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?
The Governor of the Central Bank of Nigeria (CBN), Mallam Sanusi Lamido Sanusi, has described Islamic financing as an alternative source of financing that is capable of providing the much-needed funding to fix the huge infrastructure deficit in the country.
He called on other African countries to also tap into the opportunities provided by this form of financing to fund gave the state of infrastructure in the continent a facelift.
Speaking in Abuja at a conference titled: “Infrastructure Development through Alternative Funding (Islamic Finance) in Africa,” which was organised by the Metropolitan Skills Limited in collaboration with the Islamic Finance Institute of Southern Africa, Sanusi noted that if well developed, Islamic bonds otherwise known as Sukuk, could serve as a major financing alternative for governments. This, according to him could be seen in countries such as Saudi Arabia, United Arab Emirates, among others.
The central bank boss, who was represented by his Special Adviser on Non-Interest Banking, Dr. Bashir Aliyu Umar, said: "It is my belief that if properly structured, Islamic financing will complement government's efforts in infrastructure development." On his part, the former Managing Director of Jaiz Bank, Mr. Mustapha Bintube, stressed that Islamic banking had come to stay in the country. He said: "In Nigeria, many people told me it was not possible, but today, with a modest beginning, it is going to stay and it is going to make impact in the economy of this country."
The acting Managing Director of the bank, Mr. Usman Hassan, appealed to the federal government to speedily finalise the development of the framework for the issuance of Sukuk in the country.
He said this had become necessary given that "with Sukuk you cannot have failed projects and funds cannot be diverted."
The African Development Bank (AfDB) Operations Vice-president, Zondo Sakala and the CEO of the International Islamic Liquidity Management Corporation (IILM), Rifaat Abdelkarim, on 24 June 2013 in Tunis inked a Memorandum of Understanding (MoU), to build robust partnership to promote liquidity management. This MoU signing comes on the heels of the AfDB's new trust fund reform policy, shifting from bilateral to multi donor and thematic trust fund.
The MoU will offer some direct benefits to the AfDB and its Regional Member Countries (RMCs). These include mobilizing finance and diversifying AfDB's funding base using investment bonds, called 'Sukuk'. The benefits also include building knowledge and capacity in RMCs in the field of Islamic finance, especially in fragile states and transforming them into productive capital. The Bank will also use the 'Sukuk' to circumvent issues of debt sustainability in RMCs.
Vice-president Zondo Salaka urged the two parties to move fast and establish a joint AfDB-IILM technical team working group to go into details of the partnership. He also expressed the hope that through IILM, the Bank can explore working with member countries of IILM. "We hope this signing will follow with concrete actions on the ground," he stated.
Abdelkarim, for his part, said that the signing of "this MoU with the AfDB would enable the two institutions to join hands to enhance Africa's development." "I am proud and privileged to sign the MoU with the African Development Bank," he affirmed, adding that "the MOU would be followed by practical case for us to work together."
About International Islamic Liquidity Management Corporation
The International Islamic Liquidity Management Corporation (The IILM) was established on 25 October 2010 by central banks, monetary authorities and multilateral organizations. It has its headquarters in Kuala Lumpur, Malaysia. It aims to develop and issue short-term Shari'ah-compliant financial instruments to facilitate effective cross-border liquidity management for institutions that offer Islamic financial services (IIFS). By creating more liquid Shari'ah-compliant financial instruments for IIFS, the IILM will enhance cross-border investment flows, international linkages and financial stability.
The current members of the IILM Governing Board are the central banks and monetary agencies of Indonesia, Kuwait, Luxembourg, Malaysia, Mauritius, Nigeria, Qatar, Turkey, the United Arab Emirates and the Islamic Development Bank Group. Membership of the IILM is open to central banks, monetary authorities, financial regulatory authorities or government ministries or agencies that have regulatory oversight of finance or trade and commerce, and multilateral organizations.
A Bahrain-based association which lobbies on behalf of Islamic finance says it plans to expand beyond the Gulf, so that it can shape rules and practices in new markets as they grow.
The General Council for Islamic Banks and Financial Institutions (CIBAFI), a non-profit organisation headquartered in Manama, has traditionally focused on neighbouring countries, which form a core market for the industry.
But Omar Hafiz, who took over last year as secretary-general of the body, said he was keen to enlarge its geographic scope while engaging national regulators more actively.
"We are trying to have a representative office in Tunisia, operating as a gateway to Africa, and also in Azerbaijan to reach central Asian countries," he told Reuters.
Founded in 1999 by the Jeddah-based Islamic Development Bank, CIBAFI has 114 member institutions, including Egypt's Faisal Islamic Bank, Kuwait Finance House and Bahrain-based Al Baraka Banking Group. Saudi-Arabia's National Commercial Bank joined last year.
The Saudi-born Hafiz, 62, said that for its long-term health, the industry should focus as much on improving the regulatory environment as increasing its size.
"It is not just a matter of licensing Islamic banks, but preparing a platform for success for Islamic banking," he said.
"We want to ensure competition between the conventional and Islamic banking industry is in its best shape, not inferior or second class, but on the same level."
Addressing a major weakness in Islamic finance, a lack of well-trained professionals, CIBAFI plans to expand its training and certification programmes, which are currently distributed through a network of over 30 agents in countries from Jordan to France.
"We hope to reach 50 agents by the end of 2014. Maybe our training centre can be a separate body - this is still in the development stage, it still needs two to three years to develop," Hafiz added.
The body also plans to hold forums in new markets for Islamic finance, including events in Morocco and Libya later this year.
One of CIBAFI's key messages is that Islamic windows - units of conventional banks which offer Islamic financial products and services - need to operate under clear rules to improve the perceptions of consumers.
"In some cases, conventional banks which offer Islamic windows or Islamic transactions are trying to pull the financial products towards their conventional ways of operation," Hafiz said, arguing this hindered consumers from distinguishing between conventional and Islamic products.
"It may be owned partially or totally by a conventional bank, but a full separation technically and legally should be shown to consumers."
This could improve the industry's appeal and eventually reduce the reliance on the Islamic window model in favour of full-fledged operations, Hafiz said.
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