The Capital Markets Authority will soon launch a ten year Capital Markets Development Master Plan. The plan is an industry-wide blue print that will provide a road map to firmly position Uganda’s capital markets as a cost-effective and efficient source of long term capital which will be required to support the national development agenda. With flagship projects under Vision 2040 expected to cost an estimated Ush 196 trillion[1],resource mobilization from a variety of sources will be critical in seeing the plan come to fruition. The need for alternative, innovative and cost-efficient sources of capital has never been this imperative in fulfillment of the national development agenda.
Sukuk Bonds as an Alternative Source of Long Term Finance
Among the recommended actions in the master plan is the need to facilitate the issuance of public and corporate sukuk. A Sukuk bond is a type of bond whose terms and structures comply with Sharia law, in order to create returns similar to those of conventional bonds.However, what distinguishes a Sukuk bond from a conventional bond is that it is compliant with the principles of Sharia law, including prohibitions on charging of interest, uncertainty and returns being made at the expense of others. A Sukuk bond can be floated by either a public sector or private sector entity. Investors in Sukuk bonds receive a return based on profits realized from the underlying assets.
There are various formats that can be adopted in structuring Sukuk bonds. Of particular interest is the Istisna Sukuk, which has been deployed in funding infrastructure globally. Istisna sukuk is mainly structured to finance projects such as airports, roads and bridges. The Istisna Sukuk would be appropriate in addressing the current infrastructure deficit that we face as a country.
Where have Sukuks been Issued in Africa?
Sukuk bonds have largely been issued in the Middle East and Asia. However, recent activity in Africa points to an increasing issuance of sukuk for long term capital raising, especially in the Muslim dominated Franco-phone Africa. The Republic of Senegal in 2014 issued a US $ 200 million Sukuk bond, with the Republic of Togo following suit by issuing a US $ 263 million Sukuk bond. Ivory Coast also launched a US $ 526 million Sukuk program in the same year. South Africa also issued a US $ 500 million Sukuk in2014, becoming the first non-Muslim majority country in Africa to do so[2].
Benefits to Issuers and Investors
Issuance of a Sukuk bond has numerous benefits for an issuer. With a quarter of the world’s population being Muslims,and over US $ 60 billion[3]funds available for investing in Sharia compliant investments, the chances of success remain quite high. Diversification of the investor base is also a major gain for an issuer. A diversified investor base can contribute immensely to the lowering the cost of borrowing. The private and public sectors can also diversify sources of capital from the traditional sources such as the banks and overseas development aid. Finally, issuers of sukuk bonds can boost their profiles internationally, which eases future access to capital.
For investors, an opportunity to diversify the risk-return profiles of their portfolios through access to Sukuk bonds is always a welcome move. With Sukuk bonds being asset backed, the underlying assets act as a form of collateral, which minimizes credit risk. Sukuk bonds generally avoid structures that involve over-leveraging, speculation and interest rates, which can minimize investor risks.
The Way Forward for Sukuk Bonds in Uganda
Attractiveness of Uganda as a destination for inflows targeting Sharia compliant products is dependent on a number of key steps.Among them is the development of a wide base of skilled practitioners with knowledge of Islamic financing; massive sensitization of potential issuers on the opportunity that Sukuk provides; and coordination among regulators and Muslim leaders to ensure conformity with Sharia law. The Government of Uganda should also lead the way by issuing a Sukuk bond which can be expected to give impetus to the private sector to also tap the immense potential of Sukuk bonds.
With a large global pool of funds seeking Sharia compliant products, a deficit of infrastructure in Uganda, a growing Muslim population globally, and membership in the International Organization of Islamic Cooperation, the conditions are ripe for Uganda to consider Sukuk bonds as an alternative source of long term capital.
[1]Government of Uganda, Vision 2040
[3] http://www.mifc.com/index.php?ch=28&pg=72&ac=159&bb=uploadpdf
[2] http://globalriskinsights.com/2016/08/sukuk-west-africa/