Turkey's Islamic banks are turning to Malaysia to cut costs as stubbornly high interest rates and slow trading hamper development of the domestic Turkısh sukuk market. Kuveyt Türk Katılım Bankası AŞ, the nation's largest sharia-compliant lender by assets, plans to offer a five-year bond this week via private placement from a 2 billion ringgit ($539 million) sukuk program, according to people familiar with it. Türkiye Finans Katılım Bankası AŞ was the first Turkish bank to sell the debt in Malaysia last year, issuing similar-maturity securities at a coupon of 6 percent. It paid 15.2 percent for a 2017 lira-denominated sukuk. Sharia-compliant assets accounted for 5 percent of Turkey's industry total last year, below the 26 percent in Malaysia. The Participation Banks Association of Turkey representing Islamic lenders envisions the share rising to 15 percent by 2023.Ahmet Albayrak, head of Kuveyt Türk's international banking division in Istanbul, said by e-mail that the bank aimed to diversify its funding and expand its investor base, and the cost was more attractive than dollar sukuk, even after ringgit swap costs. "The main motivation is diversification," he said.Tax incentivesTürkiye Finans Katılım Bankası is planning another offering of Islamic notes, more than two years after the government sold its first international sukuk. Muslims account for more than 99 percent of the nation's 82 million population.One-year deposits in Turkey pay 9.6 percent, trailing only the 46 percent in Argentina and Russia's 14.4 percent, the highest among the emerging markets tracked.Malaysia pioneered Islamic finance in the 1980s and does not charge taxes on capital gains or those on the underlying assets used to back sukuk to comply with Islam's ban on interest. Turkey has TL 102.5 billion of banking assets compliant with sharia out of the total TL 1.93 trillion, Turkish Participation Banks Association data shows.Kuveyt Türk Katılım Bankası's sukuk was assigned a AA3 rating from RAM Rating Services Bhd., the fourth-highest investment grade. Average yields on Malaysia's five-year corporate conventional bonds are 4.84 percent, a central bank index shows.Türkiye Finans Katılım Bankası, which is 66.3 percent-owned by Saudi Arabia's largest lender, National Commercial Bank, was also assigned AA3 by RAM. It sold 800 million ringgit of five- year sukuk at a yield of 6 percent in June and 150 million ringgit of similar-maturity securities at 5.9 percent in February via its unit TF Varlık Kiralama AŞ. The 2019 notes yielded 5.75 percent when last traded on March 25 and the 2020 securities were paying 5.70 percent, according to prices compiled by Bursa Malaysia.There is no reason why Turkey's ambition to develop its sukuk market cannot coexist with plans by their companies to tap funding in Kuala Lumpur, Thomas Meow, head of credit markets and banking in Malaysia's capital at CIMB Group Holdings Bhd., last year's biggest sukuk arranger, said by e-mail March 26. International issuers"The successful establishment of Türkiye Finans's ringgit sukuk program caught the attention of Turkish companies," Leon Koay, managing director and head of financial markets in Kuala Lumpur at Standard Chartered Bank Malaysia Bhd., said by e-mail on March 27. "As investors become more familiar with Turkish credits, and provided market conditions continue to be favorable, we believe there will more Turkish companies tapping the ringgit market."Corporates from Indonesia and France are also coming to Malaysia to raise funds. PT Adira Dinamika Multi Finance, Southeast Asia's largest consumer lender, will offer as much as $150 million of sukuk in Kuala Lumpur by next month. Societe Generale SA, France's third-largest banking group by assets, has a 1 billion ringgit sharia-compliant debt program.Overseas issuers are providing the market with a welcome boost. Sales of corporate sukuk were 8.34 billion ringgit in 2015, the weakest start to a year since 2010, data compiled by Bloomberg shows. Offerings totaled 64.7 billion ringgit in 2014 and 63.8 billion ringgit the previous year.