Islamic finance: Sukuk for Senegal

When Senegal issued a 100bn CFA franc ($168m) sovereign Islamic bond in June 2014, it beat economic giants Nigeria and South Africa to market and began a race to create a hub for Islamic finance in Africa.

Following Senegal's Islamic bond, or sukuk, Nigeria, Niger and Côte d'Ivoire have also expressed interest in developing a sharia-compliant sector of the market in a bid to attract investment from the Gulf states.

Senegalese officials are optimistic about the country's prospects. "We have a dynamic financial centre in Dakar," says Alioune N'Diaye, the finance ministry's director for money and credit.

"We have an Islamic bank in Senegal, the Banque Islamique du Sénégal, we have the advantage of a good relationship with the Islamic Development Bank (IDB) and we are the first country to explore these opportunities in the region. We have a population of 95% Muslim people as well. It has been a long time in planning, but we think that we can be a hub for Islamic finance in Africa."

Traditionally, Senegal has looked towards the West for loans, borrowing from lenders such as the World Bank, the International Monetary Fund and France.

In 2011, Senegal issued a $500m eurobond, marking a change of course in its borrowing patterns.

But with a gradual readjustment of tax and other laws to be able to accommodate sharia-compliant financial instruments and growing ties with Gulf states such as Saudi Arabia, Kuwait and the United Arab Emirates, Senegal could become a prime destination for Arab investors who are looking for higher returns on their money.

Resilience

"We saw that the Gulf countries had an excess that they wanted to invest but in a sharia-compliant way," says N'Diaye.

"To attract this investment, we set up sharia-compliant instruments. With the debt crisis in Europe, we saw that Islamic finance was more resilient. The 2008 financial crisis was due to speculation, so we can see that Islamic finance is more attractive."

Islamic financial instruments take into account basic investment principles set out in Islamic law, or sharia.

These include not charging interest, not investing in sectors forbidden by Islam, investing in a tangible asset and the sharing of profit and loss between the lender and borrower.

In Senegal's case, the 2014 sukuk used the finance ministry's administrative building as the asset in which to invest.

Senegal's stability is what makes it an attractive investment opportunity for Arab countries, says Mouhamadou Lamine Mbacké, the managing director of the Dakar-based Institut Africain de la Finance Islamique, an advisory and training organisation that has worked with the government on developing Senegal as a centre for Islamic finance.

"West Africa is a natural destination for Islamic finance. And in West Africa, Senegal is probably the most stable country. I think we can attract a lot of direct investments."

Mbacké argues that there is a cultural shift happening in the region, with countries such as Senegal throwing off their traditional connections and turning instead to countries with whom they share ideological principles.

The launch of the sukuk gave Senegal a huge amount of publicity in the Gulf and has opened the doors for investors in other areas of Islamic finance.

"I don't think that Senegal is very well known as far as investors in Islamic finance are concerned, because it is more the English-speaking countries [that are known]," says Mbacké.

"But the sukuk gave a lot of attention to Senegal. I think from the issuance of the sukuk, many Islamic finance investors are now coming to Senegal."

Enthusiastic lenders

According to the government, which in 2014 launched its five-year Plan Sénégal Emergent (PSE) to grow Senegal's economy significantly by 2018, Arab investors are now one of the main lending groups in the country.

At the PSE meeting in Paris in 2014, at which donors pledged 3.7trn CFA francs of new money to help Senegal with infrastructure development, 38% of the money promised was from Arab investors.

"The IDB pledged 550bn CFA," says Moustapha Ba, the director general in charge of finance at the ministry of finance, "and after one year we have received 182bn CFA francs of that money. The IDB is now the main lender in Senegal. There is a very strong trend towards non-traditional Arab lenders."

But while Senegal seeks to position itself as sub-Saharan Africa's first choice for Arab investors on the continent, obstacles still remain.

"You need a regulatory framework for Islamic finance to take place so that investors are not disadvantaged from a taxation standpoint," says Samira Mensah, a financial services analyst specialising in Islamic finance at Standard & Poor's.

"Senegal used the existing conventional regulation of the Union Economique et Monétaire Ouest Africaine as well as regulation specifically introduced by the ministry of finance to be able to issue the sovereign sukuk. Senegal hasn't yet met the conditions to become an Islamic finance hub. They need time to develop Islamic finance alongside conventional finance and to deepen the offer of Islamic instruments, otherwise investors won't buy into it."

