Entries in English and Malay (Bahasa Melayu)

Thursday, 14 February 2013

Turkey banks consider subordinated sukuk issues

Strong investor demand and a need to improve capital adequacy ratios are causing Turkey's Islamic banks to consider issuing subordinated sukuk, bankers and analysts say.

Ibrahim Oguducu, head of the financial institutions business at Bank Asya, the country's largest Islamic bank, said longer-tenor subordinated sukuk would help balance mismatches between the maturities of banks' liabilities and assets, while diversifying their funding sources.

"A public subordinated sukuk transaction would definitely attract more investor appetite than murabaha," said Oguducu, declining to say whether his bank specifically was considering such an issue.

Turkey's four Islamic banks have so far issued only two sukuks; both were from Kuveyt Turk, which is 62 per cent owned by Kuwait Finance House and raised a total of $450 million in 2010 and 2011.

That is likely to change soon. Bank Asya said in December that it was finalising a 100-150 million lira sukuk issue and also planned a $200-300 million dollar-denominated sukuk in the next two or three months.

Officials at Al Baraka Turk, a unit of Bahraini lender Al Baraka, have been talking about a $200 million sukuk issue for over a year.

The Turkish government's landmark issue last September of a $1.5 billion sukuk, which drew massive demand, may be the trigger for such plans finally to go ahead.

While subordinated instruments are more expensive for issuers than their secured counterparts, the current appetite for Turkish debt seems strong enough to translate into favourable pricing for the banks, protecting their profit margins in the increasingly competitive banking sector.

And with Basel III global banking standards expected to be phased in from this year, some Turkish banks could consider subordinated instruments to raise capital, according to Alex Roussos, counsel at the Norton Rose law firm in Dubai.

"Current capitalisation levels of certain banks and the desire for innovation would encourage them to consider such a structure," Roussos said.

"Where the underlying credit is solid and the issuer can present a good story, the hike in pricing of a subordinated sukuk will not be as painful. Issuers know they will still be able to get a decent pricing despite the subordinated nature of the instrument."


Turkey's Islamic banks, which describe themselves as "participation banks" because of domestic political sensitivities and to adhere to local law, have in the past obtained their funding mostly from retail deposits and short-term, syndicated murabaha loans. Murabaha is a common cost-plus-profit arrangement in Islamic finance.

Subordinated sukuk could give them a welcome alternative to these sources, while classifying the sukuk as Tier 2 capital would help the banks meet the regulator's minimum 12 per cent capital adequacy requirement as a proportion of assets.

Although Turkish Tier 2 bonds have in the past priced about 85 basis points higher than comparable Eurobonds, a Tier 2 sukuk could see tighter pricing, a London-based banker estimated.

"This spread may be a little bit narrower as sukuk investors are of a different style and may accept a narrower spread," he said. In many parts of world, sukuk have been pricing slightly tighter than conventional bonds because of a shortage of supply relative to the size of cash-rich Islamic funds.

Turkey's Islamic banks have enjoyed a jump in assets over the last year, but profitability and capital adequacy remain concerns.

The banks held a combined 68.9 billion lira ($38.8 billion) of assets in November, or 5.2 per cent of the country's banking assets, according to Turkish brokerage IS Investment. This represented 24.7 per cent growth from a year earlier, compared to 10.2 per cent growth for the overall banking sector.

But net income for Islamic banks grew only 10 per cent in the same period versus a 37 per cent increase for the overall banking sector, the report showed.

The capital adequacy ratio (CAR) for the Islamic banks combined stood at 13.68 per cent in November, a fall of 0.34 percentage point from a year earlier, data from the regulator showed. The ratio for the overall banking sector was 17.39 per cent, up 1.02 percentage point.

"Participation banks like Al Baraka and Bank Asya have relatively low capital adequacy ratios. Subordinated bonds will boost their CAR and they will have a freer hand in giving out loans," said Duygun Kutucu, senior analyst at brokerage Burgan Securities.

(Trade Arabia / 13 Jan 2013)

Alfalah Consulting - Kuala Lumpur:
Islamic Investment Malaysia:

Qatar Financial Centre (QFC) Islamic finance tax regime ‘friendliest in Mena’

The Qatar Financial Centre (QFC) has the most Islamic finance friendly tax systems, out of the eight jurisdictions in the Middle East and North Africa (Mena) region, according to a study.

“While simpler Islamic finance transactions can be carried out in some countries without prohibitive tax costs, of the countries reviewed only Turkey and the QFC have a tax system that enables sukuk transactions to be carried out without excessive tax costs,” said the study, conducted by three leading experts Mohamed Amin, Salah Gueydi and Hafiz Choudhury, said.

None of the countries covered have modified their tax laws to facilitate Islamic finance, apart from Turkey, which has introduced limited changes to facilitate sukuk issuances and Qatar with its special tax regime in the QFC, said the study, which was sponsored by QFC Authority (QFCA) in partnership with the International Tax and Investment Center based in Washington DC.

The study examined two alternative approaches a country can take to update its tax system to support Islamic finance transactions (the UK model and the Malaysian model), and recommended the one that is adopted in Malaysia as being “quicker and simpler to implement for Muslim majority countries”.

The study reviewed the tax treatment of four common Islamic finance structures ‘murabaha’, ‘sukuk’, ‘salaam’ and ‘istisna’ in the eight Mena countries: Egypt, Jordan, Kuwait, Libya, Oman, Qatar, Saudi Arabia, Turkey, and also in the QFC.

“Islamic finance is of growing importance within the Mena region, but the taxation systems of almost all Mena countries were developed in an environment of conventional finance. This too often means that Islamic finance suffers an additional, and therefore unfair, tax burden not borne by conventional finance,” according to Ian Anderson, chief finance and tax officer at the QFCA.

In an increasingly globalised world, and rising prosperity in many Muslim majority countries, Islamic finance institutions are already a very important part of the financial infrastructure of global business, Daniel A Witt, president, International Tax and Investment Center, said.

“We very much hope that it will start the dialogue within and between countries with active Islamic finance markets on dealing with the very real barriers to the growth of such markets raised by tax rules,” he added.
“The study shows clearly that the additional transactions required by Islamic finance to achieve economic outcomes similar to conventional finance are at risk of being subject to transfer taxes or to taxes on income or gains, and can make Islamic finance transactions prohibitively expensive,” according to Amin, the report’s main author.

(Gulf Times / 13 Jan 2013)

Alfalah Consulting - Kuala Lumpur:
Islamic Investment Malaysia:

Latest Posts

Upcoming Events on Islamic Finance, Wealth Management, Business, Management, Motivational

Alfalah Consulting's facebook


Alfalah Consulting is NOT providing any kind of loan to finance project etc and asking for a fee. If you've received any email claiming to be from Alfalah Consulting, offering loan to you, please ignore it or inform us for further actions. Our official email is If you've received an email from, that's NOT from us. Be cautious!