News Date: Thursday, December 22, 2016

Discussions on lease certificate (Sukuk) issuance in Turkey

THE IFN TURKEY REPORT 2016

IFN Turkey Forum Report 2017 Special Report

Umit Akkaya

In this article, UMIT AKKAYA intends to assess, from a legal perspective in the context of the provisions of the applicable legislation, the criticisms over the transfer of title to and pledge of the underlying assets in Sukuk practices in Turkey.

IFN Turkey Report 2016

Lease certificates (Sukuk) are pretty new financial instruments first introduced in the financial/economic life of Turkey in 2010. A lease certificate is defined in Article 61/1 of the Capital Markets Law No. 6362 and Article 3/1 of the Lease Certificates Communiqué (III-61.1) as follows: “Lease certificates are capital market instruments the qualities of which are determined by the Board and issued by asset-leasing companies for the purpose of providing the financing of all kinds of assets or rights and securing that their owners obtain a right from the generated incomes in proportion of their shares.”

Taking into account all the definitions and classifications, the ‘Sukuk’ term is apparently a financial legal institution in reference to the purpose of ‘providing finance’, and it is required not to disregard that raison d’etre of the Sukuk in making assessments and criticisms over this matter.

In this respect, our assessments over the title transfer and pledge issue, as one of the basic matters criticized and cited in Sukuk practices in Turkey (arguments that the asset or right has not been permanently and absolutely disposed of and that the power of disposition over the asset/right has been restricted by law, etc) are summarized in the following.

AAOIFI states that: “Sukuk, to be tradable, must be owned by Sukukholders, with all rights and obligations of ownership, in real assets, whether tangible, usufructs or services, capable of being owned and sold legally as well as in accordance with the rules of Shariah, in accordance with Articles (2)1 and (5/1/2)2 of the AAOIFI Shariah Standard (17) on Investment Sukuk”.

Transfer of ownership

In terms of applicable legislation in Turkey, the Sukuk-related asset/right is transferred to the asset-leasing company (ALC) in accordance with the applicable law (Article 5/2 of the Communiqué Nob 61.1.III) and is kept in custody by the ALC for and on behalf of the investors unlit the same is redeemed (Article 61/3 of Law No. 6362). Therefore, the investors own the said asset/right perfectly and without any restrictions. The ownership right of the investors is willingly restricted under buy-back agreements executed by the parties and during the effectiveness of the buy-back right. Such a buy-back right is among the limited rights in rem as per our legislation and grants the rightholder to buy back the underlying asset within the period of time defined in the contract (not exceeding 10 years) (Article 736 of Turkish Civil Code). If the rightholder fails to exercise its buy-back right within such a period, the ownership becomes unlimited again and the owner (ie the ALC acting on behalf of investors) becomes entitled to enjoy a complete discretion over the asset/right.

At this point, in our opinion, it would be legally appropriate to consider the type of ownership the investors acquire over the asset/right as ‘co-ownership’ in accordance with Article 701 of Turkish Civil Code because in this case, a group came together to acquire the Sukuk to be issued (ie investors) and these investors have combined their capital in order to purchase (acquire) the asset/right to be issued and to derive income therefrom. It is quite possible the group so gathering together can also be considered as an ordinary partnership. As a matter of fact; Article 620 of the Turkish Code of Obligations reads: “Ordinary partnership agreement is a contract whereby two or more persons undertake to combine their labor and goods to reach a common goal. If a partnership does not have the distinctive qualifications of partnerships as regulated by law, such partnership is considered as one subject to the provisions of this section”.

At this point, while the ordinary partnership is not a perfect qualification, it would be required to qualify that group as an ordinary partnership. Therefore, with reference to the provisions of Article 638/1 of the Turkish Code of Obligations which reads: “Goods, receivables and rights in rem which have been acquired for or transferred to the partnership belong to all the partners as the co-owners under the partnership agreement”, it would be appropriate to say that the investors are the co-owners of the underlying asset/right.

Islamic scholars reviewing the problems related to the title transfer and buy-back in the case of Sukuk transactions have dealt with that matter within the scope of Bai Al-Wafa (Bai Bi-l-Istiglal). Bai Al-Wafa has been defined as a sales contract with the condition that, “when the seller pays back the price of the property sold, the buyer returns the property to the seller”.

