (Yakar, 2013:76).

1.4. Sukuk Structures

Three common uses of sukuk have emerged in the recent years as asset, project, and balance sheet specific. In project-based sukuks, sukuk is issued in order to provide financing for a planned project. In the asset-based sukuk transaction, assets owned by firms are sold to investors. In this way, the right to profit of the assets will be transferred to the investor and the fund will be obtained. In the balance sheet indexed transaction, sukuk is issued to provide funds to more than one project (Aslan, 2012: 63-64). There are 14 types of sukuk structure approved by AAOIFI (Dar Al İstithmar,2006).

Table 6: AAOIFI Sukuk Structures

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Source: AAOIFI,

According to the International Islamic Financial Market (IIMF) 2016 report (see Table 7), a total of 856.730 million dollars was issued between 2001-2016 in global sukuk market. 674.992 million dollars of these sukuks were issued in the domestic markets of the countries and 181,738 million dollars were also issued to the international markets. In the domestic markets, it is seen that murabaha sukuk was issued the most. 43.7 percent of the issuances, in 2016, were carried out with domestic murabaha. Murabaha sukuk was followed by the al-Ijara sukuk. Then followed by Musharaka sukuk, wakala[6] sukuk, deferred murabaha sukuk, hybrid sukuk[7], mudaraba sukuk, salam sukuk[8], exchangeable sukuk[9] and istisna sukuk[10].

While the least issued sukuk structure is sukuk al-istisna, the most issued sukuk structure is murabaha sukuk. No deferred murabaha and istisna sukuk were issued in the international markets. The largest transaction volume of sukuk market, with 374 million dollars, is the domestic murabaha. The smallest volume of sukuk market, with 408 million dollars, is the exchangeable sukuk.

Table7: Structural Break-up of Sukuk İssuance in Global(Jan 2001-Dec 2016) - All Tenors, All Currencies, in Usd Millions

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Source:International Islamic Financial Market (İİFM) 6th Sukuk Report

According to the Tok, the sukuk are divided into two groups. One of them is tradable sukuk in secondary market, the other one is non-tradable sukuk in the secondary market.

Table 8: Tradable or Non-tradable Sukuk Structures in Secondary Market

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Source: Writer’s own work

1.4.1. Sukuk Al-murabaha (sell with cost plus profit)

A murabaha contract is an agreement between a buyer and seller for the delivery of an asset where the price includes the cost of the asset plus an agreed-upon profit margin for the seller. The buyer can pay the price on the spot or establish deferred payment terms. Under a murabaha sukuk, the issuer of the sukuk will utilise the proceeds of the sukuk issuance to purchase commodities from a commodity supplier. The trustee will then on-sell the commodities to the originator of the sukuk at a deferred price, which reflects the purchase price plus profit for the trustee as compensation for its involvement in the transaction. The period for the deferred payments reflects the maturity of the sukuk. The instalments of the deferred price received from the originator are then used to make payment of the periodic distribution amount due to investors under the sukuk (Latham and Watkins LLP, 2015).

Sukuk al-murabaha transactions can only be tradable in the primary markets. Trading on secondary markets is forbidden by Fatwa Boards. We see that, in 2016, the greatest number of iussued sukuk structure in the global market is sukuk al-murabaha.

Table 9: Sukuk Al-Murabaha Transaction Structure

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Source: Writer’s own work

The sukuk al-murabaha structure consists of the following transactions; First, a master agreement is signed between the SPV and the obligator.

1. SPV issues Sukuk to the investors.
2. SPV receive Sukuk proceeds.
3. SPV gives the money to commodity broker[11] 1 for purchase of sharia compliant tangible assets.
4. Broker one, which received the price of sharia compliant tangible assets, sends the assets to the SPV.
5. SPV sells the commodity to the obligator at the spot price plus a profit margin, payable on instalments over an agreed period of time.
6. The obligator (borower) sells the commodity to the commodities Broker two on the spot market.
7. The commodity broker 2 pays the cost of the assets to borrower.
8. The borrower pays a coupon payment to the SPV in due date.
9. The SPV pays the coupon payment to the investors in due date.
10. The borrower pays the commodity price and plus profit to the SPV at the end of the maturity.
11. The SPV pays the commodity price (redemption payment) to the investor.

