September 13, 2012 / 10:48 AM / 5 years ago

UPDATE 2-Turkey plans lira-denominated sovereign sukuk - Al Baraka

* Turkey’s lira sovereign sukuk issue seen taking place by end-Sept

* Lira sukuk issue expected to be around 1.5-2.0 billion lira

* First sovereign sukuk issue expected on the week of Sept. 17

* Debut dollar-denominated sukuk to have a maturity of 5-1/2 years-bankers (Adds details on debut sukuk maturity)

By Ceyda Caglayan

ISTANBUL, Sept 13 (Reuters) - Turkey is expected to issue a lira-denominated sukuk, its second sovereign Islamic bond, by the end of September and demand for the instrument is likely to be high, the Turkish unit of Bahraini lender Al Baraka said on Thursday.

Ayhan Keser, deputy chief executive of Al Baraka in Turkey , said the issue was expected to be of around 1.5-2.0 billion lira ($0.8-1.1 bln) with a maturity of two years.

Al Baraka is one of the four “participation banks” - a term used in Turkey to refer to Islamic banks - which are expected to buy most of the lira-denominated sukuk.

“Participation banks have been expecting this instrument. It’s very attractive for participation banks, because it has a secondary market, and because of its zero risk from a capital ratio perspective,” Keser told reporters.

The issue was expected to take place a week after Turkey’s first-ever dollar-denominated sovereign Sukuk, he said.

Turkey this month mandated Citigroup, HSBC and Kuwait’s Liquidity House to manage the sale of its first-ever sovereign sukuk. Banking sources told Reuters the dollar-denominated sukuk would be issued in the week of Sept. 17.

The debut dollar-denominated sovereign sukuk will have a maturity of 5-1/2 years, bankers told Reuters on Thursday, with a roadshow set to conclude on Sunday and pricing expected as soon as next week.

Prime Minister Tayyip Erdogan’s government, which espouses Islamic values, shied away from a sovereign sukuk during its first decade in power, for fear of giving ammunition to critics who accuse it of seeking to roll back state secularism.

Because of these sensitivities, sukuk are referred to as “participation certificates”.

“There were talks between the treasury and the participation banks. The treasury is about to complete preparations to issue a lira-denominated sukuk this month. The issue will take place before the end of September. Participation banks will buy most of the issue,” said a high-ranking official from one participation bank.

The planned sukuk sales should give Turkey access to a wider pool of investors via a global sukuk market estimated at more than $100 billion.

They will also set a benchmark for future sukuk issues by banks and companies.

Turkey’s treasury raised a total of $4.6 billion this year by selling Eurobonds, in line with its external borrowing target of $4.5 billion in 2012.

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.

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.

$1 = 1.8075 Turkish liras Writing by Seda Sezer, Editing by Nick Tattersall and Patrick Graham

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