In a study published on September 9 by Standard & Poor’s, the credit analyst Mohamed Damak talks about the growth of Islamic financial bonds or sukuks, and the increasing interest Africa is showing in them.

Interview conducted by Bénédicte Châtel, Paris

Les Afriques: In a study that just came out, of which you are a co-author, Gambia appears on the sukuk market and other African countries are interested in this alternative. Is this something new?

Mohamed Damak: Definitely. The sukuk market in Africa is very limited for the time being. Only Gambia has issued around thirty or so sukuks through its central bank, for a total amount worth 4 million dollars. But we think that there is a lot of potential for this market in Africa.

Les Afriques: And is this potential significant?

MD: Very significant. In fact, a number of entities based on the continent have already announced their intention to use them. The Housing and Development Bank in Egypt plans to issue sukuks to the tune of 200 million Egyptian pounds ($37 million) for real estate financing and rumours of sukuk projects are circulating about the Senegalese and Kenyan governments. The governor of the Central Bank of Kenya publicly stated that he was not excluding the possibility of turning to this new product, provided it is beneficial to the country. The second reason that leads us to think that there is potential for the sukuk market in Africa is the reality that infrastructural and financing needs remain quite high. Some of these lacks could be met by Islamic financing and particularly by transactions that conform to Sharia law. We have seen a few examples of projects in Tunisia and Morocco launched by Gulf Finance House, which is an investment bank based in Bahrain. In Tunisia, for example, there is a project to develop an offshore financial centre. Islamic finance, in general, and the sukuk market in particular, could act as a bridge between Africa, where there is an immense need for financing, and the Gulf countries which have a wealth of financing resources due to their strong oil-based economies.

In the course of the first eight months of 2008, only 13.3% of all sukuks were issued in dollars as opposed to 41.8% in 2007 and 85% in 2002! 

Les Afriques: In your report, you highlight the growing interest of non-Islamic countries in this type of financing. Which African countries demonstrate this?

MD: In Africa, most countries that have expressed an interest in issuing sukuks, such as Senegal and Egypt, are Muslim. The non-Islamic countries interested in this trend are mainly based in Europe and Asia.

Les Afriques: Another point raised in your report is the fact that there are now fewer sukuks issued in dollars.

MD: Yes, and this is mainly for three reasons. Firstly, conditions on international markets have become much more difficult. Secondly, there is the weakening of the dollar over the last 18 months. And thirdly, there are the expected changes in foreign exchange policies in the five Gulf countries. Today, these countries, excepting Kuwait, have got a fixed exchange rate system in relation to the dollar. Yet, with rising inflation and the declining dollar, there has been speculation anticipating that the central banks of Gulf States were going to change their exchange policies.

Les Afriques: How has the position of the dollar changed when dealing with sukuks?

MD: In the course of the first eight months of 2008, only 13.3% of all sukuks were issued in dollars as opposed to 41.8% in 2007 and 85% in 2002!

Les Afriques: How do the issuance conditions of sukuks compare to traditional forms of credit?

MD: In comparison to conventional issuance procedures, the cost is virtually the same, perhaps a tiny bit higher for the instruments that conform to Sharia law, as these transactions are more complex. Therefore, with sukuks, one can have more diverse financing sources rather than simply having access to less expensive financing options.

* Sukuk market continues to grow despite gloomy global market conditions, Mohamed Damak, Emmanuel Volland and Ritesh Maheshwari, Standard & Poor’s, Paris, 9th September 2008.