High demand by investors could overcome the high cost of selling sukuk
African states more than ever need to fund growth plans, construction, refinance and spur investment. While reasons to tap the Islamic finance market vary from one state to another, the main ones are:
1. Many of these countries are predominantly inhabited by Muslims and it only makes sense to go for Islamic finance – in fact, they are a bit late in catching up with that global trend.
2. Islamic finance is a global trend and increasingly governments are becoming aware of the fact that one efficient way to attract the Muslim pool of wealth – concentrated in the Middle East oil-rich states, is by providing Shariah-compliant investments.
3. Raising funds through sukuk is a means of diversifying funding sources and hedge against global financial crisis and the attached volatility, shocks and risks, something traditionally conventional debt sellers and equity investment fans are becoming increasingly aware of.
Sudan’s financial sector is based solely on Shariah principles. All banks in Sudan are Shariah-compliant and all bonds issued in Sudan are in fact sukuk. The Sudanese market witnessed a one-time corporate sukuk in 2007 by Berber Cement Company worth USD 130 million. However, the fact that the whole Sudanese financial services sector is Islamic is not enough to take it as an example. We need to see how other financial systems which are traditionally conventionally run borrowers are going to integrate Islamic finance or at least establish a mix of conventional and Islamic finance.
Gambia has a successful record of sukuk issuance. In 2008, the Central Bank of Gambia started selling short-term Salam Sukuk. Since then, almost every week, the central bank sells three-month sukuk – beside its conventional debt. Zawya Sukuk Monitor estimates at least USD 95 million has been raise to date via 167 sukuk.
Following the Arab Spring that Egypt witnessed in 2011 – and even prior to that – Islamists started calling for more Islamic financing in a country that is one of the largest Muslim nations on the planet. In June 2011, the Egyptian Financial Supervisory Authority issued primary approval on proposed amendments to the Executive Regulation of Capital Market Law No. 95 of 1992 regarding the rules governing issuing and trading sukuk.
In February 2012, EFSA presented a draft to amend the regulation. Egypt is said to be planning to sell USD 2 billion of sukuk to Egyptians abroad and the National Bank of Egypt will be in charge of issuing the bonds.
Similarly, ruled by the Islamists following last year’s revolution, Tunisia is reported to be seeking to raise funds via sukuk. In November 2011, Islamist party Ennahda said it will promote greater options in Islamic finance in the country.
Morocco’s central bank last year said it is in talks with the country’s banking industry group GPBM on regulations that would allow sukuk issuance.
In Algeria, the chairman of the MSP’s parliamentary group, Mohamed Said Boubekeur, called in April 2011 for traditional banks to open counters dedicated to Islamic banking.
Libya’s central bank is reported to be preparing a law to allow lenders and issuers to sell sukuk after the fall of Muammar Qaddafi.
West, East and South Africa
Nigeria, West Africa’s largest economy, has repeatedly expressed its interest in selling sukuk. In 2011, the central bank had given an implicit approval to Jaiz Bank, the country’s first Islamic bank.
Delays in sukuk issuance include Senegal, which has announced a deadline to meet investors and sell sukuk in both the domestic and international markets. Yet, to date, it has not sold any sukuk.
Similarly, in Kenya – the largest economy in East Africa – legislation to eliminate tax barriers to sukuk issuance was discussed last year but never materialized. According to Kenya’s central bank, including sukuk is likely to increase the amount of cash flowing into Kenya from the Gulf region. The Capital Markets Authority of Kenya has recommended continuous allocation of a sukuk component in future bond issues targeting Islamic institutions and retail investors. Now there is serious talk about a USD 500 million sukuk by June 2012.
Interestingly, South Africa, where Muslims are estimated to constitute only 1.5% of the population, seems to be the most serious of all. In December 2011, the National Treasury invited banking institutions to submit proposals for the provision of advisory services for the structuring and issuance of a government sukuk in the local and international markets.
Shortlisted bidders were supposed to be informed by January 20, 2012. To date, we have not heard of any development. Does this mean South Africa will stand in line like the other African candidates? The situation is more of “let’s wait and see”.
African Sukuk Pipeline
Egypt Sovereign Sukuk
Tunisia Sovereign Sukuk
Senegal Sovereign Sukuk
South Africa Sovereign Sukuk
Nigeria Sovereign Sukuk
Al Baraka Egypt Bank Sukuk
Kenya Sovereign Sukuk
Source: Zawya, Sukuk Monitor
Factors to Watch
As we see progress in terms of regulatory changes as well as the initiatives and measures taken toward issuing sukuk, a few questions arise. First of all, how fast will the African states move; how serious are they about issuing sukuk? Countries such as France, the United Kingdom, Japan and Korea have been considering issuing sukuk for years now, but the attempts were hindered by opposition and criticism. We expect such opposition and criticism to be almost zero in Africa. However, political risk and uncertainty could play a vital role in a historically and traditionally unstable continent.
Another factor to watch is the recent talk about sukuk being expensive; at least more expensive than conventional bonds. Will African states find it expensive to sell sukuk? Or will the high demand from both domestic investors and international investors make up for high issuance costs, hence making it more affordable?
Finally, are we going to see more of the Gambian and Sudanese models (domestic sukuk), or are we going to see international sovereign sukuk? So far, Senegal, Egypt and South Africa are talking international. Are we going to see sovereign sukuk only or is it a matter of time before African companies start selling sukuk as well.
Zawya’s Sukuk Pipeline lists only sovereign sukuk from Africa, as no companies have revealed plans to sell sukuk yet – except for one shelved by Al Baraka Egypt. However, corporates typically rush to sell sukuk as soon as a sovereign bond is sold and the benchmark is set.Sukuk is an inevitable choice, apparently more so in Africa than anywhere else. The governments’ efforts on this front will be crucial.