African sovereign sukuk to take off this year
During a discussion on capital market development at the annual meeting of the African Development Bank in Rwanda, panellists argued sovereign sukuk issuance will finally take off this year in a bid to diversify sources of long-term dollar financing away from the Eurobond market.
Sub-Saharan African sovereigns are poised to issue sukuk bonds, according to a panel of experts at the African Development Bank (AfDB) annual meeting in Kigali. South Africa and Senegal are in the running to be the first in the region to issue this year.
While Senegal reportedly has a $200 million sovereign sukuk in the pipeline – in a move that helps the sovereign’s ambitious plans to become west Africa’s Islamic finance hub – South Africa is looking to be a regional leader with a larger issue of up to $750 million.
“Islamic finance offers an alternative to African sovereigns that adds to their resilience,” says Farid Masood, director, advisory and asset management department at the Islamic Development Bank, in a separate interview with Euromoney magazine.
“There will be multiple sovereign sukuk issuances out of Africa this year.”
To date, there have only been a few African sovereigns to issue sukuk – Mauritius, Gambia, Nigeria and Sudan – which accounts for 0.6% of global sukuk issuance.
In 2013, the state of Osun in Nigeria issued a N10 billion ($62 million) sukuk, and was deemed the first Islamic bond from a leading sub-Saharan country.
The dire need for infrastructure funding and long-term finance in Africa, alongside a necessity to diversify away from traditional routes of funding, has taken hold in the continent, ensuring the appeal of Islamic finance, say experts.
“In Africa there is growth, but how can you fund this growth?” says Datuk Rifaat Ahmed Abdel Karim, CEO of the International Islamic Liquidity Management Corporation based in Kuala Lumpur and panellist at the AfDB meeting in an interview with Euromoney magazine.
“After the global financial crisis, money became scarce. Even the multilaterals wouldn’t give you an open-ended cheque. It was at this point that it became essential for institutions and sovereigns, especially in emerging markets, to look for diversification of funding. Sukuk provides the diversification.”
He adds: “And if instruments are structured well, they will not be more expensive to service, as some believe to be the case with sukuk.”
Masood says: “Unlike conventional finance, Islamic finance is geared to be asset based so there has to be a physical asset for you to finance, so financing tends to be more secure in its nature and is broadly suited to an African environment where infrastructure needs are high.
“If you are looking to build a power plant, for instance, you actually have this asset on the ground. If it is a road, or a toll road, it’s the same idea. The physical asset is important.”
However, African sukuk issues will be more likely to succeed if they are investment grade, explains Abdel Karim.
“Sovereigns and other institutions in Africa are able to go to the AfDB or other multilateral institutions for credit enhancement,” he says. “This way, sovereigns that may not be considered by certain investors due to their investment grade get guarantees from the bank.
“This is a way they will qualify for sukuk from an institution like ours. We are now in talks with the AfDB to provide credit enhancement to a number of African sovereigns.”
There is, however, still a lot of work to do in terms of building the market in Africa.
“Sovereigns should look to issue sukuk as well as, and not just instead of, Treasury bills,” says Masood. “Conventional and Islamic banking will be set up in tandem, although perhaps not at the same rate, in Africa, to fulfil the needs of a diverse population.”
Rather than focus solely on building Islamic banks, it would be a good idea to create Islamic financing windows and build from there, explains Masood. The same can be said for regulation. “Would it be a benefit to implement fully Islamic regulation everywhere?” he asks. “This would take years.
“It would be worth our while to introduce changes and issue sukuk over time to encourage the changes.”
There have been no global sukuk deals issued by African names, so the relative value of conventional Eurobonds compared with sukuk deals is unknown, but the latter format offers a hitherto untapped pool of liquidity from the Gulf and Malaysia, as well as patient capital.
A lack of monetizable physical assets has traditionally inhibited sukuk deal flow in Africa – the hope is that the likes of Morocco, Tunisia, Senegal and South Africa will open up the market.