By Africa Links 24
Published on 2024-04-04 10:13:09
In 2023/24, Africa’s three largest economies – Nigeria, South Africa, and Egypt – collectively raised a significant amount of public debt funding through three sukuk issuances, totaling $3.045 billion. Sukuk is an Islamic debt instrument that differs from conventional bonds in that the finance provider has ownership of real assets and earns a return sourced from those assets, as opposed to earning interest, which is prohibited under Sharia law.
As the IMF warns of the growing challenge of high sovereign debt servicing costs for low-and-medium-income countries (LMICs), sukuk is emerging as a viable and potentially less costly alternative for public fundraising. The rapid increase in public debt servicing costs, annual refinancing needs, and the impact on national budgets have led LMICs to explore alternative funding options such as sukuk.
Egypt, Nigeria, and South Africa have ventured into the sovereign sukuk market as part of their fundraising strategy, along with conventional bonds, IMF standby facilities, and other financing options. While global outstanding sukuk volumes have grown, African sovereign sukuk issuance remains low, with Egypt, Nigeria, and South Africa contributing only 2% of global sukuk volumes in 2023.
The complexities and evolving legal requirements related to sukuk issuance have made African sovereigns hesitant to use sukuk for large infrastructure projects. However, with the support of multilateral financial institutions, some African countries have successfully issued sukuk to address their infrastructure financing needs.
The demand for sukuk issuances by Egypt, South Africa, and Nigeria has been robust, with investors comfortable with the country’s credit risk. Despite challenges such as lack of market depth and awareness, these countries are likely to continue leading the sukuk expansion in Africa.
Egypt, South Africa, and Nigeria have all issued sukuk to fund key infrastructure projects, demonstrating their commitment to leveraging Islamic finance for development. The potential for sukuk to contribute modestly towards closing infrastructure financing gaps in frontier markets is evident, and efforts by international financial institutions to promote sukuk issuance in LMICs are gaining traction.
Overall, the sukuk issuance learning curve for Africa is steep, with only a few African sovereigns having issued sukuk to date. As the popularity of sukuk grows globally, African countries have the opportunity to leverage this Islamic finance instrument for sustainable development and infrastructure financing.