However, Mensah says, Islamic financial instruments such as sukuk are suited to the Senegalese economy. "The idea of issuing the sukuk was to develop infrastructure projects, so this is a very good fit. Africa in general is a good fit for Islamic finance. To develop infrastructure you need long-term funding and to diversify your funding base, and to provide investors with investment opportunities. 

To issue sukuk, you need real estate assets, and Senegal has plenty of land which is not yet developed. It is a perfect match."

Mbacké agrees: "Investing in [sub-Saharan Africa] is more profitable than investing in the Western world because the cost is lower, the return is higher and everything has yet to be done in Senegal." Mbacké's organisation has its sights set on opening an Islamic bank in Senegal and will begin by starting an Islamic microfinance institution later this year to provide small businesses with sharia-compliant loans.

"Microfinance is a big industry," he says, "but interest rates are going over 30%. We think that Islamic finance is the solution because there are no interest rates and also because we finance assets, not money. We think that Islamic finance will keep the advantage of the conventional microfinance and that it will take away the bad parts,which is the interest rates."

If, after two years, he says, the microfinance institution is going well, they will look for investors to start a bank.

More bonds to come

One Senegalese microfinance institution has already had some success.

Le Millénium Compagnie Islamique du Sénégal started off under another name in 2002 and had 14 outlets and about 7,000 customers by 2011.

According to Standard & Poor's, worldwide sukuk issuance could reach $115bn in 2015, with Malaysia and Saudi Arabia leading the market.

In March, Senegal's President Macky Sall said the government would sell $500m of standard bonds in the international market and could issue more Islamic bonds to help finance the budget.

In April, the government voted in a law to allow waqf, or funds that distribute resources for social projects.

The Senegalese government is also in the process of launching a project with the IDB to modernise the country's daaras, or Koranic schools.

"We are thinking about complementary ways of diversifying our economy," says money and credit director Alioune N'Diaye.

"Conventional finance has its place and will keep that place, but we will also have the opportunity to use Islamic finance. Islamic finance is a really dynamic force today, which we hope will bring results.

(The Africa Report  30 September 2015)

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West Africa an Emerging Market of Islamic Finance

Dakar - There is an ample scope of Islamic banking and finance in western African region and Senegal can play a vital role in elevating it through the countries. It was spoken by Muhammad Zubair Mughal, Chief Executive Officer AlHuda Centre of Islamic Banking and Economics (CIBE) while attending an international seminar on Takaful that was held at Dakar Senegal. Delegates from Senegal, Mali, Ivory Coast, Mauritania, Guinea and other neighboring countries of western Africa participated in the stated seminar.

Mr. Mughal further added that Senegal situated in Western Africa has a population of 14 million carrying 95% Muslim population. Due to Muslim tendency, it has growing demand for Islamic financial products. If Senegal pursues the marketability of Islamic finance it will directly impact rest of the stakeholders of western Africa that wholly depend upon the expertise of Senegal. Senegal ensuring its advisory to other western African countries through central bank (UEMOA) that is comprised of (08) eight member countries i.e. Benin, Burkina Faso, Cote d'Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo.

Promoting Islamic banking and finance means direct growth of Shariah compliant banking and finance in Senegal, he exclaimed that it is worth noticing that Senegal with very less potential technical capacity, runs a full fledge Islamic bank, Islamic microfinance and Sukuk organizations that is appreciable. Senegal can attract banks and other Islamic banking and finance institutions from countries like Middle East and Malaysia to open their branches in Senegal or to start up new projects over there. Through this, Senegal can be succeeded to attract ample FDI in the country that will not only increase Islamic banking and finance industry but also prove to be the source of prominent progress in business and other pertinent fields. It can serve as a healing power for the poor living in western Africa through Islamic microfinance further leading to poverty reduction and socio economic progress.

