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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Indonesia’s gain in Islamic banking

Indonesia is drawing interest from Middle-Eastern banks seeking to tap the world’s biggest pool of Shariah-compliant investors as some Islamic lenders wind down or close operations in Malaysia and Singapore. Emirates NBD PJSC wants to invest at least US$300 million (RM1.32 billion) in a new Shariah lender or acquire a stake in an existing one, Dhani Gunawan Idat at Indonesia’s financial regulator said. That’s a vote of confidence for Southeast Asia’s largest economy, which is also bidding to host the regional infrastructure unit of Saudi Arabia-based Islamic Development Bank that’s due to begin operations in 2016.

The investments would be a boost for Indonesia in its ambition to become an Asian hub in the US$2 trillion industry. Emirates NBD’s plan comes as Kuwait Finance House prepares to close its Islamic operations in Malaysia, while Bahrain’s Elaf Bank BSC has already done so. DBS Group Holdings Ltd is winding down its Singapore arm catering to Muslims, having said this month it was “unable to achieve economies of scale”. 

“Islamic banking elsewhere is starting to reach saturation point,” Dhani, director of Islamic banking research, regulation and licensing at the Financial Services Authority, said. “This investment will bring in fresh funds as well as Middle East expertise in infrastructure investment, which the economy needs.” Investment from the Middle East would be timely as Indonesia’s Shariah-compliant banking assets have shrunk 18% in 2015 from a year earlier amid the global financial turmoil. They stood at 201 trillion rupiah (RM60.3 billion) in May, compared with Malaysia’s RM523 billion, central bank data show. Indonesia offered the highest profitability among nine major Islamic banking markets tracked by Ernst & Young LLP, with a return-on-equity of 15%, according to the company’s 2014-15 competitiveness report. 

That compared with 10% in both Malaysia and the United Arab Emirates, 0.7% in Bahrain and 7.4% in Kuwait, the research firm said. While Indonesia limits foreign ownership in the nation’s lenders to 40% under legislation introduced in 2013, it’s seeking to consolidate the banking industry. In that vein, the FSA will allow an investor to take a bigger stake as long as the buyer merges the two entities. Emirates NBD, Dubai’s largest lender, was advised to open a new Islamic bank in the Southeast Asian nation to sidestep the ruling, Dhani said. A spokesman for Emirates NBD, who asked not to be identified, declined to comment on the Indonesia plan. “Indonesia has some resistance towards foreign banks coming into the market,” said Megat Hizaini Hassan, head of the Islamic finance practice at law firm Lee Hishammuddin Allen & Gledhill in Kuala Lumpur. “The perception of some in Indonesia is that foreign banks are trying to gobble up the business.”

 Malayan Banking Bhd in Kuala Lumpur bought out PT Bank Internasional Indonesia in 2008 before the investment cap was brought in, and then set up PT Bank Maybank Syariah Indonesia in 2010. Malaysia’s CIMB Group Holdings Ltd and Singapore’s Oversea-Chinese Banking Corp entered the local market in 2002 and 2008, respectively, and now offer Shariah-compliant products via PT Bank CIMB Niaga Syariah and PT Bank OCBC NISP. The Islamic Development Bank, whose largest shareholders are Saudi Arabia, Libya, Iran and Nigeria, may choose Indonesia as the base for its Islamic Investment Infrastructure Bank, Finance Minister Bambang Brodjonegoro said in April. The government is approaching “key countries,” especially those in the Middle East, to earn the right to host the IDB, he said. 

The multilateral lender currently owns 32.7% of PT Bank Muamalat Indonesia, the country’s second-largest Shariah-compliant bank by branches. Singapore’s DBS Holdings abandoned its plan to buy conventional lender PT Bank Danamon Indonesia for US$6.5 billion in 2013 due to the new ownership rule. China Construction Bank and South Korea’s Shinhan Bank are currently seeking two acquisition targets to merge. “The Indonesian Islamic banking market has all the ingredients to achieve similar, if not more success” than its counterparts, said Alhami Abdan, head of international finance and capital market at Kuala Lumpur-based OCBC Al-Amin Bank Bhd.

