Islamic finance is key to closing sub-Saharan infrastructure gap
• Ring-fencing a project via a special-purpose vehicle gives financiers visibility over fund use
The infrastructure gap, generally understood as the “investment required to enhance basic infrastructure to a level that is consistent with the sustainable development goals and projected growth levels”, is nowhere more pronounced than in sub-Saharan Africa.
The Boston Consulting Group/Africa Finance Corporation report of May 2017 states that the sub-Saharan Africa infrastructure gap amounts to about $100bn in yearly infrastructure investment. Countries in this region are losing 2.1% of annual GDP growth due to inadequate infrastructure.
Economic and social development, poverty alleviation and advancement towards the UN sustainable development goals, the ultimate drivers of infrastructure development, are fundamentally aligned with the faith-based ethical principles underlying Islamic finance.
Traditional project finance techniques deployed in infrastructure financing are also compatible with the recognised Islamic modes of financing. The shariah prohibition on accrual of interest or any form of unjustified accretion (riba) has led to the use of asset sale/purchase or asset-leasing structures being employed as a way of generating shariah-compliant returns for Islamic financial institutions.
This asset-based approach is in line with traditional infrastructure-financing models that involve the procurement or construction of a tangible asset.
The ring-fencing of a project via a special-purpose vehicle structure also gives Islamic financiers complete visibility over the use of the funds.
This alignment of objectives and transaction structuring creates a favourable terrain for the use of Islamic finance in project financing. The experience from the Gulf Cooperation Council countries and the wider Middle East, where financing structures for large infrastructure projects are often structured to enable sponsors to access Islamic liquidity, is testament to this symbiotic relationship.
In the past decade, Islamic finance has been growing steadily in sub-Saharan Africa.
SA was the first African sovereign to issue sukuk (Islamic bonds). The proceeds of the $500 sukuk-al-ijarah have been principally earmarked for infrastructure investment. Other sovereigns followed. Senegal, Ivory Coast, Togo and Nigeria have all issued local currency sukuk principally to finance infrastructure development.
Kenya has been preparing for a debut sukuk issuance. The first sub-sovereign $150m issuance by Africa Finance Corporation took place in 2017.
The aggregate value of African sukuk issued to date is about $1.5bn. Governmentbacked sukuk will be a vehicle for infrastructure capital-raising in sub-Saharan Africa.
The public sukuk issuances may overshadow less visible but even more significant shariahcompliant capital flows into subSaharan Africa. Since its inception in 1975, the Islamic Development Bank Group has provided about $21.7bn in shariahcompliant financing to subSaharan Africa member countries, 80% of which is allocated to basic infrastructure development. In July 2017 the bank and the African Development Bank signed a memorandum of understanding providing for joint investment of up to $2bn.
The other entities of the Islamic Development Bank Group are also strongly focusing on sub-Saharan Africa. The Islamic Corporation for the Development of Private Sector has acted as one of the lead arrangers of the Togo, Senegal and Ivory Coast sukuk and arranged a number of financing lines to sub-Saharan Africa private sector entities. The Africa sukuk are only a drop in the sub-Saharan African infrastructure gap ocean. The amounts raised have been modest.
The South African dollardenominated sukuk, with 59% of subscriptions from Middle Eastern investors, has arguably achieved the goal of diversifying the investor base and opening up new sources of liquidity. The local currency sukuk denominated in CFA francs or Nigerian naira have not enjoyed such an international uptake.
Currency risk, West African Monetary Union (Uemoa) securities offering regulations, listing on the regional West African stock exchange rather than on an internationally recognised venue and the structure of the sukuk relying on the Uemoa regulations rather than the internationally recognised trust structure have restricted the originators’ access to deep Islamic liquidity pools in the Middle and Far East. The limited involvement of regional and international Islamic financial institutions is another optimism-tempering factor. Most Islamic funding for infrastructure development is flowing through governmental channels. In sub-Saharan Africa large infrastructure investment is still mainly the preserve of the public sector and public-private partnerships are still in their infancy. In sub-Saharan Africa (with the exception of SA), there have been only a few examples of successful projects of this nature capable of attracting commercial debt.
However, as a pipeline of bankable projects builds up and the flow of commercial finance is unlocked, Islamic financial institutions will follow suit. Successful precedents, such as the dual-tranche conventional Islamic financing of the container terminal in Doraleh, Djibouti, do exist.
Islamic modes of financing pose regulatory and taxation issues and few sub-Saharan Africa jurisdictions have enacted enabling regulations. In most countries Islamic institutions have to operate within conventional regulatory environments, which can make the implementation of basic Islamic financing modes difficult. Regional Islamic institutions have generally developed from a retail base approaching their principal mission as enabling the participation of Muslim populations in the formal banking sector.
Although some that are active in the region have now achieved an asset and capital base that gives them the financial strength to engage in larger transactions, the skills and technical expertise required to assess the credit and the credit risk mitigation tools in large project finance transactions are often not available.
Sub-Saharan Africa is still far from the sophisticated market of the Gulf Cooperation Council. Governments can help promote Islamic finance by creating an enabling regulatory framework.
The industry can also contribute if the key players can work with governments and regional institutions to build capacity and lead by example, using their expertise to take a lead role in origination and structuring transactions while promoting participation by a wider segment of the industry.
To harness the development potential of Islamic finance in sub-Saharan Africa, a close dialogue between the governments and the industry is key.
THE PUBLIC SUKUK ISSUANCES MAY OVERSHADOW EVEN MORE SIGNIFICANT SHARIAH-COMPLIANT CAPITAL FLOWS