The latest wave of finance to reach African corporations and governments is coming from the Middle East, with an increasingly large sharia-compliant component.
Like with other forms of bonds, sovereign issues – those from central governments – are critical for setting benchmarks for corporate issues and deepening financial markets.
Bahrain's Al Baraka Banking Group announced in May that it plans to issue sukuk through its local operations in South Africa once the government takes the first step.
Money from the Middle East is also coming in the form of development finance. The Islamic Development Bank said in June that it is devoting $180m to renewable energy projects in Africa and plans to provide $7bn in finance to African countries by 2019.
While it is not through strictly Islamic financial channels, the Gulf states and Saudi Arabia had pledged $20bn in aid to Egypt by May of this year.
In a world shaken by the fallout from the credit crunch and unscrupulous bankers, Islamic finance holds a new attraction.
"People are looking for alternative and safe finance," says Adnan Halawi, an Islamic finance expert at Zawya, an online Reuters' news portal dedicated to sharia-compliant finance.
"Islamic finance is safer than conventional finance, it's asset backed and it's not making unjustifiable levels of interest because that is not Islamic," he explains.
Until recently, Islamic finance in Africa had held more promise than progress, but that is changing.
Of the more than 600 Islamic financial institutions operating globally Africa is estimated to have around 45, with sub-Saharan African countries rapidly catching up with their northern counterparts.
So say the organisers of the Islamic Banking Summit Africa, which meets for the third time in Djibouti in November. Banks are also targeting their services at individual clients, offering all sorts of Islamic finance services, from savings accounts to Takaful insurance.
Sukuk work by the investor taking a share of a specified asset as well as a share in the risk.
For example, if you want to buy a house, a sharia-compliant finance institution would buy it for you based on an agreement that you will purchase it from the bank later at a higher price. This avoids the payment of interest, which is not permitted under Islam.
Despite hosting large Muslim populations, North African countries have been slow to develop regulatory frameworks for Islamic banking. However, post-Arab Spring governments appear keen on proving their Islamic credentials.
Last year, Tunisia and Egypt implemented new Islamic banking laws. In June, Morocco's national assembly approved legislation to allow local and foreign banking institutions to set up Islamic banking branches.
Zawya's Halawi admits that "progress has been slow" on expanding Islamic finance in Africa. Nonetheless, he says: "Summits are taking place, mutual agreements are being signed and Islamic finance institutions are playing a key role in encouraging the governments there to regulate and improve where needed, so we will hope we will start to see movement."
According to the Malaysia International Islamic Financial Centre (MIFC) – which was developed 30 years ago as an international marketplace for Islamic finance – Mauritania, Morocco, Tunisia and Egypt may follow Dakar's lead by launching sovereign sukuk before the end of the year. Banking sources also say Kenya could follow suit in 2015.
Sudan, where sharia-compliant banking is obligatory, has been using Islamic bonds for years. The Gambian government makes regular but small issues, and last year Nigeria's Osun State raised $62m with a sukuk.
The MIFC argues that sukuk could help plug Africa's infrastructure deficit. "Sharia-compliant instruments can play a major role in connecting sharia-compliant liquidity inflows from the liquidity-abundant, oil-rich Muslim economies and other major Islamic international trade economies," the Malaysian institution noted in a 14 May report about Islamic finance opportunities in Africa.
Zawya's Halawi agrees: "The Gulf Cooperation Council (GCC) economies are very strong at the moment, and they want to invest their money. One of the options is Islamic investment. Demand continues to outstrip supply."
This sukuk buzz comes as Islamic banking is enjoying an African growth spurt, as banks tap into the growing needs of the continent's estimated 500 million Muslims.
In March, London-listed Standard Chartered launched its first African sharia-compliant bank offering in Kenya. Barclays Africa Group already operates Islamic banking windows in South Africa, Kenya and Tanzania. It is preparing to set up similar services in Mozambique and Zambia.
"Governments and regulators in Africa no longer view Islamic banking as a niche industry but actively seek to encourage its development," explains Kariuki Ngari, head of Standard Chartered's retail banking for Africa.
"By the end of this decade, it is quite possible that banking complying with sharia law could account for up to 10% of banking assets in five or six sub-Saharan African countries," he adds.
Uwaiz Jassat, head of Islamic banking at Absa, tells The Africa Report that Islamic banking is not just about offering Muslim-friendly products to economically active populations, but it is also a way to reach out to the unbanked and to drive development.
"Most of our customers in Kenya and Tanzania had never banked before, but now they are banking because there is an Islamic option," he says. "We are seeing a whole new market opening up, so this is definitely an exciting time."
Jassat says that that South Africa's sukuk is a way to attract "Middle Eastern petrodollars" to the continent. Middle Eastern investors "are trying to diversify their in- vestments, so Africa is the next big opportunity for them," he says.
Not everyone is so bullish. One major problem faced by all GCC countries investing in Africa, be they sharia-compliant or not, is the problem of transaction size.
Tarik Senhaji, director of the Fonds Marocain de Développement Touristique, explains: "They would rather do one $500m deal than 10 [at] $50m. Otherwise, they spend 10 times the money on their due diligence."
Amadou Sy of the Washington DC-based Brookings Institution says that sukuk are well suited for infrastructure projects because they require cash flows to be generated from assets like toll roads or real estate.
But, for that reason, they also take time to set up. "For first-time issuers, delays are to be expected in structuring a sukuk," he explains, referring to the need for new legal documentation and the creation of special-purpose vehicles, the entities used for asset acquisition.
"The legal documentation, in particular, can take time to iron out. At the moment there is more traction for issuing eurobonds."
Simon Stevens, a Dubai-based associate at law firm Chadbourne & Parke, warns that the tenures for sukuk are generally shorter than for conventional bonds.
That makes them less well-suited to infrastructure financing now, "but the tenures have been slowly increasing," he says. Which holds promise for the expansion of Islamic finance activities in Africa.