South Africa proposes extending sukuk to corporate issuers

South Africa's Treasury has proposed extending tax reforms to facilitate the issuance of sukuk, or Islamic bonds, by listed companies after the government did a $500 million debut deal last September.

Sukuk transactions in Africa have been few and infrequent but this is gradually changing as governments see an opportunity to tap cash-rich Islamic investors from the Gulf and Southeast Asia.

Senegal issued sukuk for the first time in June last year while Niger, Nigeria and Ivory Coast are planning debut deals.

South Africa introduced tax amendments in 2011 to allow the government to issue sukuk and this was extended to public entities in April this year. The proposed changes will come into effect in January 2016.

"It has always been the government's intention to ensure that these financing arrangements are accessible to other entities as well as an additional source to raise capital," the Treasury said in the draft of the legislation.

Taxation is often problematic for sukuk because of their asset-backed nature, which means multiple asset transfers may be required for a transaction to take place, creating a heavy tax burden for issuers unless special legislation is in place.

Firms such as South African National Roads Agency Ltd (Sanral) and power utility Eskom have been considering following the government's sukuk deal, which attracted an order book of $2.2 billion.

Sanral has studied sukuk for years but has faced some challenges relating to the transfer of assets and its tax status, the company told Reuters in May.

Both Sanral and Eskom have said they would only sell sukuk if this was cost-effective versus other funding sources.

(Reuters / 28 July 2015)

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UPDATE 1-South Africa's debut sukuk to be at least $500 million

JOHANNESBURGAug 28 (Reuters) - The South African government plans to raise at least $500 million in its first issue of Islamic bonds, a Treasury official indicated on Thursday.

"South Africa is looking to issue a benchmark-size sukuk and the tenor will be in line with other sukuk transactions in the market," Tshepiso Moahloli, director of debt issuance and management, told Reuters.

Traditionally, benchmark size is understood to mean at least $500 million. Five years is the most popular tenor for major international sukuk issues, and South African officials said last year that the country was leaning towards that tenor for its U.S. dollar-denominated sale.

The government has said it was issuing a sukuk in order to diversify its fund-raising. It has hired BNP Paribas, Standard Bank, and KFH Investment, a unit of Kuwait Finance House, to handle investment meetings in Europe, Asia and the Middle East starting on Sept. 8, Moahloli said.

"A sukuk issue may follow but the timing will depend on market conditions."

Ratings agency Moody's issued a provisional Baa1 rating to the expected bond on Thursday, the same level as South Africa's sovereign rating, saying the two were expected to move in tandem.

"Higher domestic savings and investment rates would support South Africa's rating, and, in turn, the sukuk rating," Moody's said, adding that stronger economic growth, less debt accumulation and maintaining sound economic policies were other factors that would be supportive.

Putting the ratings at risk is the possibility of a deterioration in South Africa's debt profile, however the ratings agency expects the government debt to GDP ratio to stabilise within the next two years.

Moody's said the proceeds of the sukuk would be used to buy interest in a portfolio of South African properties.

Sukuk transactions in Africa have been few and infrequent, but governments see an opportunity to tap cash-rich Islamic investors from the Gulf and southeast Asia.

Gambia has long been selling small amounts of sukuk for the domestic market, while last year, Nigeria's Osun State sold a local currency sukuk worth $62 million. Senegal raised 100 billion CFA francs ($208 million) via its first sukuk in June.

Egypt and Tunisia have also considered sukuk but those plans have not yet materialised. Outside Africa, governments looking to tap the sukuk market for the first time include Hong Kong and Luxembourg, both of which have hired banks to arrange investor meetings in September. 

(Reuters / 28 August 2014)

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Islamic banking sector in SA shows healthy growth

ABOUT half of Africa’s population is Muslim and businesses are gearing up to meet the needs of this growing market with Islamic finance and banking products.

Just less than a decade since the market was created, the local Islamic banking sector is estimated to be worth R80.6-billion in terms of assets under management.

