Many African countries have been on the brink of an Islamic banking boom for almost a decade, however development has been somewhat stunted. This is not through lack of demand. Islam first spread its prayer mats in Africa in the early seventh century, and today it is thought that a third of the world’s Muslim population call the continent home. Still, Islamic finance remains at an embryonic stage.
THE RIGHT RULES
However, recent developments suggest that Islamic finance is coming of age on the continent. In 2017, Kenya’s government unveiled a raft of measures to boost the country’s decade-old Islamic banking sector. The new laws promise to create a framework for Islamic funds and banking and cradle a Sukuk sector. While Kenya was relatively quick to cotton onto Islamic banking, it has lagged behind its African peers in the development of a Sukuk market.
No Sukuk has been issued in the East African region, despite the government teasing the market with its intentions to do so. In November, Nasdaq Dubai and The Nairobi Securities Exchange signed a Memorandum of Understanding (MoU) to help nurture a Sukuk sector in Kenya. Under the MoU, the two exchanges will collaborate on the issuance and listing of Sukuk by the Kenyan Government, government-related entities and private businesses. The exchanges also hope to promote Islamic capital markets products together.
Hamed Ali, Chief Executive of Nasdaq Dubai, said, “As the region’s international exchange with growing links to African countries, Nasdaq Dubai looks forward to supporting the Nairobi Securities Exchange, the Kenyan Government and the country’s capital markets community as they develop a thriving Sukuk sector. “By cooperating and sharing our respective expertise, the two exchanges will provide powerful support for the growth of Islamic finance in Kenya.”
Geoffrey Odundo, Chief Executive of the Nairobi Securities Exchange, added, “We look forward to benefiting from Nasdaq Dubai’s extensive experience as a global leader in Islamic finance, as we build our own Sukuk sector in Kenya by promoting issuance and listing as well as attracting local and international investors. “The development of the Islamic capital markets can provide significant support for funding national development and growth while strengthening our international relationships.”
Kenya’s decision to position itself as a hub for Islamic finance is timely; as the pace of development quickens in Africa, Kenya can’t afford to be left behind. Already, Senegal is two Sukuk issuances ahead of Kenya. It issued its debut offering in 2014, with the ICD acting as one of the lead arrangers. Its second Sukuk in June 2016 was valued at $350 million, the proceeds from which will be used to finance Senegal’s economic and social development projects, including the urban centre of Diamniadio, a drinking water supply programme, and a road and street lighting programme.
Not wanting to be outdone, South Africa became the third non-Muslim country after Hong Kong and the UK to issue sovereign Sukuk in September 2014. Looking to emulate Senegal and South Africa’s success, Cote d’Ivoire has since made inaugural debuts in 2015 of $260 million. Togo issued its maiden Sukuk worth $277 million in July 2016, becoming the third state in the West African Economic and Monetary Union (WAEMU) to issue a Sukuk after Senegal and Cote d’Ivoire. Following its five-year Sukuk programme with the ICD, Cote d’Ivoire issued its second sovereign Sukuk valued at $263 million in August 2016.
Sukuk may provide new answers to Africa’s age-old problems. Africa has been billed as the next new powerhouse of the world, by virtue of its strong macroeconomic growth, a rising middle class and the world’s youngest population. And yet the seemingly intractable nature of Africa’s poverty continues to blight its potential. As an alternative type of funding, Islamic finance and its inherent characteristics lend themselves well to facilitating and promoting sustainable development in the continent.
“In particular, Sukuk as an alternative means to mobilise medium to long-term savings and investments from a huge investor base continues to be an important source of much-needed capital to meet the ever-increasing demand for sustainable infrastructure development across the globe,” said a recent report from the International Islamic Financial Market (IIFM).
Sukuk has long been the posterchild for Islamic finance across the globe. While consumers struggle to understand banking on faith, the corporate world has been quick to comprehend the benefits of a Shari’ah-compliant bond. “Sukuk has proven its viability and dynamism as a global product for fund-raising and investment activities in the international financial markets and this has been a key driver behind the interest in Islamic finance,” explained the IIFM.