Practical example: A company applies to an issuer (Special Purpose Vehivle-SPV) for a construction work machine priced at 500.000 Turkish Liras (TL). Special Purpose Vehicle issues 5.000 pieces of sukuk which is 100 dollars each certificate. With this proceeds, the construction work machine is purchased by SPV. Then, SPV adds a profit of 100.000 TL over the cost price of the construction machine and sells this machine to A company with 12 months maturity. Company A pays 50.000 tl per month to SPV. Thus, company A buys the construction machine and Sukuk İnvestors make a profit of 100.000 TL from this transaction.

1.4.2. Sukuk Al-Ijara

Sukuk al-Ijara is in fact a lease agreement. With the Ijara agreement, use of real estate belongs to the contract owner. Sukuk al-Ijara is a security that representing the ownership of well defined existing and well known assets, that are tied up to a lease contract.

Sukuk structure most commonly used is s ukuk al - ijara. Sukuk al-ijara refers to the securities in which the owner, jointly, owns some part of the assets the profits of which has been transferred to the consumer or the originator according to the ijara contract. In Ijara Sukuk the right of using the profits of the assets or a series of assets is transferred from the owner to another party in exchange for the payment of the lease.The tenure of Ijara contract is definite and the lease could be paid at the beginning or end of the period or at monthly, quarterly, or annual maturity dates. Since ijara Sukuk is the securities that are indicative of joint ownership, they could be traded at secondary markets and with a price that is determined by market agents (Capital Market Central Asset Management Co. 2016)

Leasing is different from the sukuk transactions. In the leasing process, the property is transferred to the buyer at the end of the rental period instead of direct sale. In leasing, the leaser first chooses the fixed asset he wants to buy. Then he asks the leasing company to allocate a credit limit for this transaction. The leasing company makes direct payment to the seller with the credit limit allocated to the leaser. Leasing company takes ownership of the property and delivers it to the leaser for using. In the sukuk process in Islamic banking, the bank gives its assets (such as buildings, equipment, etc.) for rent over a predetermined period and a certain amount of lease. The obligor purchases back tangible underlying assets taking from the sukuk holders at a specified price at the end of the lease term.

Table 10: Sukuk Al-Ijara Transaction Structure

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Source: Writer’s own work

The sukuk al-ijara structure consists of the following transactions;

1. A master agreement is signed between the SPV and the obligator. The obligator sells certain assets to the SPV from an agreed pre-determined purchase price.
2. SPV issues sukuk that represents undivided shares in the ownership of tangible assets.
3. SPV receive Sukuk proceeds from İnvestors.
4. SPV pays the purchase price to obligator (originator).
5. SPV leases the assets back to originator under a lease arrangement (ijara) for a term that reflects the maturity of the sukuk and abligator pays to periodic lease payment to SPV.
6. SPV pays to the periodic lease peymant to the investors in due date.
7. The SPV sells tangible assets back to the obligor at the price they had previously agreed upon.
8. The obligator pays the commodity price to the SPV.
9. SPV pays the commodity price to the all investors. This is a last payment, the other name is redemption payment.

1.4.3. Sukuk al-Musharaka (profit/loss participation partnership)

Musharaka means partnership, joint venture. Capital Market Central Asset Management Co defines as follows; A musharaka arrangement is a partnership arrangement between two or more parties, where each partner makes a capital contribution to the this joint venture. Certificates of equal value that are issued for the purpose of investing the mobilized funds of musharaka for establishing a new project, developing an existing project or financing a business activity on the basis of shari'a complied partnership contract.

Musharaka; meaning that profits and losses occurring in a commercial enterprise are shared by all partners. In sukuk al-musharaka transactions, profits are distributed according to the conditions previously determined in the agreement. The loss is divided according to the capital ratios of the partners. In the musharaka transaction, certificate holders own the project or activity in proportion to their share. Musharaka sertificates can tradable in the secondary market. These certificates are issued at equal value to establish a new project, to develop an existing project, or to fund an activity based on any partnership agreement. The most prominent feature of sukuk al-musharaka; is to allow the shareholders to have the same amount or to invest in different amounts (capital). Even if partners put capital in the same amount, the profit sharing rate can be set differently (Rımaz, 2014: 44).