On the African continent, the market’s assets are estimated to be more than $1.6-trillion (about R17-trillion) and are expected to surge to more than $5-trillion by 2020. These numbers may seem a stretch, but Africa is home to more than 500 million Muslims — about a quarter of the world’s Muslim population.

The growth of Islamic banking has not gone unnoticed by the National Treasury. Earlier this year during the budget speech, former finance minister Pravin Gordhan revealed that South Africa will launch Islamic bonds — better known as sukuk — before the end of the year. Sukuk are normally based on property or infrastructure and are designed to pay a fixed profit rate rather than a coupon.

Absa, FNB, Al Baraka Bank and HBZ Bank offer Islamic commercial and corporate banking products in South Africa.

Standard Bank has Islamic banking offerings in other countries on the continent, and Nedbank is rumoured to be assessing the possibility of dipping its toes into the market.

Islamic banks do not require their clients to be Muslims. “We are not pushing a religion here. We are pushing a [financial] product that has certain requirements,” said the head of Islamic banking at Absa, Uwaiz Jassat.

Those requirements have to be compliant with sharia law, which prohibits the taking and receiving of interest and also rules out certain other practices in conventional banking.

For example, when Islamic banking clients deposit money in their savings accounts, the lender will then trade the money to earn a return on it and those returns are shared with the customers.

Jassat said this method sometimes beat the return on a conventional interest-bearing savings account.

Last year, the returns for Absa Islamic banking saving accounts were 2% higher than for conventional ones.

So it is not surprising that more people are opting to switch to Islamic banking. About 10% of Absa’s Islamic bank customers are non-Muslim. Although Absa’s Islamic banking division is relatively small, its contributions are quite significant to the parent company’s bottom line, according to Jassat.

Al Baraka, the first stand-alone Islamic bank to operate in South Africa with a full bouquet of financial products, has more than 40 000 customers.

Al Baraka, whose parent company is based in Bahrain, has eight branches nationwide, most of them in Muslim communities. Last year, total assets grew 18.7% to nearly R4.4-billion, and advances swelled 13.1%. Al Baraka’s deposit book grew 18.6% to R619.1-million and the equity finance book increased 23.1% to R126.6-million.

Al Baraka’s CEO, Shabir Chohan, said about 30% of the Muslim population — which is estimated to be more than two million strong in South Africa — was using Islamic banking products provided by local banks.

The total Islamic banking sector in South Africa is estimated to be worth as much as R12-billion. Chohan said this meant his bank had the potential to grow eight to 10 times its current size.

Absa’s Islamic banking division is eager to introduce vehicle and home-loan products. Jassat said that once more products were introduced, “customer numbers will skyrocket”.

However, if it does not move fast, it might end up eating its rivals’ dust. FNB’s Islamic banking unit already offers these products and recently launched a term-deposit product.

The CEO of FNB’s Islamic banking unit, Amman Muhammad, attributed the success of FNB’s Islamic banking products to the fact that they were underpinned by strong values and principles that, he said, covered much more than just finance.

Much like Absa, which is controlled by Barclays, FNB has its sights set on expansion beyond South Africa’s borders.

“Africa provides a large opportunity for growth,” said Muhammad. “Muslim entrepreneurs play an important role in the African economy, so the need to provide appropriate financial services through the correct channel is paramount.

(Business Day / 29 June 2014)

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Senegal Sukuk Shows Way for South Africa, Nigeria to Debut

Senegal beat South Africa and Nigeria to market with sub-Saharan Africa’s biggest sovereign sukuk, clearing the path for the continent’s biggest economies to follow with debut Islamic bonds.

Senegal opened a sale this week for 100 billion CFA francs ($208 million) of the debt that will close July 18, tapping a global market that may surpass record issuance of $46.5 billion in 2012, according to arrangers. Worldwide offerings rose 27 percent to $24.4 billion in 2014 from a year earlier, data compiled by Bloomberg show. Gambia, which shares a border with Senegal, sells sukuk maturing in less than a year weekly, with yields on 91-day notes falling 117 basis points this year to 14.89 percent.

