Under the Radar: Sukuk bonds boom in West Africa

Long under-serviced by Islamic finance, sub-Saharan Africa, and West Africa in particular is seeing a boom in sukuk bonds. West Africa is set to benefit from more intra-regional investment and increased interest from foreign Islamic investors.

The growth of Islamic finance in recent years has seen a rapid increase in the value of ‘Islamic Economy’ – with the global shari’a-approved financial sector projected to be worth $3 trillion by 2018. While Middle Eastern and Asian countries are leading this trend, one region—Sub-Saharan Africa—remains under-serviced.

The growth of sukuk in Africa

Indeed, with over 250 million Muslims, the region is home to a quarter of world’s Muslim population, yet commands a disproportionately small fraction of Islamic financial activity. However, this is changing as sub-Saharan Africa—West Africa in particular—is seeing a marked uptick in Islamic finance, especially in the issuing of Islamic bonds, or sukuk.

Increased GDP growth rates in West Africa have led to higher demand, as nations in this region seek to diversify their lending and borrowing options. Sukuk is increasingly being used to finance development projects, as well as to increase domestic capital reserves and financial inclusion; thus aiding local small and medium-sized businesses.

Furthermore, since speculation is prohibited, and all financial activity must concern real economic activity (with all loans backed by concrete assets), sukuk in theory offers greater stability. Sukuk’s asset-backed investments and risk sharing can offer African nations more forgiving terms and insulate them from the volatility of the wider global economy.

Sukuk issuance boom in 2016

Global sukuk issuance decreased from $101.8 billion in 2014, to $66 billion in 2015. While global uncertainty played a part, the main reason was the cessation of short-term sukuk issuance by Bank Malaysia Negara, the largest issuer, with 50% global market share. This decrease was also due to saturated or unstable traditional markets (Syria, Iraq, Turkey, Libya). Despite these concerns, forecasts for 2016 see an increase to $70 billion, with West Africa playing a significant role.

Significant sukuk use is only now beginning in sub-Saharan Africa. While states such as Sudan and Gambia have issued sukuk in the past, it was in 2014 that Senegal authorized the region’s largest sukuk issuance ($200 million). 2016 has seen a host of new sukuk issuances in West Africa. On August 10th, Togo’s initial CFA 150 billion ($263 million) sukuk offering closed. This comes after Senegal launched its second $263 million round at the end of June.

The trend is likely to continue. Looking ahead, Côte d’Ivoire is planning the second phase of its CFA 300 billion ($526 million) sukuk program. Similarly, Nigeria has convened multi-agency meetings to organize its maiden sovereign sukuk issuance, expected by the end of the year. Furthermore, Kenya and South Africa are planning issuances for 2017.

Islamic investment in West Africa

As a result of sukuk’s unique traits, the IMF is promoting the regional adoption and inclusion of sukuk into African government debt strategies. The region’s Muslim population and development efforts are attracting Islamic financiers from further afield.

Interestingly, in 2014, South Africa became only the third non-Muslim country to issue sukuk; issuing Africa’s first dollar denominated sukuk ($500 million). Pretoria is targeting sukuk’s growing regional influence and is attempting to tap into investment markets in the Middle East and Asia. Specifically, South Africa’s issuance in U.S. dollars was aimed at enticing foreign investors, and is part of its attempt to position itself as a hub for the import of halal products and financial services.

Alongside newcomers to the sector, established players such as Saudi Arabia’s Islamic Corporation for Development of the Private Sector (ICD) are eyeing West Africa as a profitable frontier market. ICD is seeking to expand its business in Africa and has positioned itself as a facilitator of sukuk deals in the region: ICD was the lead arranger for both Togo and Côte d’Ivoire’s sukuk launches.

By 2017 West Africa could be the latest arena for Saudi-Iranian competition, as Iran restarts its sukuk industry following the end of sanctions. Iran has an advantage in the sukuk market in that its entire financial sector is sharia compliant. This is due to the Law for Usury Free Banking Operations, passed in 1983, which in turn makes Iranian Islamic finance compliance a legal requirement, rather than regulatory issue.

