Legislation gaps slow Sukuk issuance in Nigeria, others – S&P
Legislation gaps are really challenging African countries’ intent to effectively issue the sukuk, an Islamic bond, which could help fund the continent’s huge infrastructure needs, Standard & Poor’s credit rating agency said on Thursday, in a new report.
To date, African sovereigns have issued just about $1 billion of sukuk instruments, compared with global sukuk issuance of an average $100 billion per year over the past five years, says S&P.
In Nigeria, Osun State has issued a N10 billion ($51m) sukuk yielding 14.75 percent, the first and currently the only Islamic bond from the Africa’s largest economy.
The global rating agency, citing experience in South Africa and Senegal, notes that a significant amount of time can elapse between a government’s announcement of intent to issue sukuk and their effective issuance, as governments gauge market interests and try to address the legal hurdles and cost of issuance.
But S&P believes that regulations and fiscal incentives could speed Islamic Finance Development on the continent and that the development of an Islamic finance industry could help Africa fund its huge infrastructure needs.
Meanwhile, widening fiscal deficits and large infrastructure gaps will likely require multibillion-dollar additional financing needs over the next decade.
Infrastructure deficit is huge in Nigeria, and funding is currently a challenge on account of fallen government revenues.
The government has presented $166 billion investment outlay for the first five years implementation of the 30-year National Integrated Infrastructure Master Plan (NIIMP) but is now looking to prioritising projects to package and market to the private sector for investment.
“Legislation gaps are the main causes of delay between a country’s intent to issue and its effective issuance of sukuk,” says S&P’s credit analyst Samira Mensah.
”We believe that a growing interest in Islamic finance could encourage some North African countries, as well as sub-Saharan countries Cote d’Ivoire, Nigeria, and Kenya, which have fairly well developed capital markets by regional standard, to issue sukuk in the future,” says Mensah.
The report suggests that a framework of regulation and fiscal adjustments will be necessary to foster African sukuk markets, provide wider investment options for potential Islamic investors, and attract a pool of Islamic liquidity.
Acceptability of Islamic banking principles is equally an issue particularly in Nigeria, where, for instance, it took almost ten years for Jaiz Bank, the only Sharia-Compliant financial institution in the country to commence operations after obtaining operating licence.
S&P thinks governments will take time to introduce new regulation and fiscal adjustments to foster African sukuk markets, increase investment options for potential investors, and attract a pool of Islamic liquidity.
It cites the success of Malaysia in South-East Asia as a hub for Islamic finance, which among other things, lies in the strong regulatory framework to support the sector’s growth.
Malaysia also moved quickly in 2009 to address the standardization of instruments and interpretation of Sharia law.
“The involvement of major multilateral institutions could accelerate the development of African sukuk issuance, in our view,” it states.
Tax regimes are equally important to consider when encouraging sukuk issuance. Sharia-compliant instruments require equal treatment with conventional instruments for investors to consider them. Malaysia introduced various tax incentives that made Islamic finance a cheaper economic alternative for institutions to raise funding.
S&P notes however that increasing technical assistance by the Islamic Development Bank (IDB) and Islamic Corporation for the Development of the Private Sector (ICD), are gradually facilitating also sovereign sukuk issues.