The Muslim News

KUALA LUMPUR, Reuters - Turkey plans to sell $400 million to $500 million of Islamic five-year bonds by the end of the year, joining a growing trend among Muslim nations to seek finance in ways that conform with religious beliefs.

Turkey had mandated HSBC and top Malaysian merchant bank CIMB Bhd to arrange the offering, industry sources in Kuala Lumpur, a hub for Islamic banking and finance, told Reuters on Tuesday.

But Turkish treasury officials would say only that the planned issuance was at an initial stage, denying that leads for the sale had been appointed.

HSBC and CIMB is the same team that late last month helped Qatar deliver the largest ever Islamic bond deal.

Dealers said yields were likely to be high, given Turkey's financial troubles, but they expected solid support for the paper.

"At the moment Islamic bonds are still more attractive to the bankers who market them than to investors," said a senior dealer at a large foreign bank.

"There's no depth to speak of and trading is almost non-existent. But somehow, there are always supporters and buyers and they don't seem to mind keeping the paper for good as long as it carries an Islamic tag."

Islamic bonds, known as sukuk, do not formally pay interest, considered usury by many Muslims. Instead the investor gets regular payments based on some other asset, such as rent on property.

Malaysia pioneered the dollar-denominated Islamic bond with a $600 million issue in the international markets in 2002, and was followed by the Islamic Development Bank, which sold paper worth $400 million.

Qatar issued $700 million in Islamic paper, half to non-Muslim investors. The bonds paid the equivalent of 40 basis points more than the six-month London interbank offered rate.

Turkey's roadshow is expected to cover Abu Dhabi, Bahrain, Dubai, Kuala Lumpur and Singapore.

Islamic bonds may be particularly attractive for Muslim investors seeking to diversify away from U.S. debt securities.

Turkey is trying to implement a $16 billion International Monetary Fund programme aimed at helping it recover from a financial crisis two years ago.

A 9.4 percent economic contraction that year sparked the country's worst recession since World War Two, and the government has promised to keep the 2004 budget deficit below the 45,167 trillion lira ($33 billion) forecast for this year.

Turkey had said the money would be used for "working capital", one of the sources said.

Apart from Turkey, the State Bank of Pakistan is due to launch a 5.0 billion rupee ($86.3 million) three-year sukuk by March 2004 to finance a plan to speed the development of a parallel financial market based on Islamic rules.

Iran and the Philippines have said they were considering issues of Islamic bonds.

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