Islamic finance is set to gain traction across Africa as funding needs of growing economies on the continent increase and investors become comfortable with the legal structure of Sharia-compliant products, according to Moody's Investors Service.
Since the beginning of 2014, $2.3 billion (Dh8.44bn) has been raised in Africa through sukuk, or Islamic bond issuances, providing a new source of funding for sovereigns and private financial institutions. However, African Islamic bonds so far make up only 0.5 per cent of the global sukuk market.
"The desire within Africa for stronger investment links with the fast-growing economies in the Gulf and Asia that have large Muslim populations with large pools of capital will help drive the issuance of sukuk on the continent," Akin Majekodunmi, a vice president and senior credit officer, at Moody's, said in a report released on Wednesday.Demand for Sharia-compliant debt is growing in the Middle East and Asia among sovereigns, government-related entities, private issuers and financial institutions. Islamic bonds are becoming a preferred mode of raising funds and they give issuers access to an expanded pool of liquidity.
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There are, however, concerns about the legal structure of how deals are executed and some investors have emphasised the for a global legal standard for sukuk transactions.
As African sovereigns seek to diversify their funding base, the amount of sukuk they issue will likely increase, said Moody’s.
Egypt, Algeria, Morocco and Sudan have already expressed interest in issuing Islamic bonds this year or next and the rating agency expects at least $1bn worth of these deals to be executed in Africa over the next 18 months.
Moody’s also sees Africa's large Muslim population, which is predominantly unbanked, provide a solid foundation for the growth of Islamic banking assets on the continent. The agency estimates the share of Islamic banking assets as a percentage of total African banking assets will rise to more than 10 per cent over the next five years, from its current level of below 5 per cent.