That being said, Iran is currently at a severe disadvantage versus Saudi Arabia, in that Iranian law for bids sukuk trading in foreign currencies. This is a major problem if Iran wants to compete in the international sukuk market, which is dominated by dollar transactions. This requirement has effectively shut Iran out of global markets, and its domestic demand is insufficient to raise enough capital for Tehran’s development goals.

Iran’s refusal to use foreign currencies is a two-sided issue with regards to West Africa. Firstly, as noted above, many West African issuers are issuing bonds in West African francs (CFA). This is because issuers such as Senegal are seeking to gain regional market share by promoting intra-regional trading. This is aided by the fact that the CFA is used by eight West African countries, and is guaranteed by the French treasury. The CFA also has a fixed exchange rate pegged at 655.957 CFA to the Euro.

Consequently, Iran’s refusal locks it out of a sizeable regional bloc of more than 105 million potential customers. However, industry experts are optimistic that Iran will change its stance on foreign currency denominated bond trading. Even a partial repeal of the law (say allowing some currencies such as the CFA, but not the dollar), would allow Iran to access the West African market. The widespread use of CFA makes this easier, which could see Iran becoming key partner in promoting CFA issued bonds to circumvent Iran’s own reluctance towards (and Saudi Arabia’s reliance on) dollar denominated bonds in the region.

Increased attention from international investors and growing domestic demand place West Africa in a favourable position heading into 2017. The region is likely to benefit from increased intra-regional investment, as well as better deals as competition between GCC, Iranian and Asian Islamic investors heats up.

Under the Radar uncovers political risk events around the world overlooked by mainstream media. By detecting hidden risks, we keep you ahead of the pack and ready for new opportunities.

(Global Risk Insights / 12 August 2016)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Malaysia's $25 bln pension offshoot set to boost Islamic finance

KUALA LUMPUR, Aug 12 (Reuters) - Malaysia's Islamic finance market is set for a much-needed boost when the country's largest pension fund launches a 100 billion ringgit ($24.9 billion) Islamic fund in January, offering a potential boon for asset managers.

The Employees Provident Fund's (EPF) sharia-compliant pension plan opened to acclaim this week with Malaysians lining outside its offices to invest.

The allocation represents about 15 percent of the EPF's total investments of 681.7 billion ringgit as of March.

Having a standalone pension fund of that size is a rarity in Islamic finance, even for majority-Muslim Malaysia, and it is expected to draw interest from foreign asset management firms with homegrown players also upbeat about the prospects.

"The benefits are multifold, to us and to the industry," said Mohamad Safri Shahul Hamid, CIMB Islamic senior managing director and deputy chief executive officer.

"As EPF allocates more into the sharia fund, surely they would want to progressively deploy more of their funds into sharia-compliant investments."

This would include the market for Islamic bonds, or sukuk, with demand gradually increasing as the EPF hires external firms to manage its bespoke funds, Safri said.

Ancillary businesses such as Islamic securities services would also benefit, as well as Islamic money markets, he said.

The EPF plans to allocate an additional 20 billion to 30 billion ringgit in 2018 to its Islamic fund, depending on the availability of sharia-compliant investments.

The new fund would attract foreign competitors into Malaysia but also widen the opportunities for incumbents, said Mohammad Hasif Murad, investment manager at Aberdeen Islamic Asset Management Sdn Bhd.

"This announcement might be a good value proposition for foreign players to jump on the bandwagon. We expect EPF to continually assess the response from the market and gradually increase the allocation for Islamic in the medium term."

Islamic fund managers screen their portfolios according to religious guidelines such as bans on alcohol and gambling, similar to socially responsible funds in Western countries.

Close to a fifth of total assets under management in Malaysia are now managed this way.

As of December, fund management companies in Malaysia held 132.4 billion ringgit worth of Islamic assets, up 19.7 percent from a year earlier, according to Securities Commission data.

While the benefits of a standalone Islamic retirement fund trickle down to fund managers, the outlook for Malaysia's sukuk market is also improving.

A healthy supply of sukuk is expected for the rest of 2016, on track to exceed the $34.5 billion of sukuk issued in Malaysia last year, CIMB's Safri said.

"We expect an active second half, in terms of total size of the corporate sukuk market, which will grow to $40 billion at the minimum," he said.

Growth in the fixed income market would outpace equities, as investors seek more stable returns, he added.

(Mail Online Wires / 12 August 2016)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com