Pledge

In some debates and assessments, there is criticism that such sales/title transfers must be considered as a pledge/security, but such hypothetical criticism is not acceptable at all due to the pledge right is of a secondary nature and it merely grants the rightholder (creditor) the right to claim the foreclosure of the pledge. Again, the rightholder (creditor) is obliged to refund to the pledgor (debtor) any sum that remains after the former has foreclosed the pledge and collected the amount owed to him and if the foreclosed sum is not sufficient to cover its receivable sum, the deficient portion can be claimed from the debtor.

IFN Turkey Report 2016

Finally, the rule that states: “Any pledge agreement providing for the transfer of the title to the pledged movable asset to the creditor in case of failure to honor the debt is void and invalid” is known as the most fundamental principle and distinctive element of the pledge law where the creditor is not entitled to seize the pledged asset (lex commissoria prohibition). There is no such thing in the case of assets/rights transferred to investors by way of Sukuk where any profit/loss resulting from the foreclosure belongs to the investors because the ownership right (except for the limited right in rem that is granted to the rightholder, for a limited period of time, with the buy-back guarantee) is not subject to any restrictions.

In our opinion, one solution for this problem is any assessment must be made by considering the following particulars with respect to legislation and contractual relationships: In the case where the buy-back right is not or cannot be exercised, i) is the right of the buyer (investors) to acquire the asset/right being the subject of the issuance prohibited?; ii) is the sum in excess if the buyer forecloses the asset/right refunded to the seller (originator)?; iii) if the foreclosed sum is not sufficient to cover its receivable sum, is it possible to claim the deficient portion from the seller’s (originator’s) assets (guarantees)? If the answer is ‘yes’ to these questions, then such a relationship must indisputably be subject to the provisions of the pledge. If the answer is ‘no’ to these questions, then the provisions of the pledge cannot be applied, and the dispute is required to be settled by applying the sales terms.

It is observed in the practice that the buy-back right is exercised with the promise of the seller (originator) in the form of an ‘acquisition undertaking or ‘buy-back undertaking’ which is, in our opinion, a fault (unlawfulness) that must be corrected because the ‘buy-back undertaking’ and ‘buy-back right agreement’ are not the same thing and as such, they do not give rise to the same effects. With respect to this problem, we believe that Sukuk are a more developed legal institution than the Bai Al-Wafa (Bai Bi-l-Istiglal) contracts with regards to Islamic law and applicable legislation in that the Sukuk perform the title transfer and sales agreements flawlessly.

Given the foregoing basic problems, we can conclude that it is regrettable that Sukuk, being indisputably one of the most important instruments of interest-free finance and a pretty new product in our country’s practice, suffer extremely tough and fierce criticisms, whether rightful or not. More constructive and improving criticism (especially by Islamic jurists) would favorably contribute to the establishment of a sound and healthy interest-free finance structure.

Umit Akkaya is a partner at law firm Mutlu Avukatlik Ortakligi. He can be contacted at umit.akkaya@mutlu.av.tr.

SOURCE: IFN ISLAMIC FINANCE NEWS
http://islamicfinancenews.com/node/81611
http://islamicfinancenews.com/content/ifn-turkey-report-2016




News Date: Friday, May 29, 2015

Facilitating the Implementation of the IFSB Standards Workshop

PROGRAMME

About the Workshop

This 2-day Workshop is tailored for the regulatory and supervisory authorities as well as market players within the Islamic banking and Islamic capital market sectors. It will focus on the following Standards:

1.IFSB-12: Guiding Principles on Liquidity Risk Management for Institutions offering Islamic Financial Services (IIFS);
2.GN-6: Guidance Note on Quantitative Measures for Liquidity Risk Management in IIFS;
3.IFSB-6: Guiding Principles on Governance for Islamic Collective Investment Schemes (ICIS);
and
4.IFSB-10: Guiding Principles on Sharī`ah Governance Systems for IIFS.

IFSB-12: Guiding Principles on Liquidity Risk Management will elaborate a set of principles for the robust management of liquidity risk by IIFS and its vigorous supervision and monitoring by the supervisory authorities, taking into consideration the specificities of the IIFS and complementing relevant existing and emerging international best practices. GN-6: Guidance Note on Quantitative Measures for Liquidity Risk Management, which complements IFSB-12 will provide guidance to supervisory authorities on the application of the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) as well as the assessment of all aspects of liquidity monitoring tools.

