1. Should East Africa see Islamic Finance as the next frontier of finance?
Mohammed Ameen Hassen

2. Islam and East Africa A 1450 year old relationship
The history of Islam and East Africa and the deep relationship that it shares is a 1450 year old one. Oftentimes, when we speak of the Hijra our minds rush to the migration of Muslims from Makkah to Madinah, but we leave behind the very important event when the first band of Muslims reached Africa and were given refuge by an East African King.
Thus, as African Muslims, we pay immense homage to East Africa as it is here that the roots of Islam on the continent lay.
In light of the topic Should East Africa see Islamic finance as the next frontier of finance I feel it important to create this linkage to the deep history and relationship between Islam and East Africa.

3. Themes
What is the market outlook for Sukuk and how can Sukuk / Islamic finance contribute to the vibrancy of the East African Capital Markets in terms of risk management, cost of funds, transparency and an increase in investor base?
What needs to be done to develop the necessary infrastructure to facilitate the issuing of Sukuk? To what extent do (further) benchmarks need to be set by the sovereign issuer?
Understanding what Sukuk investors are looking for when deciding where to invest?

4. Extract(s): Thomson Reuters, Sukuk perceptions and forecast study
Market Outlook
Extract(s): Thomson Reuters, Sukuk perceptions and forecast study

5. Issuances – January to October 2017
Supply / Demand (Subscription) (USD mn)
7.27x
5.03x
3.37x
2.25x
4.26x
3.73x
4.20x
2.96x
2.96x
2.27x

6. Preferences Appetite for International growing; easing on ratings
Issuances in USD eliminates currency risk
Quantitative easing program from ECB triggering European investors seeking higher returns in emerging markets
Investors seem to be relaxing their demand for high grade Sukuk, given lower supply levels
Investors with a Shari’ah mandate (window or full) have a stronger preference for lower rating
Rating by credit agencies simplifies process of portfolio selection for investors. Inflow of funds would be a smoother process with a credit rating
Asset-based Sukuk are preferred

7. Main reason for investing in Sukuk
Shari’ah Mandate (Window or Full)
The main reason for investing in Sukuk is diversification
Second thereto is scarcity of alternative Islamic instruments
¼ feel reasonable credit risk is important
Negative debt yields in many countries and low supply of investment opportunities in the international market resulting in demand for reasonably rated (credit) Sukuk from emerging markets

8. Portfolio allocation into Sukuk
What value would be allocated to Sukuk?
20% are willing to allocate >50% of their portfolio to Sukuk
The largest cohort (36%) are willing to allocate between 5% and 24.9% of their portfolio to Sukuk
14% of investors are willing to allocate >$250m into Sukuk from their portfolio
40% of investors are willing to allocate <$25m into Sukuk from their portfolio
16% of investors are willing to allocate between $75m and $150m into Sukuk from their portfolio

9. Global Supply and Demand
Gap expected to widen as short supply (issuances) persist
$bn
2018 F
2019 F
2020 F
2021 F
Total global Sukuk issued
59.0
64.9
71.4
78.5
Total Global Sukuk matured
44.1
56.0
50.1
46.0
Total Global Sukuk outstanding
358.2
367.1
388.3
420.9
Total Sukuk Demand
536.6
588.2
645.2
692.2
Sukuk Supply & Demand Gap
178.4
221.1
256.9
271.3

10. Emerging (Islamic) Markets
Which are the most attractive markets for Sukuk Investment
1/3 of the countries are in Africa
From East Africa, Kenya features
Higher preference for “larger” economies

11. What can be done? What should a sovereign issuer bear in mind?
Liquidity
Most investors would like to see a more liquid secondary market (currency choice; listings etc.)
Lead arranger preference
Most issuers prefer an international multinational lead arranger primarily engaged in conventional financial services
More innovative structures
With majority of all Sukuk issuances utilising similar “vanilla” Shari’ah structures, ¼ of investors and issuers would like to see the use of more innovative structures that can cater for intangible assets
Tenor
The largest cohort prefer 3 – 5 year tenor
Legal and Tax
We have heard very often the need for the legislative environment to be changed and indeed the efforts of sovereigns must be lauded. However, oftentimes the legal environment is amended but the Tax regime is silent on the treatment i.e. it is deemed legal but ambiguity on local tax treatment

12. Summary
While there is certainly a noticeable mismatch between supply and demand – with demand exceeding supply by a few multiples – this does not detract from the fundamental investment principles that are applied generally
There seems to be a cohort of investors that are willing to accept lower rated instruments simply because of the lack of Shari’ah compliant alternatives
Decision to issue Sukuk by a Sovereign or company is no different to the normal decision flow (e.g. amending taxes to increase revenue vs take on debt) – macroeconomic fundamentals still need to stack up

13. Tel (0)
Mail
Web
30 Baker Street, Rosebank, Johannesburg, 2196