Africa: sukuk’s promised land?

Islamic bonds could become an instrument of choice to finance infrastructure projects on the continent, fresh research says.

Kenya aims to build a $4 billion rail line to deepen regional trade. In Côte d'Ivoire, the government has pledged to disburse almost €45 billion in the years to 2020 to support industrialisation. Yet amid a downturn in the resources sector, government funds are drying out. Who’s going to pay for Africa’s ambitious infrastructure schemes?

Part of the answers lies with greater use of sukuk, according to Standard & Poor’s, which released a report this week pressing for greater use of Islamic bonds.

Africa’s current issuance of sukuk is puny. While the 17 sub-Saharan African states rated by S&P issued $46 billion of conventional debt in 2015 alone, the continent’s entire sukuk market is currently worth a mere $2 billion, the ratings agency says.

Their rise to fame may not happen overnight. S&P expects only a handful of countries to issue Islamic bonds over the next 12 months, largely because there is a “general lack of clear legal and tax regimes to support a thriving sukuk market”, the agency reckons. “In many cases, the complexity of structuring sukuk could deter issuance.”

But analysts expect multilateral organisations to play a growing part in developing the market. S&P cites the example of Senegal's issuance of sukuk in 2014 and 2016, aided by technical support from the Islamic Corporation for the Development of the Private Sector. Other institutions that might catalyse issuance include the Islamic Development Bank. Central banks could also help expedite issues, the report stated.

“We see South Africa and Côte d'Ivoire as serious contenders to attract foreign investors because of their large infrastructure projects, which need institutional funding. In addition, these two countries benefit from a well-developed financial infrastructure that could help them become financial hubs for such transactions.”

Rising fiscal deficits across the continent may prompt more countries to consider sukuk issuance, and push forward with establishing enabling frameworks.

“Over the past few years, Sub-Saharan Africa sovereigns have enjoyed unusually favorable financing conditions, with many issuing bonds in the global capital markets for the first time, and yields hit all-time lows in mid-2014,” S&P said. “But the tide has turned. We expect that the majority of these sovereigns will direct an increasing share of revenues over the next three years to servicing debt.”

The agency thinks the average fiscal deficit of rated Sub-Saharan governments will rise to 5 percent of GDP in 2016, compared with an average of 4.6 percent in 2014-2015.