Dubai: Islamic Development Bank (IDB) is actively involved in supporting African governments’ efforts to diversify funding through Islamic capital markets, said Kodeidja Malle Diallo, director, group risk management department of IDB.
Speaking to Gulf News on the sidelines of the second Annual Standard & Poor’s Islamic Finance Conference in Dubai yesterday, Diallo said, IDB welcomes many African sovereigns’ efforts develop regulatory structures and capital market infrastructure in their respective countries.
“We are involved with many African nations in developing Islamic banking and financial institutions through equity participation. In addition, the IDB Group and group entities are committed in supporting development projects and capital market linked Islamic fund raising efforts,” She said.
IDB Group’s portfolio investments in sovereign sukuks will be purely driven by credit worthiness of issuing sovereigns, she said. “The bank has a commitment to its member states to participate in their fund raising efforts, but such participation will be driven by factors such as credit risk assessment and single obligor limit. We can’t subscribe to whatever size of sukuk a country is willing to issue. Our commitment to member countries is to allocate funds on a fair allocation basis,” she said.
Standard & Poor’s analysts said the entry of African sovereigns into Islamic capital markets for fund raising is a significant development for the expansion of global sukuk markets. They see the involvement of IDB as a major catalyst in developing these markets as major source of sukuk issuance.
“Several new players are seeing sukuk as a way of funding growth and diversifying fiscal and external funding. Many countries in the Middle East and North Africa region have put the development of Islamic finance more prominently on their growth agendas in recent months,” said Stuart Anderson, Managing Director and Regional Head, Middle East at Standard & Poor’s.
IDB officials and S&P analysts expect Africa with significant Muslim population will be the next frontier of sukuk expansion. Most Sub-Saharan African countries that are running large fiscal and current account deficits have huge financing needs. While many of them are currently funding these through conventional bond issues, analysts say there is a huge scope for sukuk issuance from the region. In North Africa, in most Arab Spring countries, Islamic finance is expected to get precedence over conventional financing due to strong political support for this type of financing.
Despite the strong potential for developing Islamic capital markets in Africa, the plans are moving at a slow pace. At a political level, many countries are yet to agree on what state assets should become collateral (underlying) for a sukuk issue. While many of these countries do not have well-established debt management structures, the debt ratings will not be impacted by the adoption of Islamic financing. Additionally, relatively low yields in conventional bonds could also emerge as a challenge for sukuk issues in these markets.
“These are new markets with structural issues, but as an Institution promoting Islamic finance we are strongly committed to Africa,” said Diallo.