Photo: IOL
Photo: IOL

Sukuk investment explained

By Supplied Time of article published Dec 31, 2018

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Durban-based Al Baraka Bank has become the first South African financial institution to issue a Tier 2 Capital Sukuk, a Shariah-compliant investment and attractive alternative to conventional bonds, raising R200 million from the retail market, capacitating the bank to target a broader market.

The bank's issuance decision is in line with an escalating international trend, with the Sukuk market globally demonstrating considerable growth in recent years. 

Sukuk issuances world-wide totalled a massive US$116.7 billion in 2017 growing by around 32% from the US$ 87.9 billion achieved in 2016 as reported in the 7th Edition of the International Islamic Financial Market Sukuk Report for April 2018 . Indications are that the market will continue to grow in the years ahead.

Commenting on Al Baraka’s Sukuk issuance Financial Director, Mr Abdullah Ameed, said: "Most encouragingly, our Sukuk initiative has been fully subscribed - raising R200 million - at the end of October this year. Initially it was gradual to gain traction because this type of investment structure was new to the South African Islamic market, we are most gratified to have achieved the target by raising these funds from the retail market. 

The Sukuk enables us to grow our advances book by both creating direct cash flow from its proceeds and also allowing us to leverage its capital effect as required by regulation."

A total of 94 people and institutions have invested in this, South Africa's inaugural Tier 2 Capital Sukuk by a bank. With the issuance restricted to this country, local investors comprised primarily of individuals in the professional and business sectors, with a number of institutions also joining the investor base.

"Because of the little-known nature of Sukuk and its risks and rewards in South Africa, we adopted a one-on-one, soft marketing approach to presenting and securing acceptance of the concept, which proved most successful. 

Although fully-subscribed at this time, we now have numerous prospective investors showing great interest in the Sukuk investment concept which, based on the risk involved, yields an encouragingly higher rate of return to holders."

"This makes it a most attractive investment vehicle and because of the popularity it has gained, we intend giving serious consideration to further capital issuances in the future, as a means of further stimulating the growth of the bank," Mr Ameed said. 

He added that one of the benefits of Sukuk is that, once established as a vehicle, it is tradable between a willing buyer and willing seller. "Sukuk are transferable and amalgamate the characteristics of debt and equity."

"Al Baraka Bank chose to look beyond share capital - its traditional source of capital - considering alternatives and selecting Sukuk; an uncharted territory for our bank. After careful consideration and following professional advice, we opted to prepare a Shariah-compliant Sukuk structure, approved by our Shariah Board. 

We were very pleased to have received approval from the South African Reserve Bank for a Sukuk issuance, on a Tier 2 Capital basis, for the raising of R200 million, Mr Ameed said.

Al Baraka Bank has created a special purpose vehicle, Al Baraka Sukuk Trust, to manage the flow of investments from Sukuk holders to the bank. Adv AB Mahomed SC, a founding director of the bank and current Chairman of the Al Baraka Sukuk Trust expressed his delight at this significant event. 

"Apart from the fact that Al Baraka Bank had been a trailblazer for the first fully Shariah compliant banking in Southern Africa, the successful subscription of the R200 million Sukuk is another historic milestone for Islamic Finance in South Africa as well as a new challenge for the South African economy" said Adv Mahomed.

Sukuk is Arabic for investment certificates, issued for the purpose of raising money for utilisation within a corporation or Government entity. In 2014 South African National Treasury successfully concluded a $500 million Sukuk issuance in international capital markets, in spite of the concept's relative obscurity in South Africa as a viable investments vehicle.

Islam's prohibition of interest precludes Muslims and Islamic financial institutions, such as Islamic banks, Shariah compliant equity funds and Islamic insurance companies, from investing in interest-bearing bonds. 

The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) defines Sukuk as certificates of equal value that 'represent undivided shares in the ownership of tangible assets, usufruct and services.' As in the case of bonds, Sukuk have a maturity date and Sukuk holders receive regular income streams. In contrast to bonds, however, these income streams and terminal values are not guaranteed, because Sukuk represents an undivided share in the ownership of the underlying asset. The generation of income streams and terminal values are, therefore, wholly dependent on the underlying asset's performance.

Mr Ameed added: "We are most grateful to the investors who have supported us in becoming the first South African bank to venture into Tier 2 Sukuk, as an investment vehicle. We look forward now to growing the South African market for the mutual benefit of all our stakeholders including prospective new customers”

Islamic finance is making sizeable gains in the South African and African markets. According to a recent Moody's Investors Service Report, Islamic finance is set to grow steadily across Africa as financing needs increase and global investors become more comfortable with the legal structure of Islamic debt securities. The South African Government has, in recent years, made amendments to financial legislation here to better accommodate Shariah-compliant banking and investment products and services, leading to enhanced public recognition of the attractiveness of Islamic banking amongst South Africans.

In a September 2018 statement, the renowned credit rating agency indicated that Africa's large Muslim population will provide a solid foundation for the growth of Islamic banking assets. Moody's believes the share of Islamic banking assets, as a percentage of total African banking assets, is likely to rise to more than 10% during the next five years, from its current level of under 5%.


Sukuk is Arabic for investment certificates, issued for the purpose of raising money for utilisation within a corporation or Government entity. A Sukuk may be used to raise capital or liquidity, depending on the need of the Entity raising the funds.

 In 2014 the South African National Treasury successfully concluded a US$500 million Sukuk issuance in international capital markets, in spite of the concept's relative obscurity in South Africa as a viable investments vehicle.


Based on the capital structure of the funds required, such funds could have been raised via a share capital issuance and/or an equity/debt instrument. The Sukuk met the equity/debt characteristics for tax and accounting purposes, as well as Shariah requirements, and was, therefore, regarded as the most appropriate structure for the type of capital Al Baraka Bank was looking to raise. 


The shariah-complaint structure of the instrument is the main differentiator.

The Islamic banking model used is Mudaraba, which is a profit-sharing model. The contributors of funds are Sukuk-holders and normal depositors, while the Bank is the applier of skills.

The Bank finances assets for customers and makes a profit on the sale of these assets. It then shares the profit with Sukuk-holders and depositors in line with a predefined ratio, retaining a share for itself.  


As with all Al Baraka Bank products, the Sukuk is not restricted to Muslims, but is available to all South Africans.


For the South African consumer, this is a new form or investment into a debt/equity instrument and is one which offers a higher return paid to the investor. This creates an additional choice within the investment market and enables investors to add a diversification component to their portfolio.

For the Bank, this creates a new source of capital, compared against its traditional source of Share Capital.


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