Shortlisted bidders will be informed by Jan. 20, 2012, which means that the global mandate may take a few more months to be issued. Taking into consideration the structuring of the issuance, the documentation and the investor road shows, realistically, the South African debut benchmark issuance may only see the light of day by the middle of 2012. Unless of course the South African National Treasury in Pretoria, fast tracks the process.
The National Treasury two weeks ago invited banking institutions to submit proposals for the provision of advisory services for the structuring and issuance of a debut government (sovereign) sukuk in the local and international markets. The RFP (request for proposals) according to an official statement, is in line with the National Treasury's intention to diversify its funding and investor base.
"There is a great interest in the sukuk market and this is the first step toward meeting the growing appetite for government backed Shariah-compliant investments," explained Lungisa Fuzile, director general of the National Treasury.
In fact, South African finance minister, Pravin Gordhan, a proactive supporter of Islamic finance in "the Beloved Country", in his speech introducing the Taxation Laws Amendment Bills, 2011 in Parliament in Cape Town on Nov. 17 gave a strong hint of things to come. "In 2010, several initiatives were introduced to regularize Islamic financing within South Africa. In this round, legislation is now being introduced to add a government savings instrument that satisfies Islamic principles, known as a sukuk. This instrument effectively offers a yield that is comparable to a risk-free government bond. It is hoped that the development of this form of financing could encourage new forms of foreign investment beyond traditional Western funding," he emphasized.
The chase for the first benchmark sukuk issuance - sovereign or corporate - out of Africa is on. It seems that Pretoria is in pole position given that no other potential issuer has published a RFP for sukuk issuance and invited interested financial institutions to submit such proposals.
Much has been said about potential sukuk offerings from Africa by countries such as Kenya, Nigeria, Senegal, Egypt and even Tunisia.
In Kenya, it is true that the Central Bank of Kenya has been talking to local Islamic banks such as First Community Bank about the possibility of issuing sukuk. But as far as guidelines, regulatory and the enabling legal framework complete with tax neutrality measures are concerned, these have not yet been contemplated, or acted upon through the establishment of a relevant technical committee.
According to Islamic finance industry players familiar with doing business with Africa, countries such as Uganda and Tanzania have a better chance of issuing a sukuk than Kenya.
In the case of Nigeria, Africa's most populous country where Muslims and Christians roughly make up half each of the 160 million population, the Central Bank of Nigeria is finalizing a technical study on the possibility of the country issuing a sovereign sukuk. Malam Sanusi Lamido Sanusi, governor of the Central Bank of Nigeria, explained on the sidelines of the meeting of the governors of central banks and monetary authorities of the Organization of Islamic Cooperation (OIC) member countries held in Kuala Lumpur in early December 2011, that the Central Bank of Nigeria is merely compiling the technical guidelines to facilitate any proposed sukuk issuance.
"The central bank does not issue Sukuk. We are working through a technical committee to prepare the framework and the guidelines. On completion we will present our findings to the Debt Management Office of the Ministry of Finance. The government will then decide whether it wants to act on this and issue a sukuk," he explained.
In Egypt despite the fact that the board of directors of the Egyptian Financial Supervisory Authority (EFSA) gave its initial approval in June 2011 of a proposal to amend the Executive Regulation of Capital Market Law No. 95 of 1992 regarding the rules governing issuing and trading in sukuk.
The proposal which deals with "completing the legal framework governing issuing and using sukuk as well as expanding the scope of activities in which sukuk can finance", was supposedly to be sent out for consultation with the relevant authorities, professional bodies and market players. The final draft of the legal framework will then be submitted to the board of directors of the EFSA for final approval before being submitted to the government for parliamentary debate, adoption and ratification.
In the wake of the recent elections in Egypt, whose result will only be declared in March 2012, and the fact that the current interim regime is a "lame duck administration" and in the light of the ongoing protests and killings in Egypt, any meaningful progress on the issuance of Sukuk must be in serious doubt. No self-respecting investor would risk such market conditions and until such time a democratically-elected government is in place in Cairo, there are no realistic chances of Egypt raising funds through a debut sovereign issuance in the first half of 2012.
Tunisia is an enigma in one sense. It is spearheading the Arab Spring drive toward democratic and economic transition. An yet, despite the fact that the interim government is dominated by the Al-Nahda Party, a type Muslim Democrat party like the Justice Party of Prime Minister Recep Tayyip Erdogan in Turkey, some of its secular ministers tend to live in denial hoping (and thinking) that Tunisian democracy will be ala London, Paris or Washington with some local flavor.