“Other governments on the continent will be watching the issuance with interest,” Sarah Tzinieris, principal Africa analyst at Bath, U.K.-based risk advisory company Maplecroft, said in an e-mailed response to questions on June 25. “With the market still relatively undeveloped in sub-Saharan Africa, the first countries issuing sukuk bonds -– such as Senegal -– are in a strong position to position themselves as African hubs for Islamic finance.”

South Africa, which has the continent’s largest stock and bond exchanges, plans to issue a sukuk this year, the National Treasury said in April. A sukuk is part of Nigeria’s strategic framework through 2017, Patience Oniha, the Abuja-based Debt Management Office market development director, said by e-mail yesterday. Kenya may offer sukuk to broaden its investor base, Treasury Secretary Henry Rotich said two days ago. Nigeria’s Osun state sold 10 billion naira ($61 million) of Islamic debt in September, the first state in the country to sell sukuk.

Capital Needs

Since coming to power in the West African nation in 2012, Senegalese President Macky Sall has shut or combined 59 state agencies and allocated more money to curb water and power cuts in the capital, Dakar. He audited the administration of his predecessor, Abdoulaye Wade, and set up a court to try economic crimes, while reducing Senegal’s inflation rate. Senegal’s economy is set to expand 4.6 percent this year, the fastest pace since 2007, and 4.8 percent in 2015, according to the International Monetary Fund.

“Senegal is issuing sukuk bonds before more developed markets in North Africa, such as Morocco and Tunisia, reflecting the investment-minded approach of the Macky Sall government, as well as its crucial need to raise capital,” Tzinieris said.

The sukuk issuance comes as Senegal plans to sell its second Eurobond, with the nation seeking to raise $500 million by July. Standard Chartered Plc, Societe Generale SA’s local unit and Citigroup Inc. have been appointed to manage the offering, Ange Constantin Mancabou, an adviser to Finance Minister Amadou Ba, said by phone from Dakar yesterday.

Yields Drop

Yields on its notes due May 2021 have dropped 88 basis points this year to 5.97 percent by 10:52 a.m. in Dakar. The average yield on African dollar bonds dipped to a one-year low of 4.97 percent on May 29, JPMorgan Chase & Co. indexes show.

In July 2012, Sudan raised 955 million Sudanese pounds ($165 million) selling Islamic debt, with no issuance since, Osama Saeed, head of the research and statistics section at Sudan Financial Services Co., said by phone from Khartoum, the capital, yesterday. South Africa’s Treasury didn’t immediately respond to e-mailed requests for comment yesterday.

Senegal has the second-largest economy in the eight-nation West African Economic and Monetary Union and is the only country in the region apart from Cape Verde that’s never had a military overthrow of the government.

Half of the debt earmarked for the sukuk has already been sold, Budget Minister Mouhamadou Mactar Cisse told reporters in Dakar, the capital, on June 25.

“The launch of this sukuk bond marks an important milestone for the development of Islamic finance” in West African markets, he said. “It allows Islamic banks and financial institutions to improve their liquidity.

(Bloomberg / 27 June 2014)

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Bahraini bank Al Baraka plans sukuk in South Africa, Pakistan

DUBAI (Reuters) - Bahrain-based Al Baraka Banking Group said it is considering issuing subordinated Islamic bonds through its South African and Pakistani units to boost their regulatory capital.

The Islamic bank's plans come at a time when sovereign sukuk are expected from both countries later this year. [ID:nL5N0JA34X] [ID:nL6N0NK1WR]

The lender has operations in 15 countries across the Middle East, Asia and Africa.

Al Baraka is working with the authorities in South Africa and Pakistan over launching Islamic bonds there, said Chief Executive Adnan Ahmed Yousif.

While details have not been finalised, the prospective deals could mirror the $200 million capital-boosting sukuk issued by Al Baraka's Turkish unit last year, Yousif said. That deal enhanced the bank's Tier 2, or supplementary, capital.