Mr. Mughal added that AlHuda CIBE has chalked down a robust strategy to promote Islamic banking and finance in West African countries so that the fruits of shariah compliance could reach to the region. It is how these countries can start progressing towards development and come out of the box of under development. He announced a special wing for French speaking countries that will be situated in Dubai. It is how shariah compliance could reach to French people and they could take maximum benefit out of it and Islamic banking and finance could also reach to its sublime a as a good number of Muslim population lives in French speaking countries. He made announcement that AlHuda CIBE with its strategic partner AAMAS Africa will organize an international conference on Islamic banking and finance in Dakar by December 2015.

-Ends-

About AlHuda CIBE
AlHuda Center of Islamic Banking and Islamic Economics (CIBE) is a well recognized name in Islamic banking and finance industry for research, advisory and capacity building over the last ten years. The prime goal has always been to remain stick to the commitments and provide state-of-the-art Advisory Consultancy and Education through various well recognized modes viz. Islamic Financial Product Development, Shariah Advisory, Trainings Workshops, and Islamic Microfinance and Takaful Consultancies etc. Side by side through our distinguished, generally acceptable and known Publications in Islamic Banking and Finance.

We are dedicated to serve the community as a unique institution providing Services not only in UAE/Pakistan but all over the world. We have so far served in more than 25 Countries for the development of Islamic Banking and Finance industry so far.

(Zawya / 01 Jun 2015)

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Islamic Finance -- a Potent Tool to Address Most Pressing of Development Challenges

Even though it still remains a small share of the global financial system, Islamic finance industry has expanded rapidly, with annual growth rates of 10 to 15 percent over the past decade. And today, Shariah-compliant financial assets are estimated to be close to U.S. $2 trillion, compared to roughly U.S. $200 billion in the late 1990s. Many countries already have sizeable Islamic finance industries, including Bahrain, Brunei, Indonesia, Islamic Republic of Iran, Malaysia, Pakistan, Sudan, and the UAE. There is also a growing interest in Islamic finance from non-Muslim countries (for example, the United Kingdom, Hong Kong SAR, China, Luxembourg and South Africa), providing further evidence that this hitherto niche market has entered into the mainstream of global finance.

So, what is behind this success? Islamic finance principles adhere to best practices coming from common sense and that's what adds a special appeal to it. These distinct features characterize Islamic finance:

• avoidance of debt and prohibition of "interest"
• promotion of risk sharing, so that the relationship between the borrower and thelender is based on shared business risks and returns,
• prohibition of contracts with high uncertainty and a requirement for full disclosure before, during and after the contract
• a requirement that financial transactions be linked to real assets
• promotion of socially responsible and ethical finance

Not only is Islamic finance gaining broader recognition in financial markets, it's also becoming a viable "alternative" source of funding to address pressing developmental challenges, eliminate extreme poverty and boost shared prosperity in developing and emerging economies. Why do I think Islamic finance has this potential?

First, Islamic finance can make significant contributions to economic development, given its direct link to physical assets and the real economy. The use of profit- and loss-sharing arrangements encourages the provision of financial support to productive enterprises that can increase output and generate jobs.

Second, by expanding the range and reach of financial products, Islamic finance could help improve financial access and foster the inclusion of those who are now deprived of financial services. Notably, Islamic finance emphasizes partnership-style financing, which could be useful in improving the access to finance for the poor and for small businesses.

Third, Islamic finance helps strengthen financial stability: there is some empirical evidence that Islamic financial institutions may be more resilient to unforeseen shocks, thereby contributing to overall financial stability.

In the World Bank, we recognize the cross-cutting relevance and importance of Islamic finance across a range of development solutions. The Finance and Markets Global Practice is expanding the use of Sharia-compliant modes of financing in World Bank Group operations, thereby delivering important benefits to our client countries. For example, recent operations in Egypt and Turkey have leveraged Sharia-compliant solutions to expand financing for small and medium scale enterprises through long-term Ijarah contracts (operating leases) to finance the acquisition of fixed assets as well as asset-backed Murabahah contracts (mark-up financing) for their working capital needs.

Despite its recent years of rapid growth and the obvious potential for development financing, we should recognize that Islamic finance is still in early stages of development. The industry will also need to address several challenges, such as establishing robust legal, accounting, regulatory and supervisory frameworks, improving risk management techniques, increasing the number of skilled Islamic finance professionals, and standardizing contract documentation and structures. As the World Bank Group continues to advance this agenda, we look forward to helping the industry at large and our client countries in particular to address these challenges. We are also expanding our efforts in promoting the systematic and sustained use of relevant knowledge of Islamic finance to raise awareness, build consensus and promote the worldwide use of Sharia-compliant financing instruments.

