Senegal plans to issue an Islamic law compliant bond in 2014, building on momentum in sukuk issuance globally.
Senegal’s government looks set to issue a type of Islamic bond, known as sukuk as the country hopes to tap financing from wealthy Islamic states. According to reports from a recent meeting of the African Development Bank, Senegal will begin the $200 million sukuk program later this year. The financial certificates will be sold with the help of an affiliate of the Saudi Arabia-based Islamic Development Bank.
The IMF forecasts Senegal’s $15 billion economy will grow by 4.6% in 2014, after a solid 4.0% growth rate in 2013. However, the country’s current account deficit remains elevated, indicating a need to borrow from abroad to finance domestic investment. While the country’s transport and telecommunications infrastructure are well developed, its energy sector remains a hindrance to future growth. A sukuk program could help Senegal lure financing from Gulf states as few nations in Africa have issued sukuk (Gambia and Sudan are two).
Sukuk – Sharia compliant financing
Islamic law, or Sharia, bans the practice of collecting interest, effectively prohibiting traditional bonds. In addition, Sharia stipulates that financial transactions must reflect a real economic activity, which explains the focus on infrastructure spending in Islamic finance. Rather than functioning as bonds, sukuk are financial certificates where the investor shares in the profits of the asset or activity financed.
Muslim countries have driven the growth of sukuk as a financial instrument. Malaysia and the countries that make up the Gulf Cooperation Council issue almost all of the sukuk on the markets to date. Countries like Senegal, where the population is 94% Muslim, stand to gain from the development of sukuk as well. Morocco and Tunisia (among others) reportedly also are considering issuing sukuk.
Outlook for Sukuk
In a recent report, Standard & Poor’s saw the outlook for sukuk financing as trending upwards. They estimated worldwide Sharia-compliant assets to value $1.4 trillion and projected double digit growth through 2016. This helps to boost the profile of sukuk based financing. According to the report, “global issuance expanded for the fourth year in a row in 2012, growing 64% to about $138 billion.” While that represents a small share of the finance industry, issuance has grown impressively from around $20 billion in 2008. As noted before, most of that activity remains in GCC countries. But African countries might be the future for further growth.
Sukuk can help African countries fund their development and investment projects through a more diversified investor base. The process for issuing sukuk can also help deepen domestic capital markets. By setting up the legal and practical framework to support sukuk, financial authorities strengthen the ability of both government and firms to finance new growth.
However, improving access to international capital markets also poses risks. Frontier economies like Senegal have seen increased investor interest in the current global low rate environment. This has led to new scrutiny of frontier economies’ fundamentals and a reversal of investment flows in the future could create problems. As countries like Senegal develop, though, they should welcome the additional investor scrutiny as motivation to strengthen their economic institutions. The planned move to issue sukuk could help accomplish that goal.