There is potential for Africa’s Islamic bond or sukuk market to meet the continent’s funding requirements for its extensive infrastructure development, according to S&P Global Ratings.
In S&P’s article, Africa’s Small Sukuk Market Shows Significant Promise, the ratings agency shares on the benefits of growing the Islamic bond market. These Islamic bonds are structured in a way to yield returns that does not infringe on Islamic law.
“We believe African sukuk can provide diversification benefits for Islamic investors as well as additional financing opportunities,” said Samira Mensa, S&P Global Ratings credit analyst.
Only a few countries will tap into the sukuk market over the next 12 months. Currently there is only R29bn worth of sukuk from a handful of issuers. This contrasts with the R662bn worth of debt issued by about 17 sub-Saharan African (SSA) governments.
SSA countries are focusing on directing capital investments to infrastructure projects. However S&P expects increasing fiscal pressure on African governments due to the low revenues as a result of depressed commodity exports. This means additional revenues will be directed towards servicing debt.
The average fiscal deficit of rated SSA sovereigns is estimated at 5% of GDP in 2016 and just over 4% in 2017, compared with an average of 4.6% between 2014 and 2015. Sukuk issuance could be a means for governments to diversify funding away from borrowing and towards domestic funding, stated S&P.
There is also a lack of clear legal and tax regimes that support a sukuk market, according to S&P. African governments need to address the “legal hurdles” to issuing sukuk. In South Africa, the government’s amendments to legal and tax laws for its first sukuk have enabled the country to grow the market.
S&P also believes the involvement of multilateral institutions (MLIs) could help increase the issuance of sukuk. Technical assistance from MLIs such as the Islamic Development Bank and central banks has help advance the issuance of African sovereign sukuk.
“In our view, the increasing involvement of multilateral institutions is one of the keys to unlock the full potential of the continent’s fledgling sukuk market,” added Mensa.
S&P believes the strong growth prospects, diverse economies, well-developed capital market infrastructure and foreign investment inflows in the SSA region are useful to develop Islamic finance hubs in Africa in future.
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