Practical example : Company A has received a contract for the construction of a City Hospital with a cost of 500.000.000 TL to be delivered after three years. In addition, if the project is not timely terminated, 10 percent incomplete payment will be made for each delayed month. The cost of the project is estimated at 400.000.000 tl. Company A will pay 200.000.000 tl for the cost of this project with its own resources. For the other part of 200.000.000 tl, sukuk al-musharaka will be issued. Sukuk's maturity will be 3 years. Thus, sukuk investors own 50 percent of this project. Therefore, at the end of the project, the generated revenue will be shared between the company A and the sukuk owners. İf there is a loss, the loss will be shared between the company A and sukuk investor at the proportion of the capital.

The sukuk al-musharaka structure consisted of the following transactions;

1. SPV issues Sukuk to investors.
2. SPV receive Sukuk proceeds.
3. The SPV transfers money to the joint venture or project.
4. The other partner transfers the capital to this project or joint venture. Thus the profit-loss partnership enterprise is established.
5. At the end of the project, the SPV receives profit or loss from the project.

Table 11: Sukuk Al-Musharaka Transaction Structure

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1. The other partner also receives profit or loss from the project.
2. The SPV pays the project profit to the investor. If tehere is a loss in this project, the loss is reflected in the investor's capital proportions.

1.4.4. Sukuk al-Mudaraba (partnership)

Mudaraba means an agreement between two parties according to which one of the two parties provides the capital (capital provider) for the other (Mudarib) to work with on the condition that the profit is to be shared between them according to a pre-agreed ratio (Dar Al İstithmar, 25).

In other words, In mudaraba contracts, investors are considered to be silent partners and the party who utilizes the funds is the working partners (as a mudarib). The profit from the investment activity is shared between both parties based on an initial agreement. In a mudaraba sukuk, the sukuk holders that are the silent partners don’t participate in the management of the tangible asset, business, or project. The working partner is the sukuk obligator (Jamaldeen, 2012).

In this type of sukuk, the whole cost of the project is paid by one side, the whole capital belongs to one side. The other partner, Mudarıb, uses his mastery and experience. Thus capital and labor come together. It is a partnership that trust among investors (capital provider and mudarıb) is at the highest level. If the project is profitable at the end of the project, profit will be shared between the two parties as stated in the profit contract. If there is a loss in the project, capital provider is responsible for all losses. Mudarıb, as a worker, also can not get anything for their time and effort.

Table 12: Sukuk al-Mudaraba structure

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Source: Writer’s own work

The sukuk al-mudaraba structure consists of the following transactions;

First; Mudarıb (the party seeking financing) enters into an agreement with a Special Purpose Vehicle (SPV) to manage certain assets owned by the SPV.

1. SPV issues Sukuk to the investors.
2. SPV receives Sukuk proceeds.
3. The SPV transfers money to the joint venture or project.
4. Mudarib (project owner) participates in the project with his labor and knowledge.
5. Joint venture (project) is established.
6. If the joint venture is profitable, gained profit is shared between the SPV (representing investors) and the mudarib in the manner that specified in the contract before.
7. SPV receives a pre-determined share of profits due to brokerage activity.
8. At the end of the project (joint venture), all joint venture assets or only the share of the SPV is sold at the market price and transferred to the investor via SPV.

Sukuk structure of all tables in this paper was obtained from Kuveyttürk and Turkey Finans Participation Bank’s sukuk issuance documents. Compared to other countries, there are minor differences between the tables, but we see that the main structure is the same.


Globally, sukuk started to be issued at the beginning of the year 2000 and the first issuance was made mainly in Malaysia and then in the Gulf countries. As to Turkey, for sukuk issuance, any communiqué wasn’t issued in Turkey for the first 10 years (between 2000-2010). With the first Communiqué Series III No:43 on Lease Certificates and Asset lease Companies that was issued by Capital Market Board of Turkey in April 2010, sukuk has acquired a legal status. In this Communiqué, sukuk is named as lease certificate.

