As South Africa finally makes good on its promise to issue sovereign Sukuk, REBECCA SIMMONDS assesses how this affects the country’s position in Africa’s developing Islamic finance market.
Legal and regulatory
The regulatory steps necessary for the proliferation of Islamic finance in South Africa were presented to parliament in 2011 and have been in place since 2012, when the government approved an act to amend taxation laws. The changes included the introduction of terms for taxation of sovereign Sukuk and the amendments were put into effect from January 2013. The amendments also detailed the tax neutrality treatment for Islamic finance transactions including Mudarabah, Murabahah and diminishing Musharakah. Following the sovereign issuance by the South African government, legislators are now also making inroads on changes to allow issuance of Sukuk by corporates within the country. Takaful remains one of the areas not specifically covered by regulation in South Africa meaning it falls under the laws governing conventional insurance.
Business environment
This year has seen South Africa lose its position as the continent’s largest economy following the rebasing of Nigeria’s GDP; and slip from 53rd to 56th in the World Economic Forum’s Global Competitiveness Index 2014. Ratings agency S&P downgraded South Africa’s credit rating to just one notch up from a junk rating, and in November, Moody’s Investors Service downgraded the country’s long-term debt rating to ‘Baa2’ from ‘Baa1’ based on a weak outlook for real growth over the coming years, with forecasts for real GDP growth in 2014 revised down to 1.4%. The country’s weakened investment climate is seen as a key factor in the downgrade, however in a 2014 investor attractiveness survey conducted by EY, Africa as a continent was indicated as the second most popular attractive market for investment and in both perception and reality South Africa was pinpointed as the most attractive location for business. The country’s perception as an investment destination was reflected in the response garnered by its debut Sukuk issue in September. While a perennial lack of skilled workers has been identified as a significant issue for development, the country has a strong financial framework, a strong services-based economy and a large domestic economy.
Banking and finance
In 2011 the National Treasury of South Africa invited banks to submit proposals for the provision of advisory services for the structuring and issuance of a debut government and appointed six institutions to perform this service, but ultimately did not issue. The intention to issue a sovereign Sukuk was announced once again by the National Treasury in the final quarter of 2013 and after a few false alarms since then, in September 2014 the country issued Sukuk via the ZAR Sovereign Capital Fund Proprietary. The issuance of US$500 million was four times oversubscribed, with an order book of US$2.2 billion according to the South African treasury, holding a tenor of 5.75 years and utilizing an Al Ijarah structure. South Africa chose HSBC, BNP Paribas, Banque Internationale à Luxembourg and QInvest to act as arrangers for the deal which was assigned a preliminary rating of ‘(P)Baa1’ by Moody’s, which has now been downgraded to ‘Baa2’ along with the other debt issuances made by the ZAR Sovereign Capital Fund Proprietary.
Aside from the newly tapped capital market, Islamic finance also exists in South Africa in the form of Islamic banking, Takaful and fund and asset management. The country has four Islamic banking institutions: one fully Shariah compliant bank, Al Baraka Bank, introduced in 1989; and three Islamic windows, provided by First National Bank in 2002 and by HBZ Islamic Bank and Absa Islamic Bank in 2006, whichwas the first bank to offer a comprehensive Islamic offering including a checking account, vehicle finance, transactional savings account, contractual savings account and Islamic wills. In 2011 the insurance arm of Absa bought Takafol South Africa, a South African Takaful company, now Takaful South Africa.
Private investment institutions are also present in South Africa and offering Islamic finance products, making up a larger proportion of the Islamic finance sector than the country’s Islamic banking windows. Fund manager Oasis Group Holding, which recently won the 2014 IFN Islamic Investor Award for Best Islamic Asset Management Firm in Africa, is one of the most prominent operators within the industry and was established in 1997. Asset management companies include Stanlib and Fraters; while Al Baraka Bank also offers an investment account.
Foreign investment
South Africa is second only to Morocco in terms of inward financial services FDI according to EY with the country gaining 18.9% of all FDI projects overall in Africa. A recent report by the Dubai Chamber of Commerce and Industry has found that the majority of funding to Africa from the GCC — 65% of US$30 billion over the last 10 years — has been focused on North Africa, certain investors such as Saudi-based ACWA Power have focused on investment in South Africa. In November 2013 Jenaan Investment, one of the UAE’s largest agriculture and livestock investment companies announced a strategic partnership agreement with South African company Suidwes; the South African company will provide technical assistance to the US$160 million worth of Jenaan Investment agriculture projects in Sudan. In October this year, UAE-based private equity firm Abraaj Group bought a majority stake in South African food and personal care manufacturer, Liberty Star Consumer Holdings.
Challenges and opportunities
One of the main challenges for South Africa will be building on the interest generated by the government’s Sukuk issuance both domestically and internationally. Domestic state-owned entities and corporates have expressed interest in issuing Sukuk and as a non-Muslim country, an active developing Islamic finance industry would be a beneficial way to attract further investment from the Gulf region.