The first Islamic bond in East and Central Africa has been floated and consequently listed on the Nairobi Securities Exchange, raising KSh3 billion at the first auction.
- •The growth and popularity of Islamic bonds was steered when Malaysia issued the first Sukuk bond in 1990 and still dominates to date.
- •At the dawn of the 21st Century, the government of Sudan issued a Sukuk bond worth 77 million Sudanese pounds – an action that was replicated by the government of Bahrain months later.
- •According to the International Islamic Financial Market Report 2023, Sukuk bond issuance has seen tremendous growth to US$182.7 billion in 2022 from US$53.1 billion in 2010, a total of US$ 1.79 trillion between 2001 and 2022.
S&P Global reported US$91.9 billion of total Sukuk issuance by mid-2024, with a substantial bullish trend in foreign currency-denominated issuances.
In Africa, more than 10 countries, including Kenya, Egypt, The Gambia, Côte d’Ivoire, Nigeria, Senegal, Sudan, South Africa, Togo, Mali, and Morocco have issued more than 773 Sukuks, with the Gambia garnering the most issuances.
Notably, Nigeria, Egypt, and South Africa raised significant public debt funding through Sukuk issuances in 2023/24, totaling an aggregate equivalent of US$3.05 billion.
What is Sukuk and How do Islamic Bonds Work?
Sukuk, which is as old as Islam, refers to investment certificates that show a proportionate interest in asset ownership, that adheres to Shariah laws.
Firstly, the firm in need of capital (originator), creates an independent Special Purpose Vehicle (SPV) which protects Sukuk assets from creditors in case of financial mayhem.
The SPV then issues the Sukuk certificates that are sold to investors with agreements on the relationship between the obligor and the Sukuk holders.
The SPV then buys the asset from the originator and subsequently presents the proceeds to the originator.
The SPV then sets up the lease of assets to the originator for the latter to make lease payments to the SPV, which later distributes the payments among the holders as lease income.
On termination, the originator repurchases the asset at its nominal value and the SPV distributes the proceeds to the certificate holders.
Differences from Conventional Bonds
- •On ownership, Sukuk implies partial ownership of the asset with the issuer selling certificates to investors while bonds imply debt obligation.
- •Sukuk-backed assets should comply with Sharia laws contrary to conventional bonds’ compliance with state laws.
- •Sukuk’s face value is often priced according to the underlying asset’s value while bond pricing is pegged on the issuer’s creditworthiness.
- •On the secondary market, if the certificate reflects a debt to the holder in instances where the assets backing it have lost value, the Sukuk cannot be tradable and should instead be held till maturity.
- •Sukuk increases in value when assets increase in value and vice versa, while bonds offer fixed interest rates.
- •Conventional bonds are issued with underwriters of the same while Sukuk uses Special Purpose Vehicles as trustees or issuers.
Further, since Sukuk investors share the risks of the underlying asset, they may not get all their initial investment back. Therefore, the value payable on maturity is determined by the current market value. With conventional bonds, investors are guaranteed their returns on initial investments.
According to Fitch Global Ratings’ recent report, only 0.24 per cent of all issued Sukuk had defaulted, with the proportion of Sukuk issuers with stable outlooks rising to 93.6 per cent in 2023 from 69.9 per cent in 2022.
Sukuk has maintained its position as a major growth driver in the Islamic Financial Services Industry (IFSI), and carries a 24.43 per cent share of outstanding Sukuk out of the total Industry’s worth of US$3.25 trillion.
The synergies between ESG and Islamic finance have been studied and taken up the global space, with frontier markets upholding Sukuk, especially for infrastructure and green financing.
However, Sukuk uptake has been precarious, pointing to the highly structured nature coupled with tight liquidity involved, especially in the secondary market.
Further, the lack of legal certainty and universal interpretation tends to hinder the Sukuk market expansion.
“Through reading many cases that have so far been litigated in courts around the world, I have found that in almost all cases, the courts have struggled to reconcile the substance and form of the contract. Was it a sale, lease, construction, or partnership contract or a financing arrangement between the parties?” Muddassir Siddiqui was criticized while reviewing cases of sukuk defaults and bankruptcies in 2017.
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