Africa to Emerge the Next Big Sukuk Issuer

The volume of Islamic bond (sukuk) issuance is expected to gain in the next few years as Africa joins other key Islamic markets such as the GCC, Turkey, Malaysia and Indonesia, according to rating agency Moody’s.

“We expect sukuk issuance to proliferate over the coming decade as more African governments tackle the complex regulatory and legislative adjustments required to enable it,” said Peter Mushangwe, an analyst Moody’s.

The massive amounts of financing needs to fund the continent’s infrastructure deficit will be a key driver. Sukuk issuance in Africa contributes less than half a per cent of global outstanding sukuk.

Decline in GCC Issuance

After a record year of issuance in 2020 dominated by GCC sovereigns at $205 billion, in 2021, global sukuk issuance is expected to consolidate in the range of $190 to $200 billion according to Moody’s estimates. Sukuk issuance in the GCC declined by 19 per cent in the first half to $35.3 billion due to a significant drop in sovereign issuance, which was only partially offset by higher corporate volumes. The sharp year on year decline in the first half of the year is attributed to significant gains in oil prices, resulting in lower financing needs for GCC governments.

New Markets, Products

Global sukuk issuance volumes reached $101.7 billion in the first half of 2021, up 3 per cent from $99.1 billion in the same period of 2020. The increase was driven by higher activity in Southeast Asia where volumes rose 22 per cent to $53.9 billion.  Moody’s sukuk issuance to remain steady at around $90 billion to $100 billion in the second half of 2021, driven by our expectation that the issuance will remain strong in Southeast Asia.

Malaysia remains the largest contributor with issuances up 15 per cent at $37.5 billion. Issuance activity in Indonesia increased by almost 60 per cent largely driven by higher government issuance.

There has been a steady stream of new entrants in recent years. Saudi Aramco and the Government of Maldives made debut issuances in the first half of this year. Saudi Aramco issued a total of $6 billion distributed over three tranches for three, five and ten years.

Sovereign Domination

Historically, governments have dominated sukuk issuances and analysts expect this to continue as governments diversify their funding base. In the African continent, Moody’s see West African nations to lead in sukuk issuances. Greater sukuk issuance will promote greater public awareness of Islamic finance.

Egypt, Morocco, Sudan, Senegal and Nigeria stand out as best positioned for growth in Islamic finance. They have large Muslim populations, have made, or are making, the extensive legal and regulatory changes required for Shariah-compliant finance and most have a history of sukuk issuance. Egypt has indicated that it will likely issue its debut sukuk in its 2021-22 fiscal year.

While African countries are starting to put Shariah-compliant laws and regulations in place but constraints remain. Islamic banking has made little headway in Africa despite the continent’s large Muslim population. Africa has close to a quarter of the world’s Muslims but its Shariah law-compliant banking assets make up only around 2 per cent of global Islamic banking assets.