(The Malaysian Insider  29 September 2015)

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Islamic Finance market set to reach $3.25 trillion by 2020

Dubai: World Islamic finance market is set to almost double by 2020 from the current $1.81 trillion to $3.25 trillion, led by banking and Takaful assets, a study has revealed.

Commercial banking contributes to about $1.34 trillion, while $33.4 billion is contributed by takaful insurance, while sukuks contribute to about $295 billion of the world Islamic Finance market.

“It is growing at about 10 per cent per annum, with the significant concentration of wealth in Islamic banking,” said Mustafa Adel, Acting Head of Islamic Finance at Thomson Reuters, adding commercial banking assets is projected to reach $2.6 trillion by 2020.

The growth has been fuelled by banking and Takaful assets, which have grown 12 per cent and 10 per cent respectively, while sukuk and funds witnessed modest growth of 6 per cent and 7 per cent respectively.

Various countries in the Islamic finance space are very sensitive to issues like interest rates and falling oil prices, and experts reckon this could have strong implications for the emerging economies.

“The chilling effect of a toxic trifecta of macro economic risk-anaemic real sector growth, lower capital inflows, and worsening domestic finances sparked by expected US interest rates rises, would combine to create strong downward pressure on emerging economies,” stated the report, titled ‘State of the Global Islamic Economy 2015/16’.

The continued presence of significant macroeconomic and geopolitical hazards do not augur well for Islamic Finance sector. Economically many countries like Indonesia and Turkey remain fairly exposed to this damaging trifecta of low real sector growth, reduced capital inflows and impact of rising rates in the US.

As far as the falling oil prices are concerned, the situation presents a broader dilemma for various Islamic countries, on how they would maintain their long term public spending without impacting its fiscal sustainability.

Dubai’s competencies:

“With the Islamic economy, we are utilising Dubai competencies in general, as it is a well developed trade hub, it has well developed physical and regulatory infrastructure,” said Abdulla Mohammad Al Awar, chief executive of Dubai Islamic Economy Development Centre.

“Our concentration is on creating synergies within sectors, like for example finance is used to fuel growth in Halal, tourism, etc, and that’s the ultimate goal,” he added.

But with this comes many challenges, experts said.

“Companies are not able to tap the global Muslim market because standards and regulations vary significantly. That obviously is a challenge, but there is a huge opportunity as well that exist within that. Countries in the Asean, GCC region is looking to developed a single standardised structure, so with that companies would be able to achieve the economies of scale as opposed to global chains,” Adel said.

(Gulf News Economy / 29 September 2015)

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Pakistan AFRIDI FOR ISLAMIC FINANCIAL LAWS IN BUSINESSES

Lahore—Pak-China Joint Chamber of Commerce and Industry (PCJCCI) Saturday called for making the businesses and commercial activities in accordance with Islamic financial laws. 

The PCJCCI President Shah Faisal Afridi told APP here that Islamic banking has proved over time that it is based on firm and sound economic principles and has a good potential to become an alternative system of banking especially in view of the global financial crises. However, efforts should be made to modify the existing structure to provide better products andquality service within the ambit of Islamic laws, he said. He said all stakeholders should understand the limitations at this stage and work towards its advancement to develop an economic system truly reflective of the sacred principles of Islam. 

According to Global Islamic Finance Report, Pakistan ranked at number nine in the world in terms of development of Islamic financial services industry in the country, and second largest Islamic market (population-wise) after Indonesia, and could become the most important player in Islamic banking and finance, if it attained 20 percent market share. Faisal Afridi said, “Time has come where we should look ahead and concentrate to develop innovative products with more perfection and purity.” 

He mentioned that growth of Islamic banking in the country has been over 30 percent in last few years, which is certainly above the average global growth rate of Islamic banking and finance. “If this trend continues, then one should expect that in the next three years Islamic banking assets will at least double from its current size of Rs 926 billion.” 

“If that happens, the country will stand next to a number of Gulf countries and Malaysia where Islamic banking represents between 20 and 30 percent of the market share,” he added. He said, at present there are more than 600 Islamic banking branches throughout Pakistan and 19 Islamic banking institutions are offering commercial banking services as he appreciated the new Islamic banking strategy by the State Bank of Pakistan to double the number of Islamic banking branches in next four years. 

