(Sukuk.net - Arab News) Turkey in its own unique way is bumbling into Islamic capital markets through the planned issuance of its debut sovereign Sukuk (Islamic bond).

In any other country including the UK, Japan, Hong Kong, the U.S. and Germany, the issuance of a Sukuk, or for that matter any bond or bill, would be a Treasury matter based on debt management requirements, and how the respective government or corporate could raise liquidity from the market in a cost efficient and timely manner.

Not so in secular Turkey, where anything to do with "Islamic", inevitably precipitates an outcry. Perhaps not surprisingly, the debate on Turkey's proposed debut sovereign Sukuk is bordering on the farcical, with pundit after pundit either espousing its virtue as a liquidity raising off balance sheet financial tool, or warning of the doom and gloom of creeping Islamism and the erosion of the Kemalist constitution. This especially when a centrist and a perceivedly pro-Islamic party, the ruling AK Party of Prime Minister Recep Tayyip Erdogan is in power.

The credit crunch and the global financial crisis have affected the Turkish economy like any other. Traditionally, Ankara usually signs a regular stand-by facility with the International Monetary Fund (IMF).

The two sides in fact met in Ankara in late December and are close to signing a new deal. Turkish State Minister Mehmet Simsek is coy about Turkey's external borrowing requirements for 2009, which some reports have suggested amount to $35 billion but which the minister has stressed is too high.

However, Simsek has confirmed that the government is looking at alternative sources of financing and is in the process of drafting enabling legislation to facilitate such financing instruments which, according to the minister "will meet the demands of investors in parts of the world where liquidity is high." Selim Yesilbas, the head of the International Finance Markets at the Turkish Undersecretariat of Treasury, confirmed to a local newspaper that the government was exploring the possibility of issuing a sovereign leasing Sukuk (Sukuk Al-Ijara) on a sale-and-lease back structure.

In November 2008 in Istanbul, Kursat Tuzmen, the Turkish foreign trade minister, confirmed that the Undersecretariat of Treasury had concluded a study and consultation on the possibility of the issuance of a sovereign Sukuk by The Turkish Finance Ministry in the wholesale markets. The study was done jointly by the Privatization Administration and State Planning Office.

Tuzmen warned that the economic crisis will worsen as trade opportunities diminish. One way for Muslim countries to lessen the impact of this is to step up economic and financial cooperation between them. "I urge you (Muslim countries) to realize this potential. We have had enough of civil service tourism which merely paid lip service to intra-trade. We have to reinforce our financial services which must be backed up by real assets not the fictional assets which have precipitated the global financial crisis," he explained.

Global banks active in the Sukuk structuring market are already putting out feelers, but progress toward the issuance of Turkey's debut sovereign issue which has been on the cards since 2003, will depend on the politics of such an issuance. While the state has enabled Islamic banks, which are called participation banks, to function in Turkey since 1983, ironically under the military government of Bulent Ulusu, it has never gone to the international financial markets to raise funds in a Shariah-compliant way - that is on a non-interest basis.

The reality is that the Turkish state, utilities and corporates have regularly accessed millions of dollars of Islamic funds through the banking majors such as HSBC, Citigroup and Deutcshe Bank and through the Islamic Development Bank largely to finance infrastructure and other developments and strategic imports such as oil and gas and exports to member countries. The new international terminal at Ataturk International Airport in Istanbul, for instance, was partly financed through a Murabaha facility.

Turkish bankers such as Meliksah Utku, Chief Economist of Albaraka Turk Participation Bank, a member of the Bahrain-incorporated Albaraka Banking Group, and Avsar Sungurlu, assistant managing director of BMD Securities, which in 2006 launched the first Islamic exchange-traded fund (ETF) in the world off the Dow Jones Islamic Market (DJIM) index, are confident that Islamic capital market instruments will take off in Turkey as soon as the government issues a benchmark Sukuk.

They also stress that with the conventional financial markets in turmoil, and with plenty of liquidity in the GCC (Gulf Cooperation Council) countries, the time for Turkey to issue a Sukuk is very conducive and has to a large extent being prompted by the credit crunch and financial crisis. A Sukuk issuance makes sense given that Turkey's direction of trade has changed over the last two decades. Today, a staggering 44 percent of Turkish trade is with its neighboring countries, mostly IDB-member countries such as the GCC, Iraq, Iran, Syria and the Central Asian Republics.

In fact several other countries and entities including the UK Treasury, Hong Kong Airport Authority, the French Ministry of Finance, the Japan Bank for International Cooperation, are considering issuing Sukuk although some of these have been delayed because new issuances have "dried up" in the global Sukuk market and have put a dampener as investors play a wait-and-see game.

However, with the successful closing of the Saudi Hollandi Bank Sukuk last week and the IDB's proposed issuance of a so-called series of credit crunch Sukuk to bring back confidence to the market, several potential issuers have confirmed that they expect the Sukuk market to recover over the next few months.

As such, bankers in London stress that a Turkish sovereign issuance would significantly contribute to revitalizing the Sukuk market and may force the UK Treasury to rethink its postponement of a possible sovereign Sukuk issuance in the wholesale sterling market.

Thus far the State of Saxony-Anhalt in Germany is the only western sovereign entity to issue a Sukuk. In the U.S., East Cameron Gas is the first western corporate to issue a Sukuk, which is now becoming an internationally acceptable capital markets instrument.