* Treasury looking to raise $1 billion
* Turkey looking to tap new pool of investors (Adds quote, details, background)
By Nevzat Devranoglu
ISTANBUL, July 5 (Reuters) - Turkey is set to mandate HSBC, Citi and Deutsche Bank to manage the sale of its first sukuk, or Islamic bond, banking sources told Reuters on Thursday.
The move by the Treasury, overcoming sensitivities about Islamic finance in the secular republic, should give Turkey access to a wider pool of investors via a global sukuk market estimated at more than $100 billion.
One banker said a size of $1 billion was being targeted, but that the sale amount was still unclear.
"The Treasury is about to finalise meetings about its first sukuk issue, and their choice (for the mandate) will be HSBC, Citi and Deutsche," said one senior banking source in London.
A sovereign sukuk from an economy regarded as one of the Muslim world's most progressive and successful would signal intent on Turkey's part to play a bigger role in Islamic finance.
Deputy Prime Minister Ali Babacan said earlier this year the Treasury might launch a sukuk issue within a few months, using legislation already in place. A sovereign deal would set a benchmark for future sukuk issues by banks and companies.
The general manager of Turkish Islamic bank Turkiye Finans, majority owned by Saudi Arabia's National Commercial Bank , told Reuters late on Wednesday it planned a $300 million sukuk issue in the next six to nine months.
Despite espousing Islamic values, Turkish Prime Minister Tayyip Erdogan's government shied away from launching a sukuk issue during its first decade in power. It feared giving ammunition to critics who accuse his ruling AK Party of seeking to roll back state secularism by stealth.
Because Islamic law bans the payment of interest, investors in a sharia-compliant sukuk acquire partial ownership of an underlying asset and share in its returns rather than receiving a stream of coupon payments.
Because of secular sensitivities, Islamic banks are called "participation banks" in Turkey and sukuk are referred to as "participation certificates".
The country has used Islamic finance methods since the late 1980s through private financial institutions that were recognised as participation banks in 2006.
There are four participation banks now operating in Turkey: Albaraka Turk, Bank Asya, Kuveyt Turk and Turkiye Finans. Kuveyt Turk, a unit of Kuwait Finance House , issued the country's first sukuk in 2010. (Additional reporting by Dinesh Nair in Dubai; Writing By Daren Butler; Editing by Catherine Evans)