For the first time in Turkey market, on August 24, 2010, Kuveyttürk issued its first sukuk with total issuances of 100.000. dollars. Secondly, in 2012, a total of 1.5 billion TL sukuk as structured of al-ijara have been issued by sovereign in Turkey. For this sovereign issuance, the investors demanded the total amount of 12 billion TL sukuk certificates. Because of this high demand rate, sukuk issuance market of Turkey has attracted the attention of all sectors.

Table 13: Sectoral Composition of the Turkey Islamic Finance Industry (2017)

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Source:,, Aktifbank issuances were not included because of low volume.

As shown in Table 13, the share of lease certificates in interest-free banking sector has risen to 13 percent in Turkey. First Takaful[12] Communique No:30186 was published in the Turkish Official Gazette on September 20, 2017. Thus, takaful known as participation insurance has obtained an official identity. The volume of this sector, which is still very small, has only reached one percent market share. İt is clearly seen that there is a parallel between growth rate of Turkish sukuk market and global Sukuk market.

The Second Sukuk Communique was published in 2013 in the Turkish Official Gazette. With this new Communique Series III No:61 having obligated the previous Communiqué Series III No:43, a wider legal infrastructure has been established for sukuk. In both communiques, the certificates known as sukuk all over the world are called "lease certificates" and the "Special Purpose Vehicle" (SPV) is called “Asset Lease Company” (from now on, it will be referred to as Asset Lease Company-ALC). It is compulsory to establish an ALC for each institution that will issue lease certificate.

The system basically works as follows. The obligator (such as bank A) sells assets to the ALC. ALC issues equally valued lease certificates for representing tangible assets. ALC receives lease sertificate proceeds. The ALC transfers the issuance proceeds to the borrower (obligator). The tangible asset is rented to borrower by the ALC. Rental income is paid by the ALC to the investor. At maturity, the tangible asset is sold back to the borrower at the agreed price before. The ALC pays the asset price to the investors.

According to the Communiqué Series III No:61 of the Capital Markets Board; Asset Leasing Companies can do the followings: to issue lease certificate, to take over and lease assets on behalf of investors, to pay obtained income to the certificate holders, to transfer the tangible asset back to obligor (borrower) again.

According to the Capital Market Board Communiqué Series III No:61, the types of lease certificates are limited by the legislator. That's why lease certificates are linked to certain rules. Their definitions have also been made specific to Turkey. For example; Sukuk is defined as follows by Borsa İstanbul; A lease certificate is a security issued by an asset lease company in order to finance the assets and the rights that are acquired or leased by asset lease company. It entitles its holders to acquire the revenues attained from such assets in proportion to their shares. In this definition, “right” refers to all and any rights backed by the lease certificate, and “asset” expresses all and any assets other than such rights.

The "Communiqué of Lease Certificates" Series III No:43, dated 2010, only allowed the sukuk al-Ijara transactions. New Communiqué Series III No:61,dated 2013, also allowed wakala, mudaraba, musharaka, hybrid sukuk and Istısna sukuk structures. The original names of these sukuks have not been mentioned in the communiqué of the Capital Markets Board.

In the Capital Market Board Communiqué Series III No:61in September 2013, the types of lease certificates are stated as follows;

a- Ownership-based lease certificates: The original name is sukuk al-ijara. ALC buys assets from obligators. ALC leases back this asset to the obligator. The ALC issues lease certificates to finance the acquisition of the property.

b- Management agreement-based lease certificates: This structure is similar to Wakala Sukuk and Hybrid Sukuk. The general structure is as follows. Debt assets (leasing contracts, murabaha assets, etc.) are transferred to ALC for a fee. ALC receives proceeds by issuing lease certificates from investors. Proceeds are paid to the obligator and then obligator transfers the assets to ALC. The assets are managed by ALC for the duration of the term. ALC leases these assets to the obligator. The proceeds are transferred to ALC. ALC pays all revenues to investors.

c- Trading-based lease certificate: The original name is sukuk al-murabaha. A tangible asset, purchased by ALC in advance, is sold in futures. These are certificates issued for the financing of tangible asset transactions.

d- Partnership-based lease certificates: The original name is sukuk al-muşaraka. Lease certificates are issued by ALCs in order to establish a joint venture. Because it is perceived as a risky product, there is no market share as yet in Turkey up to Jan 1,2018.

e- EPC[13] contract-based lease certificates: The original name is sukuk al-istisna. Certificates issued by ALC in order to create a work as a business owner and to provide the required financing. Today, There is no market share of this sukuk structure as yet in Turkey up to January 1, 2018.

