Turkey: Prominence Of Sukuk In Turkey As An Islamic Finance Instrument

Last Updated: 17 July 2014
Article by H. Ercüment Erdem

Most Read Contributor in Turkey, August 2019

Turkey's first regulation for Islamic Finance was realized during the 1980s, during a period of liberalization as part of a plan to attract foreign direct investments. Interest free banking was introduced with the legalization of "special finance houses" which did not possess bank status and therefore did not benefit from banks' privileges.

The Islamic Finance sector kept evolving steadily in the 1980s and 1990s with Arab Gulf investors setting up finance houses and commencing lending activities, accommodating mainly specific religious clientele.

The leap for interest free banking came after the 2001 economic crisis. Banking finance legislation went through a major overhaul after the crisis. A union was formed to provide a certain level of state control and support for special finance houses. 2006 saw the introduction of Banking Law No. 5411, which legitimized participation banking and provided insurance through the Savings Deposit Insurance Fund for participation deposits. Along with these changes, the special finance houses union became the Participation Banks Association of Turkey ("TKBB"), which sets forth the ethical, professional principles for participation banks. All participation banks had to be a member of TKBB. The following years saw a rapid increase in participation banking and the 2008 global crisis highlighted the need for more stable financing. In line with the government's support of Islamic Finance and interest free finance instruments, the World Bank Global Islamic Finance Development Center was launched on the premises of the Istanbul Stock Exchange in late 2013.

Sukuk Financing

Turkey had various previous experiences with interest free financing in the form of profit-loss sharing certificates and real estate certificates mainly used for the financing of large infrastructure and construction projects. The issuance of sukuk was initially regulated with the Capital Markets' Board ("CMB") Communiqué Series III, No. 43 on Lease Certificates and Asset Lease Companies ("Communiqué Series III, No. 43") in 2010. Communiqué Series III, No. 43 regulated lease certificate (sukuk) issuance in a broad manner without specifics and several issuances were realized under it. In 2013, it was abolished by the Communiqué Series III, No. 61 on Lease Certificates ("Communiqué"). In 2012, Law No. 6327 was introduced allowing for the Undersecretary of Treasury to issue sovereign lease certificates. Statistics of the Organization of Islamic Cooperation indicate that Islamic banking in Turkey has not received the same level of interest as compared to other Muslim countries and is far from saturation. As such, the sukuk market is yet to develop. In fact, the first sovereign sukuk issuance was realized in August 2013 with significant over-subscription closing at USD 8 billion which shows huge demand for sukuk.

Legal Framework

As is known, sukuk holders obtain a partial ownership over a specific asset enjoying the profit that such asset generates and the proceeds from the sale, if sold.

The Communiqué introduced five types of lease certificates consisting of certificates based on ownership (ijara sukuk), management (musharakah sukuk), trading (murabaha sukuk), partnership (mudarabah sukuk) and engineering, procurement and construction (EPC) contracts (istisna sukuk) or through the combined use of these different types. Yet lease certificates that may be issued are not limited to these, as the CMB is receptive to novel instruments.

The legislation also regulates the establishment and management of asset leasing corporations ("ALC") and their capacities. ALCs may issue more than one lease certificate at a time and may issue for companies that are not the originating company.

ALCs may be established by banks, intermediary institutions, listed real estate investment trusts, public corporations with an average market value above TRY 1 billion and average market capitalization over TRY 250 million, partnerships where the Treasury holds 51% and more shareholding.

The board of directors of the ALC is liable for failure to collect the proceeds obtained from the rights and assets as well as to make payment to lease certificate holders pro rata their share as per their lease certificate.

The Communiqué regulates the issuance of lease certificates in a broad manner, leaving space for interpretation and practice. As per the Communiqué, real persons or legal entities execute a written agreement, indicating their intention to pool their properties to establish the originating institution. The originating institution transfers assets and rights to the ALC for the issuance of ownership-based lease certificates, or to the companies incorporating the ALC that manage the assets or rights on behalf of the ALC in the issuance of management agreement-based lease certificates. The ALC serves as the special purpose vehicle to which the assets or rights are transferred or leased.

