Recent Shariah compliant sovereign sukuk issuances in Togo and the Ivory Coast indicate the growing momentum of Islamic finance in Africa. African nations are looking to finance infrastructure and development projects through new and innovative means, providing investment opportunities across the continent for a wide array of investors including those complying with Shariah principles.

Recent listings

In August 2016, Togo and the Ivory Coast launched two Shariah compliant sukuk issuances with the intention of each raising 150bn CFA francs (approximately $263m). In the case of the Ivory Coast, this was the second phase of a 300bn CFA franc sukuk programme launched in 2015. These sukuk issuances, together with three others, including an issuance from Senegal, were listed on the BRVM (Bourse Régionale des Valeurs Mobilières), a regional stock exchange in Abidjan, Ivory Coast, on 18 October 2016.

The listing on the BVRM coincided with the second annual Africa Islamic Finance Forum held in Abidjan on 17 and 18 October 2016. The Africa Islamic Finance Forum highlighted investment opportunities in key African markets, and focused particularly on sukuk and their application in infrastructure project financing.

What are sukuk?

Sukuk, which can be issued by both governments as well as corporates, closely resemble conventional bonds. They are however compliant with the principles of Shariah law, including prohibitions on the charging of interest (riba), uncertainty (gharar) and profit being made unjustly at another’s expense. Sukuk investors receive a return based on profits realised from the underlying assets that the proceeds of the sukuk are invested in.

Background to Islamic Finance

The global Islamic finance industry currently has assets in excess of $1.1trn held in more than 700 institutions across 61 countries. Although largely concentrated in financial centres in the Middle East and South East Asia (principally Malaysia, the United Arab Emirates, Iran and Saudi Arabia), recent activity in Africa, such as that in Togo and the Ivory Coast, indicates the growing popularity of Islamic finance in Africa. It is noteworthy in this regard that of the 56 states which are members of the world’s largest Shariah compliant bank, the Islamic Development Bank, 27 are in Africa.

Opportunities for investors

Shariah compliant structures have been successfully utilised in infrastructure and energy projects (including oil and gas, mining and power) in the Middle East and beyond. These types of projects are especially suited to Islamic finance, as they meet one of the main aims of Islamic finance, namely to develop society. They also have underlying tangible assets which are favoured by the Shariah.

Some recent examples of the application of Islamic finance in the energy and infrastructure sector include a US$1.38bn sukuk by Sarawak Hidro (Malaysia’s largest hydro power producer), the Kuwait National Petroleum Company’s $3.97bn bifurcated Islamic and conventional financing in connection with a US$11.25bn clean fuels project, and QInvest’s five year US$30m facility made available to Crescent Capital to fund its acquisition of a 100% stake in a hydroelectric power plant in Turkey. The infrastructure project pipeline across the African continent could mark the next natural progression for investors well versed in the benefits of Shariah compliant structures.

South Africa’s $500m dollar sukuk issuance in September 2014 and several sukuk issuances which are expected this year including in Kenya and Nigeria, to invest in infrastructure projects, indicate the scope of Islamic finance across diverse economies and cultures. Kenya will also host the second East Africa Islamic Economy Summit in April 2017, indicating the potential of the sector in East Africa following recent developments in West Africa. In North Africa, following an announcement by Morocco’s finance minister indicating an intention to launch domestic sukuk in 2017, the Central Bank of Morocco recently announced its approval of the opening of five Islamic banks and will additionally allow three French banks to sell Islamic products in the country. These developments illustrate the growth potential of Islamic Finance across the continent.

The world’s largest Sariah compliant private equity provider, Abraaj Capital, has sought to tap into this potential and raised over $1bn in funding for projects in Africa, across a wide variety of sectors but typically focusing on high potential growth areas such as financial services, healthcare and consumer products tapping into Africa’s burgeoning middle class. The trend demonstrated by Abraaj, and others similar to it, shows how an increased focus by private equity investors on Africa coupled with an increased number of viable Shariah compliant opportunities presents benefits to both investors and consumers equally.