Africa’s extensive infrastructure development needs create a fertile environment for the growth of sukuk issuance over the next decade, said S&P Global Ratings in its recent report.
“We believe African sukuk can provide diversification benefits for Islamic investors as well as additional financing opportunities,” said S&P Global Ratings Credit Analyst Samira Mensah.
“Moreover, we think sovereign sukuk issuance could, in the long term, facilitate the development of Shariah-compliant private-sector sukuk on the continent. Given Africa’s significant funding and infrastructure needs, sovereigns there could benefit from an active sukuk market,” she added.
Yet so far the market comprises only US$2 billion of sukuk from a handful of issuers. By contrast, 17 sub-Saharan African (SSA) governments S&P rated issued $46 billion of conventional debt in 2015 alone.
Despite sukuk’s widespread appeal to investors, S&P expects that only a few African countries will tap the sukuk market over the next 12 months, for several reasons.
One of which is the general lack of clear legal and tax regimes to support a thriving sukuk market, and in many cases, the complexity of structuring sukuk could deter issuance. However, multilateral institutions could become increasingly important in enabling countries to enter the sukuk market. This was illustrated by Senegal’s issuance of sukuk in 2014 and 2016, aided by technical support from the Islamic Corporation for the Development of the Private Sector.
S&P sees 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.
“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,” Ms Mensah added.