April 2016

Africa’s Sukuk Market

Photo of Rabea Benhalim

By Rabea Benhalim

Rabea Benhalim is an experienced lawyer with a focus on oil and gas finance in the Middle East and Africa. Most recently she has served as in-house counsel to Maersk Oil on a major Angola energy facility, and has assisted with multi-million and multi-billion dollar oil and gas deals. At the Brookings-Doha Center, Ms. Benhalim acted as a Legal Fellow in Governance Studies where she researched and published papers on law and policy related to detention and privacy. She previously worked for the Carter Center in the Democracy Program, researching democratic developments in the Middle East and North Africa. Benhalim studied at the University of London School of Oriental and African Studies, and holds an M.A. in Public Policy from the University of Michigan and a J.D. from the University of Texas. She is currently completing her Ph.D. in Islamic Studies at the University of Texas.

The comparative resilience of Islamic banks during the 2008 financial crisis sparked a renewed global interest in Islamic finance.

Since then, African governments, especially those with large Muslim populations, have introduced significant new legislation aimed at promoting Islamic finance.  In the wake of the Arab Spring, Tunisia and Egypt have witnessed a rise in such legislation coming from their new governments.  Morocco has also implemented a new framework for the establishment of Islamic financial institutions. This interest in Islamic finance is not solely limited to North African countries.  Sub-Saharan African governments have also implemented similar initiatives.

In September 2015, the inaugural Africa Islamic Finance Forum was held in Abidjan, Cote d’Ivoire. In December of the same year, Nigeria hosted the Second International Conference on Islamic Finance.  A particularly popular financial tool addressed at both conferences was sukuk, Islamic finance compliant bonds.  Sukuk differ from conventional bonds in that they are an asset-backed security. For instance, South Africa’s sukuk issuance was based on an ijara (lease) structure.  Under this model, sukuk holders are granted the right to own and control the underlying asset, which must already be in existence and clearly defined.  Legislative tax reform is often required prior to the issuance of sukuk due to the significant tax burden issuers may face from the requirement that sukuk are asset backed. Also, multiple asset transfers are often required for a sukuk issuance.

Sukuk have a long history in Gulf countries such as the UAE and Qatar and in Asian countries such as Malaysia and Singapore.  African countries have begun to adopt legislation for the issuance of sovereign sukuk as a means to raise fund for infrastructure projects and attract Gulf investment. Several Sub-Saharan African countries have already issued sukuk, moving more quickly than their North African counterparts.  Senegal became the first African nation to issue sovereign sukuk in 2014, followed in quick succession by South Africa, Cote d’Ivoire, Niger and Nigeria.

In North Africa, the Libyan and Egyptian post-Arab Spring governments both initially passed legislation for sukuk issuance.  Continued political instability in Libya has delayed attempts to issue sukuk, and Egypt’s efforts have similarly come in fits and starts.  Under Morsi, Egypt passed a bill allowing for sukuk issuance, but the Egyptian Financial Supervisory Authority ultimately revoked the law following Morsi’s ouster.  In late 2015, Egypt made the initial moves to approve the issuance of sukuk via drafted legislation, formally replacing the laws passed under Morsi.  The Egyptian Finance Minister, Hany Kadry Dimian, indicated in December 2015 that Egypt is looking to issue sukuk in 2016 as a means of bridging the $36 billion 2015-2016 fiscal year gap.

Kenyan officials have also reported Kenya’s interest in issuing sukuk this year.  However, Kenya’s Banking Act requires reform before such issuance can occur. Kenya was initially expected to debut a sukuk issuance in 2015, but after having secured a Sh75 billion loan, it decided to delay the issuance to 2016.   The Kenyan Parliament has indicated that it will consider its finance committee’s recommendation of sukuk issuance as a means to fund several national construction projects.  Such sukuk legislation follows Kenyan initiatives to establish Kenya as an Islamic finance leader in East Africa.  In February 2016, Kenya will be hosting the East Africa Islamic Finance Summit in Nairobi.  The conference will address the role of sukuk in addressing East Africa’s infrastructure deficit, and it will include a case study examination of South Africa’s $500 million sukuk issuance.

South Africa first passed tax amendments in 2011, allowing for government issuance of sukuk.  The tax reform resulted in South Arica’s 2014 issuance of a debut sukuk of $500 million, which was four times oversubscribed.  The oversubscription indicated the serious demand for sukuk and has drawn interest to expand sukuk offering in Africa.   The success of the government’s sukuk deal has drawn attention from public entities such as the South African National Roads Agency LTD and Eskom (power utility).

Further tax reforms are is in the process in order to extend the issuing of sukuk to listed companies.

Despite all of the recent sukuk activity in Africa, Standard & Poor’s has forecasted a 20% global drop in sukuk issuances this year.  This forecasted decline results from lower oil prices, and expected declines in Gulf countries’ and Malaysian spending.  Additionally, the Malaysian central bank stopped issuing sukuk in 2015, resulting in the issuance of new sukuk globally dropping by almost half as compared to the prior year.

Notwithstanding this decline, African countries will likely continue to pursue the implementation of Islamic finance and banking tools and institutions.  Partnerships with Gulf and Southeast Asian countries via joint ventures and investments – although potentially slowing – will still provide African countries with needed capital.  For example, in December 2015, Morocco finalized the establishment of the first fully Islamic finance compliant banking institution.  Morocco accomplished this task by partnering with Qatar International Islamic Bank.  Egypt has indicated it will issue sukuk in the first quarter of 2016, and Kenya is anticipated to follow suit.  While decreased Gulf interest in spending will affect new sukuk issuances, the need for infrastructure and public debt financing will continue to fuel interest in sukuk throughout Africa.

Photograph of Fez, Morocco by John Walker /