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Turkey is set to issue its debut domestic currency Sukuk bonds on October 3, the treasury announced late on October 1. The debt will be Turkey's second sovereign debt issue aimed at the Middle East in as many weeks as it looks to diversify its financing away from the stuttering European markets.

The lira Sukuk will have a two-year maturity, the treasury said, according to Reuters. with the volume set to rise to as much as TRY1.62bn ($900m). One "participation bank" - the term used to refer to Islamic banks in Turkey due to sensitivity over the role of religion in the country - said early in September that a lira-denominated issue was to be issued just one week after Ankara's debut Islamic debt issue, which arrived on September 17.

Now the local currency issue has been announced, analysts say they expect to see strong demand, following in the wake of the huge success of the debut Sukuk. After months of preparation, Turkey saw the book on the dollar-denominated issue oversubscribed by close to five times as it sold $1.5bn in 5 1/2-year Sukuk bonds last month. Despite the higher costs associated with issuing Islamic debt, the bonds were sold at a yield of 2.8%, around the same levels that Ankara pays on standard sovereign issues.

Alongside the ruling AKP's strong Islamic stance, the move into Islamic debt markets is driven by Turkey's high exposure to the precarious financial markets in the Eurozone. The Turkish economy heavily dependent on external financing due to its chronic current account deficit, and relies on European banks for as much as 80% of its needs. A large shock in Europe therefore could potential offer Turkey a devastating hit.

Following that line, Ankara has clearly stated that Sukuk sovereign issues are intended to open the way for Turkish banks and companies to follow suit, to tap a global Islamic bond market reported to total $100bn. The bulk of Turkey's debut Sukuk (58%) was bought by investors from the Middle East, with investors from Europe (13%), Asia (12%), Turkey (9%) and the US (8%) also taking part.