Table 14: Structurel Break-up of Sukuk Issuances in Turkey (Sept 2010-Dec 2017) All Tenors, All Currencies, in TL Thousand

Abbildung in dieser Leseprobe nicht enthalten

Source:Writer’s own work

As can be seen in Table 14, Lease certificates based-on Management Agreement rank first with 8.248 million TL. Compared with global issuance, murabaha sukuk that ranks first in global, ranks fourth in Turkey. It is seen that İjara sukuk that ranks second in global scale, ranks fifth with 950 million TL in Turkey. It seems that no sukuk al-istisna or sukuk al-muşaraka was issued.

When we look at outstanding lease certificates (see Table 15) on January 1, 2018 in Turkey, sovereign issuances are seen to be twice as high as private sector issuances. This shows that the issuance tendencies in the world is similar to the issuance tendencies in Turkey. We can say that sovereign sukuk issuance market is the locomotive of the sukuk issuances both in the world and in Turkey.

Table 15: Turkey Outstanding Lease Certificates by Issuer Status as of 2010 ≤ 2017

Abbildung in dieser Leseprobe nicht enthalten


ALCs do not issue lease certificates for only their owner in Turkey. They can issue the lease certificate in other persons or institutions. Turkey Finance Asset Lease Company (TFALC) that owned Turkey Finance Participation Bank issued 34.5 million TL lease certificates for Çetin Civata Sanayi Firm in 2014. Also, in October 2017, Vakıf Participation Asset Lease Company that owned Vakıf Participation Bank issued 200 million Turkish Lira lease certificates for Zorlu Enerji Inc.

We see all the ALCs that issue sukuk at the table 16 in Turkey. As of January 1, 2018, there are total of seven ALC in Turkey. It is seen that the total amount of sukuk issuances between 2010-2017 are approximately 60.4 billion TL. The highest amount of sukuk was issued by the Sovereigns with 37.5 billion TL. Kuveyt Turk Participation Bank ranks second with issuance of 10.6 billion TL. Turkey Finans Participation Bank ranks third with issuance of 6.2 billion TL. Others, respectively, Albaraka Türk Participation Bank ranks fifth, Vakıf Participation Bank ranks sixth, Ziraat Participation Bank ranks seventh and Aktif Bank ranks eighth.

Table 16: Lease Certificate Issuers In Turkey (Asset Leasing Companies) (Beyween 09/2010-12/2017, Thousand TL), All Currencies, In Turkish Lira

Abbildung in dieser Leseprobe nicht enthalten

Source: Writer’s own work (The total amount of sukuks consist of domestic and international issuances between 2010-2017)

We see in Table 17 that shows total sukuk outstanding of Turkey, 62 percent of sukuk was issued by the sovereign in Turkey. After the sovereign started to its first sukuk issuance in 2012, İt became the main issuer in this sector since that time. Kuveyt Turk Participation Bank ranked second with 18 percent market share, Turkey Finance Participation bank ranked third with 10 percent market share. And last one, other banks issuances ranked fourth with 10 percent market share.

Table 17: Total Turkey Sukuk Outstanding by Issuer Status (Aug 2010-Dec 2017)

Abbildung in dieser Leseprobe nicht enthalten

Source:,,Aktifbank sukuks were not included due to low volume.

