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 forbids 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.