“To achieve the desired goal, we need highly competent, motivated and involved persons with required knowledge of conventional banking and finance as well as knowledge of Islamic Shariah,” he asserted. Faisal Afridi mentioned to product innovation, development and research, flexible and practical application and enforcement of shariah principles, creation of global financial hubs and regulators as key drivers for growth and competitiveness of Islamic finance industry.

(Pakistan Abserver / 28 September 2015)

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The rise of ‘halal hubs’ represents an Islamic finance opportunity

An interesting trend is developing in the halal sector: regional hubs are developing in places that have some local demand but not the size that would be significant markets on their own.

Think of Malaysia (the largest) or Dubai or tiny Brunei. Each sees the halal sector as being strategic to their economic growth, and for Dubai and Brunei at least, as key aspects of their economic diversification.  This trend has the potential to support global growth in the Islamic economy as well as SME development but need a lot of (costly) infrastructure put in place to open up the international side to SMEs, writes Blake Goud

To some degree, each country benefits from sitting on trade routes that have connected Muslims to one another for centuries for their position. If nothing else they can be logistics hubs and Malaysia can be more with a larger population that can survive also if it were autarkic.  But what differentiates the three from other places is the role they play in setting standards for the rest of the (Muslim) world.

Dubai is a hub of the MENA region which puts it as a gateway for establishing the halal authenticity of food imports that represent a lot of the food consumed in the region. Malaysia has its own domestic market but its JAKIM standard is widely accepted, though not universally. Brunei is like Dubai in having a relatively small domestic market but like Malaysia in being geographically close to huge Muslim populations.  It is trying to build its value chain that includes food, cosmetics and pharmaceuticals with an “oversight along the production chain”.

Brunei’s decision to focus on end-to-end compliance mirrors the shift globally towards the beginnings of comprehensive halal logistics system for global trade in halal products (a potentially $151 billion business according to the State of the Global Islamic Economy Report 2014/15).  This process highlights the value being created by the development of regional hubs whose standards are gaining recognition more broadly.  Standards from Dubai (ESMA and Dubai Municipality), Malaysia (JAKIM) and Brunei’s (Brunei Halal) have the potential to become more widely recognized which would be necessary to expand trade in halal products.

The hubs emerging for halal standards are concentrated in the OIC region but the hubs for halal trade are wider, and serve a much larger population than just their immediate region.  For example, in addition to the Jebel Ali port in the UAE, the Klang and Penang ports in Malaysia, there are halal hubs (as designated in the State of the Global Islamic Economy report) developing around the ports of Santos (Brazil), Marseille (France), Rotterdam (Netherlands) and Zeebrugge (Belgium).

This represents the opportunity for the regional hubs to go global and to do it in a way that is not competition against one another but through cooperation.  The halal trade market is significant but requires substantial expenditure to put in place the logistics systems that will need the support of both governments and large companies.  A lot has been made of the potential for the Islamic economy to be an engine for SMEs in OIC countries, but unless the regional hubs cooperate with larger companies to build the standards, certification, accreditation and logistics hubs which only they have the resources to do, the Islamic economy will remain a domestic opportunity for SMEs and the global picture will be dominated by the larger companies.

(Bnking Technology / 22 September 2015)

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Call to dispel Islamic banking misconceptions in Oman

Muscat: There are some misconceptions about Islamic banking in Oman, which need to be dispelled through raising awareness about this sector, says a senior official at Bank Nizwa.

“Perhaps many market participants believe that Islamic banking is just a way to ‘Islamise’ interest and they keep comparing Islamic banks to conventional banks,” Dr Jamil El Jaroudi, chief executive officer of Bank Nizwa, told ‘Times of Oman’ in an exclusive interview.

“At Bank Nizwa, it is not only our belief, but also our commitment to build Islamic banking true to its core based on Sharia,” said the official at Oman's first dedicated Islamic bank.

El Jaroudi noted that they do not want to simply replicate what is out there in the conventional banking and continuously try to innovate and build an industry based on Sharia objectives, and not necessarily just to be Sharia-compliant.

“However, during the initial phase, we do have to provide alternatives to the current conventional products to suit the demand of customers. This process will take time. In the meantime, we can help to re-design the basic concept of finance based on Sharia, which is more equitable to all rather than only based on debt,” he said.

