Turkey is working on new regulations to allow wider use of Islamic bonds, a closely watched move which could see sukuk issues employed by the government and corporations for project finance and infrastructure development.

Turkish institutions and the Treasury currently only issue the ijara type of sukuk, which is among the most widely used internationally; the new regulations would approve the use of istisna, murabaha, mudaraba, musharaka and wakala bonds.

Banking sources said the Capital Markets Board would complete its work on the regulations within a couple of months, and was seeking to ensure the new types were 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 in the sector told Reuters, asking not to be named because the plans are not yet public.

"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 to."

The development of Turkey's sukuk market is of interest to countries around the world, since the fast-growing economy could become a major issuer of Islamic debt and influence trends throughout the industry.

Turkey's experience is also seen as a test for Islamic finance in a secularist legal environment; it could serve as a benchmark for Western markets which want to encourage the industry.

After proceeding only slowly with the development of Islamic finance for years, partly because of the sensitivities of its secular political system, Turkey issued its first sovereign sukuk last September. It has now issued three sukuk, two of them lira-denominated totalling 3.14 billion lira ($1.75 billion) and one dollar-denominated worth $1.5 billion.

Turkish banks have issued several sukuk, and 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.

Bankers cited the case of a perpetual sukuk - one without a maturity date - issued by Dubai Islamic Bank in March; the $1 billion hybrid instrument was almost 15 times subscribed.

"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.

"Turkey's Capital Markets Board is trying to ensure that regulations are suitable for all issues, so the Treasury and corporates can swiftly issue these bonds when there's demand."

Sukuk avoid interest payments, which are banned by Islam, and instead pay returns based on investment in assets. The types of sukuk which Turkey plans to allow include istisna, which is used for project financing, primarily in infrastructure deals and for large construction and manufacturing projects.

Murabaha is seen as a structure which is relatively close to conventional bonds, while mudaraba involves the issuer appointing a manager (mudarib) to oversee the operations of a project or business activity.

Musharaka is a partnership contract akin to joint venture financing, and wakala is an investment agency agreement in which the issuer acts as an agent (wakil) of the sukuk holders to manage the sukuk assets.

Bankers said allowing such diversity in the Turkish market would help increase volumes, because the currently used ijara sukuk require the issuer to have income from a leased asset such as real estate, a limiting factor for many corporates.

"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," a banker close to the matter said.-Reuters