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Monday, April 15, 2024

Launch Partners

Further incentives needed to promote sustainable Sukuk in Turkiye

Green Sukuk have been gaining steady momentum in Turkiye. While we are seeing more green and sustainable offerings, there is a need for more incentives to promote further issuances, according to Esma Karabulut, the head of investment banking and investor relations at Emlak Participation Bank.

“The [current] incentives are not enough to trigger the development and growth of sustainable Islamic capital markets. It is essential to take some concrete steps such as introducing much more discounts on expenses arising from Sukuk issuances and tax incentives for both investors and fund users because of high additional costs (second-party opinion, impact reporting, etc) in thematic Sukuk issuances,” Esma told ISFI.

According to Esma, the biggest investors in local Sukuk issuances in Turkiye are Islamic portfolio management companies, pension funds and insurance companies. Increasing the weight of thematic Sukuk issuances in the funds will increase the demand for green and sustainable Sukuk. This will create a domino effect and encourage the private sector and financial institutions that want to access lower funding sources to issue thematic Sukuk, Esma shared.

While the introduction of a mandate or incentive for investing in thematic Sukuk would increase demand and lower the cost of funding for thematic offerings, the issue of critical mass remains. For this regulation to be introduced, a sufficient level of thematic Sukuk issuances must be created in the market so that the funds will not have problems in taking thematic Sukuk into their portfolios. It is the chicken and egg problem.

Additionally, the introduction of tax exemptions and/or tax deductions such as withholding tax and corporate tax may also contribute to incentivizing further green issuances. Expenses arising from second-party review and impact reporting in thematic Sukuk issuances could be covered up to a certain amount, Esma added.

The incentives proposed by Esma with regard to tax incentives and external review costs are a close parallel with the Securities Commission Malaysia’s enhanced SRI Sukuk and Bond Grant Scheme.

When the first sustainable or green Sukuk regulations were introduced by the Capital Markets Board of Turkiye in February 2022, a 50% discount on some operational expenses including board fees and listing fees were introduced.

Emlak Participation Bank, which recently issued its second green Sukuk, believes that green Sukuk issuances will increase with the introduction of regulations in Turkiye and globally.

“We expect all Sukuk and debt instruments issued not only in Turkiye but also all over the world to be thematic within the next five years. Non-thematic Sukuk issuances are expected to be more expensive than thematic Sukuk issuances, with the carbon border taxes [that] will be implemented in the upcoming years,” Esma predicted.

According to Esma, many institutions from different sectors, from energy to agriculture to recycling, are eyeing the Sukuk market to increase the diversity of funding resources.

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