The steady growth of the Sukuk transaction volume shows that a new and efficient product emerged in the Islamic finance sector beside conventional banking products. This product that increased investment alternatives made a rapid entry into Turkish financial markets. However, it is seen that there are some structural problems of Sukuk market in Turkey. First, for the Sukuk issuance, operational procedures are too much. Second, there are some restriction on the sukuk market. Only five types of sukuk structure can be issued in Turkey’s sukuk market. İt was not allowed to issue other kind of sukuk by Capital Market Board. Additionally, issuance operational procedures of ALC's are very long. ALCs have to do all operational operations again if they want to issue sukuk again. This obstacles restrict the growth of this market in Turkey. Despite all these difficulties, we see that it is a great success that the total amount of issuanced lease certificate has reached 60 billion TL.

As can be seen that market share of Sovereign sukuk is higher than the others. Because of the default risks, investors prefer sovereign based lease certificates more to corporate based certificates[14]. Compared share of sovereign sukuk market between global and Turkey, It is seen that sovereign market volume of Turkey is higher than sovereign market share of global issuances.

Until 2018, it has 12 percent market share in global islamic market, quasi-sovereign certificates haven't been issued, except one issuance, in Turkey. “Toprak Mahsulleri Ofisi”, a Turkish Quasi-Sovereign İnstitution, has issued a lease certificate of 100 million TL on November 27, 2017. İn the period of 2018-2019, it is announced to planned to be issued 5 billion TL lease certificate by the Board of Directors of the "Toprak Mahsulleri Ofisi". It is understood that in future this product will be also issued by quasi-sovereign institutions beside the sovereign in Turkey (

Lease certificates, issued between 2010-2017 in Turkey, are shown in Table 18. As can be seen in it, transaction volume of sukuk issunaces in Turkey has increased steadily over the years. The total of 769 million TL lease certificates were issued by the islamic financial institutions between 2010 and 2011 in Turkey, but there was no issuance by the sovereign that time. In 2012, it wasn't issued any sukuk issuance by Islamic Financial Institutions, but total amount of 4.302 million TL sukuk were issued by sovereign that was unique issuer. After 2012, it is seen that sukuk issuances increased in both sovereign and Islamic Financial İnstitutions. In 2017, with 16.306 billion TL, sukuk issunces volume was reached the highest peak in Turkey.

Table 18: Sukuk Issuance In Turkey (Aug 2010- Dec 2017), All Currencies, In Turkish Lira

Abbildung in dieser Leseprobe nicht enthalten


You can see in Table 19 as below, sovereign is the main issuer in Turkey as in the global market. The other issuers are islamic bankings. As it mantioned above, apart from sovereign and islamic financial isntitutions, only one quasi-sovereign whose name is “Toprak Mahsulleri Ofisi” and a corporate whose name is Zorlu Enerji İnc Issued sukuk. But their volume are quite low.

Table 19: Distribution of Turkey Sukuk Issuance by Issuer Status (Aug 2001- Dec 2017), All Currencies, In Turkish Lira

Abbildung in dieser Leseprobe nicht enthalten

Note: Sukuk issuances of a quasi-sovereign instituon and a corporate in 2017 were not included due to low volume. Source of this tables are,

In the table 20, we see that most of the sukuk was issued in TL currency. But we can say definetely, Turkish sukuk obligators (sovereign and financial institutions) are very successful in the international sukuk issuance market to find funds. 38 percent of total sukuks issued in the international markets in Usd currency. This rate is quite high for borrowing at table 20.

Table 20: Distribution of Turkey Sukuk Issuance by Currencies (Aug 2001- Dec 2017)

Abbildung in dieser Leseprobe nicht enthalten

Source: Writer’s own work

International markets and shows that there is a high level of trust in Turkish investors who are attracting funds with sukuk in international markets.


No vat tax (value added tax) is to be imposed on the sale of the asset by Originator to ALC, the leasing of the asset by ALC to Originator, the delivery of the leasing certificates by ALC, or the sale-back of the asset by ALC to Originator (Yolal, 2018).

Withholding tax rate of Lease Certificates is lower than the saving account's in domestic market of Turkey. While 15 percent withholding tax rate is applied to the six months participation accounts, this rate is 10 percent for the lease certificates (in Turkey, instead of "saving account", Participation Banks prefer to say "participation account"). For natural person investors, the withholding tax rate is 10 percent. But there is no withholding tax rate for legal entities at the all maturity date in Turkey.