(Huff Post Impact / 21 May 2015)

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The Globalization of Islamic Finance

Islamic finance remains one of the bright spots in the global financial industry post the 2008 financial crisis. Despite two decades of strong growth, the industry is now finally poised to break into conventional financial markets in the West.

Islamic finance is comprised of instruments, infrastructure, institutions, and markets that apply Sharia rules and principles. You might be wondering how Islamic finance impacts you, if you’re based in a non-Muslim country. Increasingly it’s being viewed as an avenue of growth for global banks, as the industry caters to the world’s 1.6 billion Muslims.

The advent of Islamic finance allowed devout Muslims the ability to access financial products and services without compromising on their beliefs. As a result, total global Islamic banking assets are projected to surpass US$2 trillion in 2014.

The Islamic finance sector is primarily comprised of Islamic Banking, Sukuk (Islamic Bonds), Takaful (Islamic Insurance), and Islamic Mutual Funds. The geographic centers of Islamic finance are primarily in Asia (Malaysia and Indonesia) and the Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates).

At its core, Islamic finance is governed by fundamental principles outlined in Sharia law. The main distinction between conventional finance and Islamic finance is that the latter prohibits riba (usury/interest). Thus, virtually all Islamic finance products are based on the principle of risk sharing as opposed to risk transfer.

For example, an Islamic mortgage transaction would entail the bank purchasing a property and then reselling it to the homebuyer at a fixed profit. The buyer would then have the option to make the payments in installments. However, due to the concept of risk sharing, the bank could not charge additional penalties for late payments but would retain ownership until the loan was paid off.

Global Investors and Islamic Finance

For global investors, the sukuk (Islamic bond) market is probably the area of greatest interest within Islamic finance. The sukuk is an asset-backed security, which represents ownership in a tangible asset. With a sukuk the initial face value of the bond isn’t guaranteed. Unlike a conventional bondholder, a sukuk investor shares the risk from the underlying asset.

In practice, some sukuks are issued with repurchase guarantees, which would result in the investor receiving face value at maturity, much like a conventional bondholder. However, not all Sharia scholars agree this structure isSharia compliant.

Traditionally, governments and government-related entities in Asia and the Gulf Cooperation Council (GCC) issuedsukuks denominated in the local currency to domestic investors. However, increased demand from global investors has led to increased cross-border issuance from non-traditional sources.

Last September, rating agency Moody’s observed,

The year 2014 has become a landmark year for sovereign sukuk, with the UK issuing its inaugural sukuk, and with Hong Kong and South Africa expecting to conclude sales in September 2014. All three are major non-Islamic countries, and the transactions indicate a significant change in the potential size, depth, and liquidity of this market.

This move into sukuk finance by countries with populations that are not predominately Muslim marks a shift in the long-held perception that Islamic finance is the domain of Muslim countries.

In an effort to assist countries that seek to issue sukuk, Islamic institutions like the Islamic Corporation for the Development of the Private Sector offer help with the structure of sovereign sukuk finance.

(Casey Research / 28 January 2015)

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Sukuk for vaccine fund ushers Islamic finance into ethical sphere

The latest entrant into Islamic finance is leading the industry in the new direction of socially responsible investment - which could even include the fight against Ebola.

Last week an immunisation programme secured a $500 million issuance of Islamic bonds, or sukuk, in the largest debut issue ever by a global non-profit organisation, under a broader trend to use bond markets to fund development and humanitarian projects.

The sukuk from the International Finance Facility for Immunisation Co (IFFIm), for which the World Bank acts as treasury manager, is a break from the predominantly commercial nature of most Islamic finance transactions.

The deal is part of World Bank efforts to adapt sukuk for use in a variety of ethical pursuits, including advising the Dubai government on a funding strategy for the emirate's green investment programme.

IFFIm, backed by nine sovereign donors including Britain and France, will use the proceeds of its sukuk to finance projects for the Global Alliance for Vaccines and Immunisation (GAVI) and is open to using the format again.

