Sucking up the sukuk
Istanbul-based bank Kuveyt Turk sold $100 million of three-year sukuk in August, the first issuance of an Islamic bond by a Europe-based bank. The sale was oversubscribed 45 percent by investors from the Middle East, Europe and Asia.
"Everyone was expecting a sovereign sukuk from the treasury, but we wanted to pave the way as a bank," Chief Executive Officer Ufuk Uyan said at the launch. Based on this success, Kuveyt Turk is already planning a second placement of $100 million in five-year bonds in 2012.
Secular Turkey has proceeded slowly into the global Islamic finance arena. Its four sharia-compliant banks, including Kuveyt Turk account for just 4 percent of the nation's assets. However, they are growing at more than twice the speed of regular banks in Turkey, expected to total $19.5 billion in funds at the end of 2010.
The republic has traditionally looked west to finance its large industrial projects, but the ruling Islamist AKP government is strengthening economic ties with Gulf nations, which now account for 7.5 percent of Turkey's foreign direct investment. Kuwait Finance House (KFH), the world's second largest Islamic bank, is a controlling stakeholder in Kuveyt Turk.
New instruments such as sukuk would provide alternative means of financing and enable the government to "diversify risk," Emre Balibek, general director for public finance at the Turkish treasury, told international press. However, until recently, the country lacked a regulatory framework for Islamic securities. The Capital Markets Board of Turkey passed legislation in April 2010 allowing for "participation certificates" to be issued by companies. To encourage sukuk, Istanbul may be considering changing its taxation laws, as the bonds are currently taxed twice upon placement and upon buying. However, sovereign placements of sukuk are still not covered by law.
Expanding 10.2 percent in the first quarter of 2010, the Turkish economy is the fastest growing of the G20, but requires massive capitalization to catch up with other industrialized nations. For Kuveyt Turk, this meant the time was right for Turkey to enter the global sukuk market. "We're now watching these instruments gain more ground once again. A total of $120 billion sukuk were issued in the last ten years," KFH Chief Executive Officer Mohammed al-Omar said at the launch of Kuveyt Turk's sukuk.
Sales of the Islamic bond have shot up recently, reaching $13.7 billion in the first half of 2010, according to ratings agency Standard and Poor's. This is nearly double the $7.1 billion recorded in the same period the previous year. Around 75 percent of these placements came from governments, looking to jumpstart their economies after the global crisis.
This has been a year of landmarks as the Islamic bond expands beyond traditional markets. Indonesia and Singapore also made debut placements this year. Japanese investment bank Nomura became the first Asian multinational to make a listing, while General Electric's placement of $500 million in sukuk was the first by a major US firm.
Asia, however, remains the global sukuk leader, accounting for 70 percent of total issuance in the first half of 2010. Malaysia is the largest country market, holding 52 percent of the total. Nearly all the rest of this year's sukuk issuances have come from the Gulf. Four sukuk issuances from the Gulf have defaulted since Dubai's real estate debt crisis of 2009, causing international concern that Islamic bonds are too risky and lack regulatory oversight. Nonetheless, more countries are climbing on board the bandwagon, with Kazakhstan planning an inaugural placement before the end of the year.
Though still a small piece of the sukuk market, new players will be encouraged by successes such as Turkey's when seeking alternative financing.
