South Africa is joining the select number of non-Muslim countries preparing to issue sovereign sukuk bonds. If all goes well, it is likely beat the others to the market, as those countries which have made similar moves have yet to actually launch their Islamic bonds.
The South African National Treasury (pictured) on Monday invited banks to bid for advising on "the structuring and issuance of a government Islamic bond in the local and international markets". And a spokesperson said that specific plans would be included in the funding proposals for the budget for the year starting April 2012.
The Treasury is working at a swift pace. It has asked lenders to submit proposals for the structuring and issuance of an Islamic bond, known as a sukuk, in local and international markets by 21 December 2011. It will shortlist bidders by 20 January, 2012.
The treasury said the sukuk plan was in line with its intention to diversify its funding and investor base.
Lungisa Fuzile, the treasury director general, said in a statement: "There is a great interest in the market and this is the first step towards meeting the growing appetite for government-backed Shariah-compliant investments."
Even though South Africa's 730,000 Muslims constitute just 1.5 per cent of the total population, the treasury wants to issue instruments that will appeal to local Shariah-compliant investors as well as to the growing international pool of Shariah-complaint institutions, notably in the oil-rich Middle East.
While South Africa won't detail its 2012-13 funding plans until the budget is put together in early next year, it is not a big borrowers by global standards. Its public sector financing requirement for 2011-12 is set at R241.5bn, or around $30bn, which represents about 8 per cent of GDP. Almost all is raised at home - with only $1bn-$1.5bn coming from abroad, according to budget data.
Peter Attard Montalto of Nomura Securities said: "They are diversifying. This is standard stuff. Probably there will be demand. Middle East investors are already active in South Africa."
"Islamic investors are prevented from buying conventional debt, so there is pretty strong ongoing demand for Islamic debt," Mark Watts, head of fixed-income at National Bank of Abu Dhabi PJSC, which manages 4.1 billion dirhams ($1.1 billion), said by phone. "The issuance of sukuk is a good way to access this market."
South Africa is a relatively low-risk debtor, which would make its sukuk bonds attractive for Islamic investors seeking to diversify their portfolios outside the Middle East and North Africa region, Watts said.
As the Finantial Times has reported, the industry has since 2006 more than doubled in size, as more individuals and institutions have sought to save or invest in an Islamic, or sharia- compliant, way.
Stefan Wagstyl, "South Africa: the First Sovereign Sukuk Outside the Muslim World?" Financial Times December 6, 2011
"South Africa Seeks Bank Proposals for Inaugural Islamic Bond" Bloomberg December 6, 2011
Reproduced with permission from Islam Today