"It's a natural market for us. These kind of socially responsible investments are very much aligned with the core principles of Islamic finance," IFFIm Board Chair Rene Karsenti told Reuters.

The sukuk helped IFFIm diversify its investor base and secure competitive pricing, but also helped raise the profile of GAVI activities among Muslim-majority countries.

The sukuk could encourage other non-profits to consider this funding tool, while Gulf countries could be inclined to become GAVI donors themselves, said Paris-based Karsenti, who is also president of the International Capital Market Association.

Founded in 2000, GAVI has financed immunisation efforts in 73 countries, with half of its investment directed to 33 Muslim-majority countries, including Yemen, Mali and Indonesia.

"Sukuk is not new but what is new here is that it is associated with a socially responsible vehicle. We hope we can lead the way for other similar institutions to use the market."

Islamic finance follows religious principles which forbid involvement in businesses connected with gambling, tobacco or alcohol, but has only recently begun to explore wider social responsibility.

Future sukuk from IFFIm could help reinforce that change by financing other high-profile immunisation efforts, and GAVI is actively in discussions over taking a role in fighting Ebola when a vaccine becomes available, Karsenti said.

(Reuters / 05 December 2014)

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Islamic Finance Budding Slowly in Russia

There are at least 10 million Muslims in Russia, but only four public organizations where they can invest and borrow in compliance with the Quran.

Islamic finance is a fast-growing field worldwide, and proponents say it offers both ethical and practical benefits to the faithful and non-Muslims alike. Russia, however, lags behind in the industry, analysts and Russian Islamic financiers interviewed by The Moscow Times agreed.

Russian Muslims are slow to change their financial habits, while nonbelievers are plagued by a deep-rooted distrust of Islam — as are, to some extent, the financial authorities, who are in no hurry to adapt economic legislation to facilitate Islamic banking, analysts said.

"The religious renaissance that spans all creeds in Russia does not mean people rush out to seek services that comply with their religion," said Andrei Juravliov, a leading expert on Islamic finance who teaches at Moscow State University.

Still, an Islamic finance industry has been budding over the past decade in Russia, and analysts and players show cautious optimism about its prospects.

"The niche is small, but the demand is better than, say, seven years ago," said Rashid Nizameyev, the head of finance house Amal, which is one of those four venues to provide Islamic banking services.

"There are more believers now … though only a fraction try to actually live by their religion's customs," said Nizameyev, whose organization is based in Russia's predominantly Muslim republic of Tatarstan.

No Money From Money

The core tenet of Islamic banking is a ban on riba, or interest, and loaning money for profit. The ban comes straight from the Prophet Muhammad, and is spelled out in the Quran.

On the face of it, such a ban should eliminate any possibility of sharia-compliant banking — but this is not actually the case.

The ban on "riba" prohibits making money from money. So instead, Islamic banks earn profits by co-investing in their clients' goods and businesses (see table for examples.)

Practice	Conventional Banking		Islamic Banking	Difference
Consumer Credit / Murabahah	Bank loans money to the client to buy goods and services		Bank buys goods / services for the client, resells it to them	The bank offers: money vs. goods / services
Joint Venturing / Musharakah	Bank loans money to the company, earns money through interest		Bank (co-)invests in a company, earns a portion of any profits	Bank gets money: regardless of company's performance vs. only if the company turns a profit

Islamic banks are also banned from financial speculation of any kind — where, again, money is made from money — as well as from investing in haram, or sinful, products, such as alcohol, pork and gambling.

The meticulously worded practices have seen a fair share of criticism from those who say they are just a piously worded cover-up for conventional banking.

This may be true in some cases, conceded Nizameyev of Amal.

But in general, true Islamic banking is more client-oriented: banks are supposed to go easy on borrowers in case of emergencies that render clients unable to pay, even up to forgiving their debts, said Juravliov of Moscow State University.

Moral vs. Financial Merit

The ethical nature of Islamic banking operations is one unquestionable — if nonmonetary — advantage of this practice, said Rinat Gabbasov, director of the Russian Center of Islamic Economics and Finance.

It can also at times prove an obstacle. Amal once had to refuse a prospective client who worked in a private security firm that guarded a distillery, said Nizameyev.