The withholding tax rate of lease certificates issued international are depending on their maturity dates. The withholding tax rate of lease certificates, which is one year maturity, is 10 percent. If the lease certificates maturity date is between three-five years, 3 percent as withholding tax is to be applied. And then if lease certificate maturity date 5 year or more, zero percent as withholding tax rate of lease certificate is to be implemented. (


Having become an important financial instrument in the last years of Islamic Finance, sukuk increases its importance with high transaction volume more and more. Sukuk is essentially seen as a financial instrument used by people, sovereigns or companies that have various tangible assets but need cash or want to do a new job but do not have the necessary cash. In the global sukuk market, particularly those countries where the majority of the population is Muslim play an active role. Non-muslim Countries, such as USA, Uk, Japan, Western European, Hong Kong, South Africa, Luxembourg and China that want to attract trillions of dollars of Gulf countries make arrangements for sukuk market.

It is obviously seen that the sukuk market has been the most rapidly expanding Islamic Finance sector in the last decade, based on growth rate. We see in 2016 that sukuk has 17 percent market share in Global Islamic Finance. But this proportion is 13 percent despite getting into sukuk market 10 years later in Turkey. It can be said that shortly gained the 13 percent market share, Turkish sukuk market has attracted attention of all investors with its development tendency. We see in this paper that sukuks are issued by sovereigns, quasi-sovereigns, financial institutions and companies in the global islamic finance market. But, in Turkey, up to 2017, 99 percent of the sukuk was only issued by sovereign and financial islamic institutions. Up to 2016, Turkey's all sukuk issuance was made by the sovereign and islamic Bankings. In 2017, in addition to sovereign and islamic banking, for the first time, a corporate and a quasi-sovereign sukuk was issued. While less than 1 percent in Turkey, the total of market share of corporate sukuk and quasi-sovereign sukuks are 40 percent in the global sukuk market. With the first corporate and quasi-sovereign transactions, we can say that sukuk market will grow up much higher than 2018 in Turkey.

Despite the fact that there are 14 most common types of sukuk on the global scale, only five sukuk structures are mentioned in the legislation of the Capital Markets Board in Turkey. It wasn't allowed to issue other sukuk structures and only five sukuk structures can be implemented in Turkish market. With the inclusion of new sukuk structures in the system, this sector will grow much faster. It is announced that Turkey’s government is determined to make Istanbul a financial hub for Islamic finance, regionally and globally in 2017. With the legal improvement of the Turkish sukuk market, it is certain that the government will make an important contribution to this purpose. But, overseas investors, because of the capital market legislation in Turkey, are not able to issue foreign currency-based sukuk. Foreign investors and issuers are only able to trade in Turkish lira. The fact that trade in Turkey through the Turkish lira has an adverse effect on the realization of the Istanbul Financial Center project.

When we compared the global sukuk market with Turkish sukuk market, it is seen that market structures are different from to each other. First, compared distribution of global sukuk issuance by İssuer Status, Global sukuk market consists of issuers that are sovereign with 55 percent, quasi-sovereign with 12 percent, Islamic Financial İnstitutions with four percent and Corporate with 28 percent. But in Turkey, as it can be seen, sukuk issuers status consist of only sovereign with 67 percent and Islamic Financial İnstitutions with 33 percent.

Important projects of Turkey, such as the world's largest airport project, Channel Istanbul and the city hospital projects, are suitable projects for financing via sukuk issuance. For financing of these projects, sukuk can be issued and that is a way of finding easy or maybe cheaper finance. Because in the Islamic banking sector that is rising in global scale, investors have started to invest in interest-free products. In fact, this is the main reason behind the rapid growth of this product on a global scale. Some people who have mattress saving don't keep their money inside the banking system due to religious sensitivities. This kind of monetary assets can be included in the financial system and sukuk can play an important role for this.

Up to now, in Turkey, all sukuks have been issued in Malaysian Ringgit, Usd dollar and Turkish lira. İt will be benefical that sukuk issuance can be possible with different currencies. If such a regulation can be made, by means of this arragement can be attracted more international investor.