‘Social philanthropic’

“Another misconception is that Islamic banking is similar to a social philanthropic entity. Accordingly, why do Islamic banks ask for profit margins and fees and this is why knowledge about this industry is imperative to succeed,” the official added.

“Yes, there are ethical and social obligations but above all, Islamic banks are commercial and profit oriented businesses owned by investors who chose to put their wealth at work in a Sharia-compliant manner,” El Jaroudi explained.

Asked what Islamic banking provides should do to help enhance the performance of this sector, the CEO of Bank Nizwa said that they need to grow to a certain size to be able to compete on equal footings, meaning good services and good returns to both clients and investors.

Protection

“Islamic banks need to be protected, may be incentivised as well, until it gets there because the ultimate beneficiary is the economy of Oman,” he said.

In addition, El Jaroudi said that Oman can learn from the Islamic finance experience of its neighbouring countries as well as other countries in the Far East and other regions.

“Oman has the advantage of seeing and learning from the experiences of the other markets, be it good or bad. If you look at Oman’s Islamic banking regulations, it is very much influenced by this, in addition to choosing what Oman decides is right for its market,” he said.

“However, learning does not stop here. Now we need to dig more into the main benefits of Islamic finance to economies in general and be prepared to modify or add what benefits the Sultanate the most,” El Jaroudi stated.

(Times Of Oman / 20 September 2015)

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Islamic finance prospects in Africa highly promising

JEDDAH —  A newly-released report “Islamic Finance in Africa: A Promising Future” by the Islamic Corporation for the Development of the Private Sector (ICD) takes an in-depth look at the tremendous growth opportunities for Islamic finance to flourish in the region. The new report was released during the Africa Islamic Finance Forum 2015 in Abidjan.

The report is being published as the global banking community comes together to define a transformative new landscape to integrate Islamic finance into the mainstream. 

Once of interest only to a niche market of Muslim investors, Islamic finance is now venturing beyond its traditional sphere, and is slowly gaining widespread acceptance in Africa.

The birthplace of a quarter of the global Muslim population, the report highlights that Africa features a potentially strong demand for Islamic financial services and products. 

While still comparatively under-developed, Islamic finance is expanding in many parts of the region, and is now present across most of North Africa and in many countries of East and West Africa, particularly those with sizeable Muslim communities. 

One of the recommendations of the report is that Islamic finance can act as the catalyst in mobilizing funding into Africa, thereby resulting in economic growth and sustainable development. 

It is estimated that the region needed $93.0 billion per year to finance large-scale infrastructure and manufacturing projects, while external funding is also needed to offset ballooning fiscal deficits. 

Meanwhile, 2 billion adults remain unbanked globally, and currently, sub-Saharan Africa alone accounts for as much as 17.0% of the world’s unbanked adults. 

In addition, there is a significant funding potential opportunity for Islamic banks in view of the increasing emergence of small-to-medium enterprises (SMEs) across Africa. 

In light of relatively low-income levels, a large informal sector and the prevalence of small businesses in Africa, Islamic microfinance is also a growth area worth looking into.

The report also highlights notable progress in the sukuk sector, where recent developments have seen governments focusing more on creating a more enabling environment for sukuk issuances. 

Some countries which have issued sukuk include Gambia, Sudan, Senegal and South Africa, while Ivory Coast is lining up to issue its debut sukuk at the end of the year. 

Moving forward, several countries such as Tunisia, Egypt and Morocco have expressed keen interest in tapping the sukuk market for infrastructure financing and have finalized or are in the midst of finalizing their legal frameworks to promote sukuk issuances. 

Although the Islamic financial services industry in Africa is currently dominated by the banking and sukuk segments, growth potential remains in the asset management and takaful spheres. 

In its key recommendations, the report underlines that to capture the tremendous potential, the regional industry must overcome various challenges which are broadly similar with challenges faced in other parts of the world. 

These include challenges on the regulatory front such as regulatory inconsistency, the shortage of qualified human capital, the lack of awareness and financial literacy by many end-users and consumers, and a conducive business landscape which will support the growth of Islamic finance. 

(Saudi Gazette / 20 September 2015)

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