"We will try to do it as a subordinated, to raise capital adequacy ratios," he said.

Islamic banks typically obtain their funding from retail deposits and short-term syndicated Islamic loans, but subordinated deals are increasingly being used as Basel III global banking standards are phased-in across the globe.

In Pakistan, for instance, Islamic banks must maintain a minimum paid-up capital of 6 billion rupees ($60.9 million), a requirement that will be raised to 10 billion rupees by the end of 2016.

Unlike most other Islamic banks, Al Baraka has built the bulk of its business outside the Gulf and southeast Asia. In South Africa, it operates the only full-fledged Islamic bank in the country, with seven retail branches.

Its franchise in Tunisia switched this year from an offshore bank license to a full commercial banking permit, with plans to open 25 branches there in the next three years.($1 = 98.4650 Pakistani rupees)

(Reuters Africa / 19 May 2014)

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South Africa's FNB to appoint new sharia board by year-end

* Sharia board resigned in July after disputes over role

* FNB Islamic division plans expansion in Africa, India

By Xola Potelwa

JOHANNESBURG, Aug 28 (Reuters) - South Africa's First National Bank (FNB) aims to appoint a new sharia board for its Islamic finance division by the end of 2012, after the previous board dealt a blow to the bank's effort in the sector by resigning a month ago.

"It's top priority for us. We are certainly aiming to have our final committee together towards the end of the year," Amman Muhammad, chief executive of FNB Islamic Finance, told Reuters late last week.

Muhammad joined FNB's Islamic finance division on July 1. The previous head, Ebrahim Patel, resigned after the bank conducted an investigation into "internal processes and practices of the businesses aligned to internal governance practice", according to Eric Enslin, head of client management at FNB Wealth, who declined to elaborate on the investigation.

FNB's sharia advisors quit after disagreements over the board's role when the new management took charge of the division, according to former board members.

A bank's sharia board supervises the institution's products and activities and certifies that they comply with Islamic principles.

FNB said its new sharia board would probably be made up of scholars from local and international Muslim communities, as its Islamic finance division would leverage the bank's presence in India and the rest of Africa to grow there.

A new sharia board for FNB, the retail arm of South Africa's second-biggest bank FirstRand, could help its business by increasing consumer confidence in its Islamic products.

"(When) members of the community have no method to get confirmation or comfort from the sharia board, that puts them on guard. They say, 'I'm not getting information from the sharia board, do I continue to deal with the bank?" said South African businessman and FNB client Abdur Moosa.

FNB says Islamic finance is currently not a "material contributor" to its bottom line, but that it intends the business to expand its contribution in future.

BOUNDARIES

Muslims make up only about 2 percent of South Africa's population but the country is looking to establish itself as a centre for Islamic finance in sub-Saharan Africa.

There are no national rules for Islamic finance in South Africa - banks are subject only to conventional banking laws - so the Islamic operations of institutions such as FNB, Al Baraka and Absa are under pressure to demonstrate to the public that their sharia boards are effective.

"Up until we get to a point where we start seeing a concerted regulatory change to the way Islamic banks operate in the country, and defined governance standards specifically around the functioning and the role of sharia boards, we ensure ourselves that through the boards we have, sharia compliance is always adhered to," Muhammad said.

The bank says it has learned a lesson from the recent incident and will draft clear rules and roles for its new sharia board, which will not include approving the appointments of senior personnel - a point of contention with the previous board, according to bank sources.

"In the absence of terms of reference, everybody (wonders) what's the role of the board," said Enslin.

"What is really key is to ensure that there's proper terms of reference and a constitution in place, which will (ensure) roles are quite clear, and their accountabilities."

Businessman Moosa, who has been a client of FNB Islamic Finance for nearly all eight years of the division's existence, said he had not entered new transactions with the bank since the last sharia board resigned.

( Reuters / 28 August 2012)

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