Led by Morocco, a handful of African nations plan to issue Islamic bonds to finance infrastructure, build reserves and diversify their investor base
After Zambia’s successful maiden eurobond issue last year, 2013 has looked like the year for Africa to join the emerging market debt rush.
But it is not just Western capital markets those countries are looking to. An increasing number of African nations are making provisions to issue sukuk, the Islamic equivalent of bonds, as they seek to finance their vast infrastructure requirements and diversify their investor base.
Sukuk are Islamic financial certificates that represent undivided shares in the ownership of tangible assets, often providing the first inroad for countries into Sharia-compliant funding. Still a relatively young financial instrument, global sukuk markets are growing fast, with issuance increasing by 64 percent last year to reach $138bn, according to Standard & Poor’s, the rating agency.
Issuers have generally stemmed from Islamic countries in southeast Asia and the Gulf Cooperation Council, and so far in Africa only the Gambia and Sudan (both not rated) regularly launch short-term domestic notes.
But in the last two years, sub-Saharan sovereigns including South Africa, Nigeria, Senegal and Mauritania have all announced their intention to come to the market with Islamic bonds.
Most are seeking to diversify their investor base as they find new ways to fund development, Islamic finance experts say. “Primarily, most of the countries in Africa are interested to issue sukuk to tap the growing Islamic liquidity pool which has become a significant part of the overall investment pool, especially in the capital surplus countries of the Middle East, and to establish a benchmark for their corporates and quasi-sovereign entities to tap this market,” explains Ahsan Ali, global head of Islamic origination at Standard Chartered Bank. “Also, a sovereign sukuk would help to support and grow the domestic Islamic finance markets in their own countries.”
Sukuk can be an important tool in meeting external financing needs and building reserves - particularly in the Arab states of North Africa - S&P adds in a report entitled Will African Sovereigns Turn To Islamic Finance To Fund Growth?