Jalloul Ayed, minister of finance of Tunisia, who addressed a symposium in London last week at the launch of the World Bank's Multilateral Investment Guarantee Agency (MIGA's) 2011 World Investment and Political Risk report, is either living in denial or is deliberately ambivalent and ambiguous when he stressed that the recent election "was not about people embracing any ideology or religion. It was reflective of people making a break from the past."
There was endless talk about the dangers and challenges of political Islamism and governmental Islamism. And yet there was no mention of financial and economic Islamism, the type of which is proving to be so successful in economies such as Turkey and Malaysia with their 5 percent to 8 percent GDP growth. The minister was very coy about any discourse on the position of the interim government on Islamic finance let alone Sukuk issuance.
Senegal seems to be in a good position to issue the first sovereign sukuk issuance out of Africa. Khaled Al-Aboodi, CEO of the Jeddah-based Islamic Corporation for the Development of the Private Sector (ICD), the private sector funding arm of the Islamic Development Bank (IDB) Group, confirmed that the corporation is working with an international consultancy and with the Central Bank of West Africa (BCEAO), of which Senegal is a founder member and whose eight members are all members of the Islamic Development Bank (IDB), on the regulatory and legal framework to facilitate sukuk issuance in CBWA member countries. ICD remains confident the issuance may come to the market in first half 2012.
BCEAO delegations have recently been on Islamic finance fact-finding missions to Malaysia, France and the UK. The latter two are strange choices given their stubborn refusal to try the Eurosukuk market especially at a time when investors may be in a strong position to ignore conventional bond issuances as they did with the recent German offering. This may be exacerbated by the ongoing threats by the three international rating agencies of possible downgrading of their AAA sovereign ratings because of the bickering over the solution to the euro zone debt crisis.
The BCEAO indeed has a sharp learning curve when it comes to Islamic finance and sukuk issuance. It would be a nigh miracle for the optimism of Al-Aboodi to materialize for a sovereign Senegalese Sukuk issuance this side of the first half of 2012.
Which brings me full circle to the South African issuance. The country has by far the most developed financial services infrastructure in Africa which is comparable to that of the UK. It has an established stock exchange in the JSE (Johannesburg Strock Exchange) and a well-developed bond listing infrastructure and culture.
The scope of the RFP requires the successful bidder to assist the National Treasury in structuring and managing the Sukuk activities; in drafting all the documentation; in helping to get the issue listed on the local and international stock exchanges; in marketing and placing the issuance with investors; in indicating underwriting and market making appetite; and in facilitating the book-building process and other relevant services such as Shariah advisory.
Similarly, the guidelines for the sukuk RFP, require the issuance and bidders to have a commitment to South Africa and its interest in sukuk origination and to provide a detailed overview of the international sukuk market and the current demand dynamics in the Islamic capital and debt market in South Africa and internationally. Other guidelines include the indicative transaction structure; expertise and skills including that of the structurers and the Shariah advisories; secondary market support; and road show and marketing.
Last year, the South African government introduced tax neutrality laws for Mudaraba (trust financing), Murabaha (cost-plus financing) and Diminishing Musharaka (diminishing shared ownership) contracts.
Gordhan, introducing the Taxation Laws Amendment Bills 2010 in the National Assembly in Cape Town last year, gave some insight into the government's rationale for the tax changes relating to the Islamic financial products.
"South Africa is an ideal location for multinationals to base their regional operation for investments into sub-Saharan Africa. South Africa offers world-class financial services, strong and clear financial regulatory architecture and world-class infrastructure... Certain domestic tax anomalies, the exchange control regime and fierce competition from certain low tax countries, remain stumbling blocks to South Africa taking full advantage of the opportunities that are available.
"To remedy this situation, the proposed amendments remove various tax hurdles that a multinational company would face if it based its regional headquarter in South Africa. Another important area of innovation relates to the growing use of Islamic financing, which contains certain prohibitions in respect of finance, including prohibitions against interest, immoral substances and the lack of transparency in respect of investments. At issue is the tax system's lack of recognition of Islamic finance, as it mainly focuses on traditional forms of finance. The proposed amendments will level the playing field in respect of certain Islamic financial products when undertaking savings and investments and when attempting to bank finance," explained Gordhan. — M.P.
