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Pushing to expand the use of Islamic bonds to diversify the country's financing sources, the Turkish government is working on new regulations to allow wider use of a range of sukuk debt.

The Turkish treasury currently only issues ijara Islamic bonds, which are among the most widely used internationally. However, that type of sukuk also has it limitations. Hence, Ankara is hoping to have legislation to support the use of of istisna, murabaha, mudaraba, musharaka and wakala bonds ready in the coming months, reports Reuters.

"Ijara has a limit - real estate or leasing revenue is necessary and that is very limiting, maybe not for the Treasury but for the corporates," an unnamed banking source told the newswire. Other sources said the Turkish Capital Markets Board will complete its work within a couple of months, as it seeks to ensure the new types are in line with internationally accepted standards for Islamic finance.

"Turkey's preparing the legal framework for the sector to use whenever it needs. These issues will not become widespread in the short term," a senior official said. "The regulation will include both the treasury and corporates, and will allow any company or the treasury to issue them whenever there's demand for such an issue. That way, we'll be able to meet the global demand whenever we need."

Turkey's heavy dependence on the shaky European banking sector is a significant concern. It stands behind the huge concern over the country's current account deficit, which dictates central bank policy and raises borrowing costs by depressing Turkey's sovereign rating. Ankara has also seen privatization efforts sabotaged in recent years by financing difficulties on the part of corporates.

At the same time, Prime Minister Recep Tayyip Erdogan is desperate to boost Turkey's standing to that of a regional leader in the Middle East. All of which makes the recent turn by the government to tap the cash rich Islamic countries of the region an obvious move as Europe lurches through its debt crisis.

After several years of almost imperceptible development of Islamic finance, Turkey issued its first sovereign sukuk in September, clearly expressing the hope that it would open the market for corporates. Ankara has since issued another two Islamic bonds for a total value of $3.25bn, while several banks have also entered the action. The treasury has announced it will issue lira-denominated sukuk twice a year.

The new regulations will give Turkish issuers more flexibility to take advantage of investor demand for various types of sukuk at certain times, sources claim to Reuters. Bankers cited the case of a perpetual sukuk - ie. without a maturity date - issued by Dubai Islamic Bank in March as an example. The $1bn issue was almost 15-times oversubscribed. "It was one of the most demanded issues in sukuk history, but it's hard to know when there will be demand for different types of issues," an Istanbul-based banker said.