IFSB-6: Guiding Principles on Governance for ICIS, for its part, will discuss reinforcement of the international best practices while addressing the specificities of ICIS pertaining to the approach of the general governance, transparency and disclosure issues, compliance with Sharī`ah rules and principles as well as examination on additional protection required by the ICIS investors. In addition, IFSB-10: Guiding Principles on Sharī`ah Governance Systems will offer insights on the components of a sound Sharī`ah governance system especially with regards to the competence, independence, confidentiality and consistency of the Sharī`ah boards.

Overall, this Workshop aims to:
● Enhance the participants’ understanding of the respective Standards and Guiding Principles thereby facilitating the implementation of these standards in their respective jurisdictions;
● Assist the participants in the practical application of issues addressed in the particular standards through case studies, hands-on exercises and other interactive tools; and
● Promote the sharing of experiences among the participants on the implementation of respective IFSB Standards and Guiding Principles.

PROGRAMME

Time

Topics

09:00 09:30

Registration

09:30 09:45

Opening Session by the IFSB and TCMB Representatives

 

 

 

 

09:45 11:15

 

Session 1

IFSB-12: Guiding Principles on Liquidity Risk Management for Institutions offering only Islamic Financial Services (IIFS)

·         Global Initiatives to Address Liquidity Risk Management Issues

·         Liquidity Risk and Types

·         Components of Liquidity Infrastructure in IIFS

·         General and Guiding Principles for the IIFS

11:15 11:30

Group Photo and Coffee Break

 

 

 

11:30 13:00

Session 2

IFSB-12: Guiding Principles on Liquidity Risk Management for IIFS

·         General and Guiding Principles for the IIFS (Cont’d)

·         Maintaining High-Quality Liquidity Buffer

·         Managing Sharī`ah-compliant Collateral

·         Case Study

13:00 14:00

Lunch and Prayers

 

 

 

14:00 15:30

 

Session 3

IFSB-12: Guiding Principles on Liquidity Risk Management for IIFS

·         8 Guiding Principles for Supervisory Authorities

·         Suggested Metrics and Monitoring Tools

·         Conclusion

15.30 15:45

Coffee Break

 

 

 

15:45 17:15

Session 4

GN-6: Guidance Note on Quantitative Measures for Liquidity Risk Management in IIFS

·         Application of the LCR in IIFS

·         Application of the NSFR in IIFS

·         Role of Supervisory Authorities

·         Case Studies

 

End of Day 1


PROGRAMME

 

Time

Topics

 

 

 

09:30 11:00

Session 5

IFSB-6: Guiding Principles on Governance for Islamic Collective Investment Schemes (ICIS)

·         Definition and Features of Islamic CIS

·         Standard and Recommended Best Practices

·         General Governance Approaches of ICIS

11:00 11:30

Coffee Break

 

 

 

11:30 13:00

Session 6

IFSB-6: Guiding Principles on Governance for ICIS

·         General Governance Approaches of ICIS (Cont’d)

·         Compliance with Sharī’ah Rules and Principles

·         Case Study

13:00 14:00

Lunch and Prayers

 

 

 

14:00 15:30

 

Session 7

IFSB-10: Guiding Principles on Sharī`ah Governance System for IIFS

·         Structure of the Sharī`ah Governance System

·         Guiding Principles on the Sharī`ah Governance System

·         General Approach to the Sharī`ah Governance System

15.30 15:45

Coffee Break

 

 

 

15:45 17:15

Session 8

IFSB-10: Guiding Principles on Sharī`ah Governance System for IIFS (Cont’d)

·         Structure of the Sharī`ah Governance System

·         Guiding Principles on the Sharī`ah Governance System

·         General Approach to the Sharī`ah Governance System

·         Case Studies

17.15 17:30

Closing & Certificate Giving Ceremony

 

End of Workshop

News Date: Wednesday, January 15, 2014

"Istanbul Commerce University Had Our Guest"

A group of students with Istanbul Commerce University Career Planning Center and Law Club has been our guest at our institution. We told detail the informations about lawyer, judge and prosecutor.

News Date: Friday, March 23, 2012

Turkish Deal Of the Year 2011

Mutlu Law Firm has won the award of Turkish Deal of the Year 2011 for the project of KT Sukuk Varlik Kiralama US$350 million certificates.



Monday,  December 11, 2017   14:33:04


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