The constitution of Djibouti declares Islam to be the state religion and its official languages are Arabic and French. According to a World Bank report, the GDP of Djibouti grew at an estimated 6.5% in 2016 and is expected to rise to 7.1% in 2017. Despite these positive economic indicators, Djibouti has an unemployment rate of 54% according to Trading Economics’s report titled ‘Djibouti Unemployment Rate’ and 23% of the population live in extreme poverty, according to the World Bank’s report titled ‘The World Bank in Djibouti: Overview’. JEAN-BAPTISTE SANTELLI and RACHA WYLDE explore.
Djibouti has few natural resources and a small industry with its economy depending mainly on foreign direct investments and port services. The country’s strategic location at the southern entrance of the Red Sea and close to the Ethiopian market has allowed Djibouti to develop various services including its banking activity.
As a member of many regional organizations, such as African Union, Common Market for Eastern and Southern Africa, New Partnership for Africa’s Development, Intergovernmental Authority on Development and the International Islamic Trade Finance Corporation (ITFC), Djibouti strives to become a financial regional hub and platform for Islamic finance in Africa to increase banking penetration, notably in its rural areas. This initiative is increasingly pursued by Djibouti’s president, Ismail Omar Guelleh. Additionally, the ITFC has granted its member countries, including Djibouti, US$100 million and EUR50 million (US$61.46 million) facilities to support trade transactions in the private sector, as stated in the Global Trade Review’s report titled ‘Islamic finance boosts intra-African trade’.
In 2011, Djibouti started to adjust its legal framework so as to allow the establishment of Islamic banks (law dated the 22nd January 2011) and introduce the Islamic insurance instrument of Takaful (law dated the 9th June 2012). The government established, by Order of the 30th October 2016, a National Shariah Council comprising five members appointed for a renewable term of five years to oversee the sector. An Islamic finance training center for legal practitioners was created in May 2017 to reinforce local expertise in Islamic finance, along with the oversight by Djibouti of the translation into French of the standard Shariah norms governing Islamic financial institutions.
As a result of this strategy, to date, four banks in Djibouti are Islamic and hold between 15-20% of the local financial market, according to Oxford Business Group’s report titled ‘Islamic finance in Djibouti could boost banking penetration’. In 2017, the banks strengthened their presence in the country, such as Salaam African Bank which expanded into the Balbala commune. Even traditional banks, for example BCIMR-BRED, are considering opening Islamic banking branches in Djibouti as part of their development strategy.
In addition to the yearly International Islamic Banking Summit in Africa held on the 8th and 9th November 2017, Djibouti also hosted from the 3rd to 7th December 2017 its first International Trade Fair to celebrate the 110th anniversary of the Chamber of Commerce, where several speakers addressed the contribution of the Islamic banking industry to new growth opportunities in Africa and the challenges the industry faces.
In this context of Islamic finance development, legal and regulatory aspects need to be considered to assess whether it would be possible for Djibouti to issue sovereign Sukuk.
Local capital market
So far, there have been no significant precedents with respect to the issuance of Sukuk in East African countries due to the lack of regional capital markets and appropriate legal and regulatory frameworks.
As Djibouti does not have access to international or regional capital markets and has no market for domestic government debt (treasury bills and bonds), it is crucial for the country, through the central bank or a stock regulator to be created, to develop a domestic Sukuk market.
The framework of any said market should offer a structure that facilitates trading, price transparency, a diversified investor base and the efficient clearing and settlement of transactions.
Sovereign immunity
Sovereign or state immunity is a principle of customary international law according to which a sovereign state is immune from civil proceedings or criminal prosecution. This principle exempts a sovereign state (and its entities) from the jurisdiction of foreign national courts, unless the state expressly agrees otherwise (immunity from jurisdiction). It also allows state entities immunity from adjudication, enforcement and execution (immunity from execution). In the case of Djibouti, sovereign immunity is a concern for investors since public assets underlying the said Sukuk may be protected by sovereign immunity. In cases of default of the Djiboutian originator to a Sukuk facility, such immunity would thus deprive the investors from any enforcement action.
As a solution to immunity from jurisdiction, the Djiboutian state entity, upon investors’ requests, may expressly waive such immunity from jurisdiction in the Sukuk documentation (the agreement to arbitrate generally constitutes a waiver of that immunity). As for the Djiboutian state, it has to expressly agree to accept the jurisdiction of the Djiboutian courts, and such courts should also accept assuming jurisdiction.
Regarding sovereign immunity from execution, there is unfortunately no universal solution to address this issue and the position of Djibouti’s courts – as to whether the Djiboutian state would benefit from ‘absolute’ immunity or be possibly prevented from immunity in case the Sukuk facility is considered as a ‘commercial transaction’ – would be determined when a case is submitted before such courts.
Domestic law issues
Investors should be aware of several domestic law issues, which include the nature of the assets underlying the Sukuk; the transferability of title where, among others, it would require formalities necessary for the transfer of title to be effective under Djiboutian law, such as registration by the Direction des Domaines et de la Conservation Foncière du Ministère de l’Économie et des Finances; and the payment of any related fees and taxes, among others.
In terms of asset classification, Djibouti has made progress with respect to Takaful, whereby it has issued a Presidential Order in November 2017 detailing the rules for assets underlying Takaful contracts in insurance companies’ consolidated financial statements.
Djibouti will also have to ensure that its tax regime does not penalize Sukuk issuances (notably due to taxes, rights or stamp duties applicable to the transfer to the SPV of the assets underlying the Sukuk) in comparison with conventional bond issuances.
Finally, the Sukuk structure should comply with Djiboutian civil law, in particular when usufruct (the right in rem to use and derive profit or benefit from property belonging to another) is used as the asset underpinning an Ijarah-based Sukuk. Similar to the French Civil Code, Djiboutian civil law provides that usufruct which is not granted to individuals may only last for 30 years. The Sukuk documentation will therefore have to comply with, and reflect, the said requirement.
Djibouti, due to its culture, geographic location as the connection between Africa and the Middle East, and its heavy investment in infrastructure, is a perfect country to centralize Islamic investments in the East African region. The issuance of sovereign Sukuk would pave the way for private Islamic finance transactions. In that respect, Djibouti still has to create a complete set of rules to promote Islamic finance.
Jean-Baptiste Santelli is a partner and Racha Wylde is an associate at De Gaulle Fleurance & Associés. They can be contacted at [email protected] and [email protected] respectively.