The large number of operational procedures for sukuk issuance make a negative effect on the development of sukuk in Turkey. The length of the Sukuk transaction periods and the length of the issuance procedures do not exactly coincide with today's dynamic and rapid financing structure. According to Alhabshi, sukuk transactions in Malaysia, which is a global leader in the sukuk market in 2016, are easy and simple. The fact that Malaysia is the country that issued the most number of sukuk because of having an easy operational procedures show us how important to have simple and easy procedures for issuing operational sukuk.

In 2013, according to the number of 28667 Communiqué Series III No:61 that issued by the Capital Markets Board in Turkey, every ALC has to have a consultative committee. The fact that each of the seven ALCs have separate consultative committee can bring the mess and confusion in this sector. The fact that all ALCs operate under a single "consultative committee", it can be reduced both complexity in the sector and transactional objections that may occur.

The sukuk, that has been issuing in the global Islamic finance industry for the last two decade and the Turkish Islamic finance sector for the past eight years, has become the locomotive of the Islamic banking sector in the world and Turkey. With the shortening of the operational processes of sukuk transactions and making new legal regulations, it is seen that this market can double its potential. At the point we have come to today, the sukuk market is seen as an important financial transaction market to meet the cash needs of sovereigns, quasi-sovereigns, islamic financial İnstitutions, corporates. It is clear that sukuk will be taking on a greater role as a financial instrument of economic development, and Turkey is set to be one of the important key players that will shape the future of the sukuk market globally.


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[1] Sovereign sukuk: Are Sukuk issued by a national government. The term usually refers to Sukuk issued in foreign currencies, while Sukuk issued by national governments in the country’s own currency are referred to as government Sukuk.

[2] Global sukuk: Both international and domestic Sukuk. (For the purpose of this report).

[3] Quasi-sovereign sukuk: Are Sukuk issued by a public sector entity that is like sovereign Sukuk. It may carry explicit or implicit government guarantee.

[4] Domestic sukuk: A Sukuk issued in local currency. (For the purpose of this report).

[5] International sukuk: a Sukuk issued in hard currency such as USD. (For the purpose of this report)

[6] Wakala: Agency. A contract of agency in which one party appoints another party to perform a certain task on its behalf.

[7] Hybrid sukuk: Hybrid Sukuk combine two or more forms of Islamic financing in their structure such as Istisna’a and Ijarah, Murabahah and Ijarah etc.

[8] Salam sukuk: are certificates of equal value issued with the aim of mobilizing Salam capital/mobilizing funds so that the goods to be delivered on the basis of Salam come to be owned by the certificate holders.

[9] Exchangeable sukuk: Convertible of Exchangeable Sukuk certificates are convertible into the issuer’s shares or exchangeable into a third party’s shares at an exchange ratio, which is determinable at the time of exercise with respect to the going market price and a pre-specified formula.

[10] Sukuk al-İstisna: are certificates of equal value issued with the aim of mobilizing funds to be employed for the production of goods so that the goods produced come to be owned by the certificate holders. (This type of Sukuk has been used for the advance funding of real estate development, major industrial projects or large items of equipment such as: turbines, power plants, ships or aircraft, construction/manufacturing financing).

[11] Commodity broker: a firm or an individual that executes orders to buy or sell commodity futures contracts, options or similar derivatives on behalf of clients.

[12] Takaful: Islamic insurance. Structured as a charitable collective pool of funds based on the idea of mutual assistance.

[13] EPC means engineering, procurement and construction contract/agreement.

[14] Corporate based certificates (sukuk): Is a Sukuk issued by a corporation as opposed to those issued by the government. It is a major way for companies to raise funds in order to expand its business or for a specific project.

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Sukuk (Lease Certificate), New Locomotive of Global Islamic Finance. A Comparison with Sukuk Market of Turkey (2010-2018)
Giresun University  (Institute of Social Sciences)
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Sukuk, Lease Certificate, Islamic Finance, Interest Free Banking, Islamic Banking
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Yusuf Aker (Author)Assoc. Prof. Dr. Alper Karavardar (Author), 2019, Sukuk (Lease Certificate), New Locomotive of Global Islamic Finance. A Comparison with Sukuk Market of Turkey (2010-2018), Munich, GRIN Verlag,


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