30
Sep
Sukuk, bonds adhering to the Islamic banking principles of risk-sharing, real asset financing and no interest, are becoming increasingly attractive to a number of sovereigns.
“Sukuk instruments are a natural fit for the African market and hold great potential amid unprecedented funding needs for infrastructure building across the continent,” Malaysia International Islamic Finance Centre (MIFC) said in a recent report, Islamic finance drives new development in Africa.MIFC reports that a total of $84.3 billion worth of infrastructure Sukuk have been issued by more than 10 countries between 2001 and 2013.
Sukuk, structured through the use of various Shari’ah principles such as Murabahah, Ijarah and Musharakah, is often viewed as a safe avenue for investment, particularly as it is suited for infrastructure financing. South Africa’s inaugural Sukuk is sure to boost this view among other Africa sovereigns, as the $500 million bond, issued on 17 September 2014, was more than four times subscribed at $2.2 billion.
Senegal issued its first Sukuk, for $208 million, just two months earlier and Nigeria’s Osun State issued one for $62 million in 2013. Mauritania, Morocco, Egypt and Libya have all introduced Islamic finance legislation this year that is aimed in part towards eventual Sukuk issuance, while Sudan and Gambia have issued small, short-term Sukuk.
“In the next few years, Africa is likely to tap the Sukuk market to support projects in the power, transportation and other development projects. Moreover, Sukuk being Shari’ah-compliant instruments can play a major role in connecting Shari’ah-compliant liquidity inflows from the liquidity-abundant oil-rich Muslim economies and other major Islamic international trade economies,” MIFC said, referring to Islamic banking hubs in the Gulf and Malaysia.
The MIFC reports that Africa accounts for just 2.4 per cent of global Islamic banking assets as of 1H2013, and only 0.6 per cent of outstanding Sukuk as of the first quarter of 2014–but the sector is quickly growing.
“The Islamic finance industry in Africa, despite being largely fragmented and nascent in the region, is fast gaining interest of the various stakeholders including central banks, regulatory authorities, international Islamic financial institutions as well as the local demographics,” it said.
Moody’s Investor Services says that the growth is part of a larger trend towards government-issued Sukuk in the global market. A combination of investors’ increased comfort with Islamic banking products such as Sukuk, the growing financial needs of the Sukuk-issuing countries, investors’ desire to engage with emerging markets and particularly Muslim country governments’ and investors’ interest in supporting the growth of Islamic banking, have all led the global Sukuk market to double in the past three years.
Moody’s reports that the stock of outstanding Sukuk has almost quadrupled during that period as annual issuance rose from less than $32 billion in 2010 to a record $83 billion at year-end 2012, commensurate with capital flows into emerging markets.
The sovereign Sukuk market accounts for more than half of total Sukuk issuance in terms of value–a cumulative issuance total of $438 billion as of July 2014. Annual issuance has risen sharply from less than $15 billion in 2010 to $33 billion and $23 billion in 2012 and 2013 respectively, Moody’s reports.
“We expect the share of international issuance to increase, attracting more global investors and improving the depth and breadth of this relatively new sector,” Moody’s said in its recent report on sovereign Sukuk. “The dollar-pegged economies in the Gulf will drive an increasing supply of cross-border, hard currency Sukuk issuance. Demand from global investors will grow as they become more comfortable with this asset class and it will support their search for yield and portfolio diversification.”
Sukuk is a relatively recent financial product, only emerging in 1990 with Malaysia’s first issue of a Shari’ah-compliant bond. In Africa its history, and that of the Islamic finance industry as a whole, has been short; but with the debut issuances of Senegal and South Africa this year, confidence in Sukuk as an alternative to conventional finance is growing.
Kenya, home to a number of Islamic banks and banking windows, announced earlier this year that the country’s second international bond offering could be Shari’ah-compliant in order to diversify investors. Egypt is exploring the framework necessary for Sukuk issuance and Morocco is in the final stages of enacting a Sukuk law.
“Sukuk issuances will provide these Sub Saharan countries with an additional degree of diversification in their creditor base by tapping Islamic investors. However, one major constraint still exists for most African sovereign issuers, since in most cases, they still need to implement the legislation needed to issue Shari’ah-compliant instruments,” Moody’s noted.
The necessary legislation will be key to building stronger ties with Islamic finance hubs in the GCC and Malaysia and promoting further inflows of investment. A number of development institutions have committed to the effort, including the African Development Bank (AfDB), Islamic Financial Services Board (IFSB) and the Islamic Development Bank (IDB) with its affiliated groups. Each has undertaken a number of training and capacity-building initiatives, and, in IDB’s case, through equity participation in Islamic banks and Shari’ah-compliant institutions across Africa. The effect, MIFC says, has been ‘an enabling environment’ for more Islamic banking framework.
At the same time, trade and investment between Africa and major Islamic finance hubs has rapidly expanded: the annual trade relationship between the GCC and Africa is currently valued at nearly $35 billion, and GCC foreign direct investment into Africa has grown. Malaysia has also become a key investor in the region–according to The United Nations Conference on Trade and Development, Malaysia’s FDI flows into Africa were valued at nearly $3.5 billion in 2011.
“Islamic finance has tremendous potentials to at least partly support the funding gaps in Africa while enhancing the financial inclusion rates in the region,” MIFC said. “The favourable regulatory environment, demand for infrastructure funding and recovery in global growth will lead to more Sukuk issuances from the continent.”
South Africa’s first foray into Sukuk
The South African Government first showed interest in issuing Sukuk as early as 2011, but took nearly four years to identify the asset to back the bond and parse out regulatory requirements. It now joins the United Kingdom and Hong Kong as the third non-Muslim majority country to issue a sovereign Sukuk.
The $500 million bond has been more than four times subscribed at $2.2 billion according to the South Africa National Treasury. The 5.75-year Sukuk was priced at a coupon rate of 3.9 per cent, a record low for South African bonds since 1994, according to data compiled by Bloomberg. The Treasury also stated that 59 per cent of investors hailed from the Middle East.
Source: https://www.zawya.com/story/Building_bridges_with_sovereign_sukuk-ZAWYA20140929112758/