Africa is for the first time embracing large-scale Islamic finance as countries seek to tap cash-rich Middle Eastern investors to finance their large infrastructure programmes.
The market for sukuk, or Islamic bonds, received a boost this month after Nigeria became the first major economy in sub-Saharan Africa to use the $100bn a year Islamic market, followed days later by Senegal.
Africa is home to roughly 400m Muslims – about a quarter of the world’s total – but until now only Gambia and Sudan have issued any sukuk, and they were for tiny sums on a short-term basis.
Analysts said the Nigerian sharia-compliant bond issued by Osun state in the southwest of the country, while relatively small at $62m, signalled the start of a trend.
Sukuk, are structured to pay a fixed profit rate rather than a coupon and are commonly backed or based on real estate or infrastructure
“Increasingly, it seems that sovereign sukuk issues from Africa might now be on the radar,” said Christian Esters, at credit rating agency Standard & Poor’s.
Senegal said it had plans for a $200m sukuk in 2014 with the support of the Jeddah-based Islamic Development Bank. Amadou Ba, finance minister, said the offering was the “beginning of an ambitious programme which could lead to the financing of innovative infrastructure and energy projects through sukuk”.
The use of Islamic finance on the continent could grow further as several north and sub-Saharan African countries – including Morocco, Tunisia, South Africa and Kenya – are laying the legal groundwork to be able to issue sukuk. The central banks of Nigeria and Mauritius are also shareholders in the Malaysia-based International Islamic Liquidity Management Corp, which has started to issue sukuk to help Islamic banks manage their finances.
Bankers and lawyers caution that the industry is in its infancy and it will take several years before Islamic finance takes off across the continent. Clement Fondufe, partner at law firm Latham & Watkins, said that compared with Asia and the Middle East, “Islamic finance is at the early stages of development” in Africa.
If the development of the US dollar-denominated sovereign bond market is any guide, it could take at least five years for Islamic finance to win widespread acceptance. The Seychelles and Ghana became the first countries in the region outside South Africa to issue global bonds, in 2006 and 2007 respectively, but it was not until 2011-12 when others followed en masse.
Amadou Sy, a fellow at the Brookings Institution and former official at the International Monetary Fund who has studied the sector, says sukuk issuance could help Africa to pay for multibillion-dollar infrastructure programmes. “You have money from the Gulf and then you have the Islamic Development Bank, and also Malaysia and Indonesia – there is money out there,” he said.
In addition to Islamic bonds, African countries are exploring other sharia-compliant instruments, according to Neil Miller, head of Islamic finance at law firm Linklaters. “Sukuk is the tip of the iceberg. There is a lot more Islamic finance going on linked to infrastructure projects, trade and food security transactions,” he said.
The Islamic Development Bank, for example, is lending $150m through sharia-compliant facilities for the new Lekki port in Nigeria. It also supported the construction of the Kenitra power plant in Morocco with a $200m loan.
African countries are keen to tap into Islamic finance partly because the cost of borrowing can be cheaper because of high demand, particularly from the Middle East, analysts said.
Global issuance of sukuk hit a record high of nearly $140bn last year, up 60 per cent from 2011, with Malaysia, Indonesia and Saudi Arabia dominating.
source: Financial Times