"Security services are good in and of themselves — but sadly, alcohol production is not," he said.

The financial merit of the Islamic system is a more complicated issue. Gabbasov said Islamic banking offers better interest rates, and Nizameyev claimed that Amal's investment portfolio had brought in returns of almost 21 percent in 2013, compared to the market average of 15 percent.

However, Juravliov of Moscow State University said that in general, Islamic banking operations are less profitable than conventional banking.

On the other hand, Islamic banking is more client-friendly, he said.

Thanks to its ban on financial speculations, interest in Islamic banking has even peaked worldwide since the last recession — though not necessarily in Russia.

Recent Invention

Nizameyev of Amal embraced finance first and Islam second.

Though always a believer, he was often negligent about practicing his faith until a routine class trip to a mosque as part of a religious studies class at the Kazan State Finance and Economics Institute in Tatarstan changed his ways, he said.

"I just felt something there, on a physical level," the 33-year-old said.

He spent several years in conventional financial organizations before founding Amal, which offers halal financial services, in 2011.

He said that he trained himself in Islamic finance through self-study, though several colleges in Russia now offer courses on the subject.

Islamic finance is generally a recent invention, first developed in the 1960s. It has since grown to an industry with $1.3 trillion in assets as of 2012, according to last year's Islamic Finance Development Report based on data by Thomson Reuters.

Among the powerhouses of Islamic banking are Malaysia, Saudi Arabia and Iran, although banks in many Western countries, including Britain and the United States, also offer halal-friendly banking services.

The first bank to offer Islamic financial services in Russia, Badr-Forte, folded in 2006. The industry has been gradually sprouting ever since and lately seems to be making headway.

Several non-Islamic Russian banks have attracted halal investment in recent years, including Ak-Bars Bank in Tatarstan, which brought in a total of $160 million in two investment deals in 2012 and 2013.

But despite these signs of growth, the country's pool of officially registered Islamic financial institutions remains limited to two organizations in Tatarstan and two in the republic of Dagestan in the North Caucasus, said Gabbasov of the Russian Center of Islamic Economics and Finance.

Analysts agreed that the Islamic finance market is at an "embryonic stage" in Russia. Juravliov estimated the total volume of assets managed by Russian halal financial institutions at $10 million, a blip on the radar for the country's banking system, whose total assets stood at 57.4 trillion rubles ($1.7 trillion) in 2013.

Nizameyev declined to disclose the size of Amal's assets.

Practice What You Preach

The prospects for growth may seem glorious, given the size of Russia's Muslim population. Muslims were estimated to make up 7 percent of the populace, or about 10 million people, by independent pollster Levada Center in 2013. In 1991, that figure was just 1.5 million.

However, many new believers are slow to change their practical habits, Juravliov said.

"Religion is one thing for them, and everyday life is another," he said.

Russian regulations are also poorly suited to Islamic banking: Russian banks are supposed to refrain from trade operations, in which they would technically engage when providing many Islamic banking services.

"We do not expect the regulations to change any time soon," Nizameyev said with a tinge of fatalism. His company circumvents the problem by registering as a "finance house," not a bank.

Another problem is widespread distrust of Islam, a result of the 15 years of violent turmoil in the largely Muslim North Caucasus, analysts said. Many officials share this antipathy, which is why they have little desire to modify Russian legislation for the industry.

The situation is better in the Muslim heartlands: for example, authorities in Tatarstan are interested in supporting Islamic finance and have hosted numerous conferences on the matter, said Linar Yakupov, head of the republic's Investment Development Agency.

However, Nizameyev said that this support has yet to translate into any kind of financial backing or tax breaks.

The industry still has plenty of room to grow — Thomson Reuters forecasts that Islamic banking assets in Russia will reach up to $10 billion by 2018, Gabbasov said.

The potential client base includes both Muslims and nonbelievers, analysts said — though some limitations are unavoidable. Amal regularly turns down deals worth tens of millions of rubles on ethical grounds, said Nizameyev.

And some client bases are yet to be evaluated for sharia compliance: for instance, Nizameyev conceded that Amal has no policy on gay clients.

"I am honestly not sure whether we would have a gay person for a client. It has never happened before and we would have to consult our sharia analysts," he said.

(The Moscow Times/ /29 June 2014)

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