Global credit rating agency headquartered in New York, Moody’s Investor Service, has said that African Islamic banks will continue to perform well and sukuk issuance in the continent will keep expanding steadily to fund sovereigns and financial institutions.
Moody’s asserted that the expectation is supported by global investors’ growing comfort with Islamic instruments, and foresees sukuk issuance in Africa to increase robustly in the next 18 months.
According to Moody’s, non- interest lenders operating in economies with deepened financial sector such as Nigeria and South Africa will benefit more from growing issuance of sukuk.
“Islamic bank performance in large African banking system should remain robust over the next 12 to 18 months,” said Akin Majekodunmi, Vice-president at Moody’s.
“And Africa’s large Muslim population, which is predominantly unbanked or underserved, will continue to provide solid foundation in which Islamic banking assets, and thus earnings can grow rapidly.” Majekodunmi added.
Islamic banking is a system based on the principles of Sharia law which prohibits banks from collecting interest on credit given to borrowers.
Nigeria through the Debt Management Office (DMO) floated its 7-year debut N100 billion sukuk in 2017 to raise funds to close the country’s huge infrastructure gap. The instrument gained traction in the capital market as it was oversubscribed by 6 percent even as over 1, 000 retail investors showed interest.
Towards the tail of last year, the state-funded agency on behalf of the Buhariled administration raised another N100 billion sovereign sukuk to fund 28 projects across the country including Lagos-ibadan expressway and Second Niger Bridge.
Sukuk like conventional bond provides investors with payment stream. Sukuk investors receive profit generated by the underlying assets while bond investors get periodic interests. But the difference is that while the former involves asset ownership the latter is a debt obligation.
Morocco issued its first $105 million sukuk in 2018 which was oversubscribed nearly four times.
According to Moody, structural factors such as legislative complexity and time associated with sukuk issuance, especially for new issuers and the need to identify physical collateral (for example, infrastructure projects) to support the sukuk mechanism, are constraints to Africa’s sukuk markets growth.
“Nonetheless, we expect robust issuance in African sukuk as more African sovereign seek to diversify their funding base,” it said, adding that Egypt, Algeria and Sudan have showed interest to issue the instrument.
Few months back, the continent’s third- biggest economy set up a Shariah supervisory committee to oversee issuance.
Given Moody’s position, Nigeria’s pioneer non-interest lender, Jaiz Bank, might see earnings numbers surpass expectations.
Amid the paucity of noninterest banking liquidity instruments, the lender saw profit hit a four-year high of N815.6 million in the six months through June 2019, driven by a surge in investment income.
In the first six months, the lender invested about N18 billion in a 7-year Federal Government sukuk with 15.74 return.
If the trend is maintained going forward, the lender is on course to deliver profit in excess of N1 billion in the next comparable period. Jaiz Bank paid N1.2 billion in profit to investment account holders, bringing its share as an equity investor to N4.5 billion, double of last year.
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