In a move that could position SA at the forefront of the global Islamic Sharia law-compliant sukuk (bond) market, national treasury has called on banks to submit proposals for the issue by government of a sukuk.
“A sukuk would create a benchmark for other emerging markets and corporates,” says treasury spokesman Bulelwa Boqwana.
The nature of the possible sukuk has yet to be clarified and banks involved in the tendering process are not permitted to divulge any information.
But a sukuk would differ markedly from a conventional bond. Islamic Finance Resource, an information service, explains that in their purest form sukuk are ownership claims on physical assets.
A sukuk issue would be to domestic and foreign investors and its size dependent on government’s funding requirements, to be unveiled in the next national budget, says Boqwana. That it would be a success seems assured.
“There is a lot of local and foreign interest in it,” she says.
For SA, a sukuk issue would open the door to a source of foreign investment beyond traditional Western funding, finance minister Pravin Gordhan said in a recent speech. Though not on the vast scale of the Western funding machine, the sukuk market is significant, with new issues in 2010 of US$50bn, Ernst & Young (E&Y) says. Sukuk issues hit $63bn in the first nine months of 2011, according to research firm Zawya Sukuk Monitor.
Behind the sukuk market there is also the huge Islamic financial services asset base, which E&Y puts at $1trillion. Deutsche Bank predicts this total could rise to $1,8trillion by 2016 and drive a significant increase in the global sukuk market, which now accounts for a mere 1% of all bonds in issue.
For Gordhan’s strategy to establish SA as the hub for Islamic product development in Africa, a sukuk issue would be a big step forward. But SA cannot afford to drag its feet. Kenya, which has expressed similar ambitions in Africa’s Islamic finance market, aims to issue its first government sukuk in June 2012. A $500m issue is planned.
Also in the running is Nigeria, which is set to issue its first government sukuk within 18 months. Senegal has also expressed interest in tapping into the sukuk market.