South Africa is preparing to launch sub-Saharan Africa's first Islamic bond, paving the way for issues by other countries in the region, officials said on Wednesday.
Thuto Shomang and Monale Ratsoma of the South African Treasury's government borrowing department told Reuters that South Africa was leaning towards a dollar-denominated, five-year sukuk, using an ijara structure.
“It's the one that seems to attract investors' interest. That's the one that the recommendations have been on so far,” said Ratsoma, adding that first-time issuers usually chose five-year tenors so that was what South Africa was considering.
The bond would be marketed to Middle Eastern countries. There are large pools of Islamic investment money in the Gulf, which have been buying sukuk eagerly this year as the global financial crisis hurts many other investments.
“On this deal we really have to go out and talk to them because we don't know what their response will be and we don't want to have a failed transaction the first time around,” said Shomang.
The Treasury put out a request for proposals in December and has appointed two consortiums led by Standard Bank and BNP Paribas to make the issue. Bahrain's Al Baraka Banking Group, Kuwait's Liquidity Management House, Nova Capital Partners and Regiments Capital are also involved, banking sources said.
Islamic finance prohibits interest payments so sukuk are structured to provide returns to investors in other ways. In a common form of ijara deal, the originator sells assets to a special-purpose vehicle and then rents them back at a price which gives investors in the sukuk a profit.
The South African Treasury is still deciding the precise timing of the issue, and is also considering a sukuk sale to domestic investors.
Kenya, Nigeria and Tanzania have also been planning sukuk issues, and a successful sale by South Africa could encourage them to put those plans into operation.
Muslims make up only 2 percent of the population of South Africa, which has a BBB+ foreign currency credit rating from Standard & Poor's, so the country seemed an outside contender to be the region's leader in Islamic finance. But it has been seeking to diversify its investor base, and its Treasury has the financial sophistication to explore new funding methods.
“I know there's jostling between Kenya, Nigeria and South Africa on who wants to take the lead, but I think the country that actually issues sukuk and attracts investment into the sukuk market is going to determine the key infrastructure for the development of Islamic finance,” said Amman Muhammad, an Islamic banker in South Africa.
In its 2012/2013 budget, announced in February, South Africa's Treasury said it intended to borrow $3 billion in global markets over the medium term to maintain benchmarks in major currencies and meet part of its foreign currency commitments.
Finance Minister Pravin Gordhan has said developing Islamic finance and issuing sukuk would encourage new forms of foreign investment beyond traditional Western funding.
“The dollar sukuk is directly linked to and intended to attract FDI (foreign direct investment) into South Africa. When you create a sukuk you promise a sharia-compliant return, and immediately the Muslim countries sit up and notice - the petrodollar countries,” Muhammad added.
“When you marry the sharia-compliant return with an emerging market economy like South Africa...it actually becomes quite an attractive proposition in your investment portfolio, to be able to invest in a country like this.”
Meanwhile, issuing a domestic sukuk could help to develop a local sukuk market and resolve a problem faced by South Africa's Islamic financial institutions.
They have to hold certain amounts of government securities to satisfy central bank reserve rules; since they have been restricted to buying conventional securities, they have obtained interest which they have then had to give away to charity, bankers and Treasury officials said.
If they were able to satisfy reserve requirements by holding sukuk, they could avoid the financial loss. -Reuters