BUILDING BETTER LIVES
Africa’s lack of infrastructure is one of its biggest barriers to sustainable economic growth. Infrastructure investments contributed to more than half of Africa’s improved growth performance between 1990 and 2005, according to research by the Overseas Development Institute. As countless studies have shown, when developing countries focus on upgrading their infrastructure, economies and people’s lives will inherently transform for the better. The returns on investment in infrastructure are very significant, with on average 30–40 per cent returns for telecommunications (ICT) investments, over 40 per cent for electricity generation, and 80 per cent for roads. Therefore, bridging Africa’s infrastructure gap as a means of addressing the continent’s numerous developmental challenges cannot be understated.
“Ultimately, the burden of financing Africa’s infrastructure projects can shift away from banks towards the Sukuk market,” the IIFM said. The IIFM believes that the recent sovereign issues in Africa will not only serve as an impetus for other African governments to follow suit and diversify financing instruments via Sukuk, but it will help the Islamic finance industry to mature and expand outside of the industry’s core centres in the Middle East and Southeast Asia. It has been reported that several African countries are in the midst of preparing legislation to facilitate further Sukuk issuances.
In fact, the BCEAO (the central Bank of eight countries in the West African Economic Monetary Union) have already pledged to implement Islamic finance regulations; Uganda and Tanzania are working towards building Islamic finance sectors in their respective markets. In 2016, the WAEMU’s regional stock exchange, the BRVM, became the first stock market for Islamic finance in Africa with five Sukuk listings from Côte d’Ivoire, Senegal and Togo amounting to $1.3 billion. While it is hoped that the listings will beef up the regional Sukuk market by attracting new entrants and boosting liquidity, the sector is not without challenges.
“Moving forward, it is crucial for entrants of the newly minted sector in Africa to recognise the multidimensional challenges that will need to be confronted,” the IIFM said. “Increasing awareness and the acute understanding of Shari‘ah-compliant products as well as employing a comprehensive marketing strategy is important to educate and engage new customers in order to increase penetration levels.”
REWRITING THE RULES
While Kenya may be late to the game when it comes to issuing Sukuk, it is among the first of its African peers to introduce regulations—and these still require fine tuning. The International Monetary Fund (IMF) has warned that Kenya is yet to refine its regulations for Islamic banks.
“The legal framework exhibits some gaps, prudential frameworks have not been adapted to the specificities of Islamic banking and there are also remaining gaps in the Shari’ah governance framework, consumer protection framework, liquidity management, resolution and safety nets,” the IMF report said.
The IIFM said that while a nation-wide strategy would be welcomed, it is crucial that any regulations are tailored to the specific characteristics of each country, paying close attention to the size of the economy and its conventional financial system. As the Islamic finance sector is set to swell over the next few years, regulators will need to move quickly to ensure sustainable growth. According to the fifth edition of the Islamic Finance Development Report and Indicator, Sub-Saharan Africa is a fast-growing region in Islamic finance. The report studied key trends across five indicators used to measure the development of the Islamic finance industry, namely: quantitative development (QD); knowledge; governance; corporate social responsibility; and awareness.
The overall Islamic Finance Development Indicator (IFCI) acts as a barometer of the overall industry’s development. According to the findings, the average IFDI value of Sub Saharan Africa rose strongly for 2017 as new regulations introduced in countries including Kenya and Uganda boosted its governance indicator. The Shari’ah governance sub-indicator value also rose with the addition of Shari’ah scholars at newly established Islamic financial institutions in Kenya and other countries, as well as a new, centralised Shari’ah board in Djibouti.
Another indicator that has been active for the region is awareness. News concerning the potential growth of Islamic finance and Sukuk in West Africa increased in 2016. Events such as conferences and seminars were also contributing factors in countries such as Nigeria, Tanzania, Djibouti and Zambia. For the QD indicator, Sukuk was another gainer as there was increased issuance in 2016, whether sovereign or quasi-sovereign.
Khaled Al Aboodi, CEO of ICD, said, “Incorporating Islamic finance in different strategies can be seen in the many steps taken by governments across different IFDI indicators. This was noticed when some authorities intervened in Islamic social funds management, raised literacy in the industry among potential market players through formal education systems, organised roadshows targeting potential market players, or built a roadmap to plot development of the overall industry.”
If Africa puts the right measures in place in time, Sukuk can be channelled towards sustainable and inclusive economic growth.