The characteristics of each type of lease certificate are as follows:

  • Ownership based lease certificates are issued to provide financing for the acquisition of the rights and assets by the ALC from the originating institution for the purposes of leasing to the originator or third parties or management on behalf of the ALC.
  • Lease certificates backed by management contracts are issued so as to transfer the proceeds generated by managing the assets or rights owned by the originating institution to the ALC.
  • Lease certificates backed by trading are issued for proceeds generated from the sale of assets and rights on deferred basis in order to finance the acquisition of such asset or right by the ALC.
  • Lease certificates backed by a partnership are issued for providing financing to enable the ALC to be a shareholder of the joint-venture.
  • EPC based lease certificates are issued to finance the realization of the relevant work for which the ALC shall be party to the EPC contract as well.

Assets and rights included in the portfolio of an ALC cannot be disposed of until the redemption of lease certificates, for any purpose other than collateralization to the benefit of lease certificate owners, even in the case of transfer of management or supervision of the ALC to public authorities. Accordingly, its assets cannot be pledged or attached, or be subject to interim injunction in favor of third parties or attached even for the collection of public receivables, or included as part of an estate in the case of bankruptcy. The ALC cannot conduct any activities other than those related to the issuance of lease certificates.

Risk Management

Apart from financial risks, a lease certificate issuance may bear operational risks in respect of the management of the rights and assets that are subject to the lease certificate and regulatory risks depending on the location of the issuance.

The Communiqué explicitly prohibits the attachment, pledge or otherwise collateralization of the assets subject to sukuk in favor of third parties in a manner that may be detrimental to the rights of the certificate holders. Although this provision does mitigate a major legal risk that may occur on the part of the investors, it is not clear which party will bear the consequences. Operational risks are covered in terms of collection and distribution of proceeds.

Another issue that bears importance is compliance with Sharia rules. Sharia rules are not applicable in Turkey and the Communiqué naturally does not impose any obligations in this respect. However, compliance with Sharia rules may be important especially for foreign investors. As known, there is no uniformity or written set of rules regarding the interpretation of Sharia rules. Different issuers may adhere to different interpretations, some of them get consulting from experts in the area, whereas others follow the interpretations of the Islamic Financial Services Board and Accounting and Auditing Organizations for Islamic Financial Institutions. These issues may be significant in the issuance of lease certificates based on businesses which include elements both compliant and non-compliant with Sharia rules. There are currently four participation banks in Turkey all of which are member of TKBB, the association for participation banking which acts as a superior authority setting out guidelines. According to the website of the TKBB, goods and services that are allowed according to Sharia may be subject to Islamic Financing even if the provider also engages in prohibited activities. However, there is no clarity as to how this rule may be applied in case of lease certificate issuances.

Depreciation of the assets may also pose a risk. The Communiqué sets forth that the value of the issued lease certificates shall not exceed 90% of the total value of the relevant asset or rights for ownership based lease certificates.

Tax Incentives

ALCs and investors in sukuk market enjoy numerous tax exemptions.

Proceeds from transfer of assets and rights to ALCs and the holders of the lease certificates are tax-exempt. The same rule applies to VAT as Value Added Tax Law No. 3065 exempts the delivery of lease certificates issued by ALCs, the transfer of assets to the ALC and their subsequent lease and transfer back to the originating entity. Documents and certificates executed for the purposes of lease, transfer and pledge transactions regarding relevant assets or rights for the purposes of lease certificates also enjoy stamp tax-exemption. The transfer, lease and pledge transactions are exempt from duties. Withholding tax percentages vary from 10% of the lease proceeds obtained from lease certificates with a term of up to 3 years, to 3% for those with a term of 3 to 5 years. Government issued lease certificates (sovereign sukuk) as well as privately issued lease certificates with a term of over 5 yearsarenot subject to withholding tax. For proceeds obtained from lease certificate trading and coupon payments; non-resident and resident stock corporations' are free of withholding tax whereas non-stock corporations, other institutional investors and real persons are subject to a withholding of 10% on income. The income obtained from lease certificates issued abroad is also exempt from tax.

On the other hand, earnings from the acquisition and disposition of lease certificates issued domestically in Turkish Lira through promise to sell or buy back and earnings from the sale before term of lease certificates are subject to banking and insurance transaction tax in the amount of 1% for issuers.


Islamic Finance and interest free finance instruments are increasing their popularity globally as part of an effort to attract Gulf investors. And Turkey's legislation and practice on the matter is rapidly evolving with its foreign investor friendly and Islam espousing political and economic environment. Thus, the favorable tax regime for issuers, investors and the finance institutions offers broad opportunities in Sukuk market of Turkey.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Yurdakul International Legal Consultancy
Ketenci & Ketenci Hukuk
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Yurdakul International Legal Consultancy
Ketenci & Ketenci Hukuk
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions