Standard & Poor pushes new rules to deepen sukuk in Africa

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Standard & Poor’s, a global rating agency has pushed for introduction of framework of regulation and fiscal adjustments across the African continent to deepen the sukuk market in the continent’s bid to bridge the infrastructure deficit in the coming decade.

In doing this, the continent, the agency noted should reviews its various tax regimes that will make Islamic finance viable.

In a latest report of the agency, it noted however that, wider investment options are limited in the continent and this has affected African countries to attract a pool of Islamic liquidity.

To date, African sovereigns have issued about $1 billion of sukuk instruments lagging behind in the global sukuk issuance of an average $100 billion per year over the past five years. Meanwhile, widening fiscal deficits and large infrastructure gaps will likely require multibillion-dollar additional financing needs over the next decade. 

It noted that experiences in South Africa and Senegal have shown that a significant amount of time can elapse between a government’s announcement of intent to issue sukuk and their effective issuance, as governments gauge market interests and try to address the legal hurdles and cost of issuance.

“We believe legislation gaps are the main causes of delay between a country’s intent to issue and its effective issuance of sukuk,” said Standard & Poor’s credit analyst Samira Mensah. The success of Malaysia in South-East Asia as a hub for Islamic finance lies, among other things, in the strong regulatory framework to support the sector’s growth. Malaysia also moved quickly in 2009 to address the standardization of instruments and interpretation of Sharia law. 

 It warned that Tax regimes should be considered when encouraging sukuk issuance noting that Sharia-compliant instruments require equal treatment with conventional instruments for investors to consider them.

Malaysia, it noted introduced various tax incentives that made Islamic finance a cheaper economic alternative for institutions to raise funding.

 However, increasing technical assistance by the Islamic Development Bank (IDB) and Islamic Corporation for the Development of the Private Sector (ICD), are gradually facilitating also sovereign sukuk issues. 

”We believe that a growing interest in Islamic finance could encourage some North African countries, as well as sub-Saharan countries Cote d’Ivoire, Nigeria, and Kenya, which have fairly well developed capital markets by regional standard, to issue sukuk in the future”.

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