beyondbrics

South Africa is joining the select band of non-Muslim countries preparing to issue sovereign sukuk bonds. If all goes well it could even beat the others to the market,  as those countries which have made similar moves have yet to actually launch their Islamic bonds.

The treasury on Monday invited banks to bid for advising on “the structuring and issuance of a government Islamic bond in the local and international markets”. And a spokesperson said that specific plans would be included in the funding proposals for the budget for the year starting next April. That sounds like it’s on for 2012.

The treasury said the sukuk plan was in line with its intention to diversify its funding and investor base.

Lungisa Fuzile, the treasury director general, said in a statement: “There is a great interest in the market and this is the first step towards meeting the growing appetite for  government-backed Shariah-compliant investments.”

Even though South Africa’s 730,000 Muslims constitute just 1.5 per cent of the total population, the treasury wants to issue instruments that will appeal to local Shariah-compliant investors as well as to the growing international pool of Shariah-complaint institutions, notably in the oil-rich Middle East.

While South Africa won’t detail its 2012-13 funding plans until the budget is put together in early next year,  it is not a big borrowers by global standards. Its public sector financing requirement for 2011-12 is set at R241.5bn, or around $30bn, which represents about 8 per cent of GDP.  Almost all is raised at home – with only $1bn-$1.5bn coming from abroad, according to budget data.

Peter Attard Montalto of Nomura Securities said: “They are diversifying. This is standard stuff.  Probably there will be demand.  Middle East investors are already active in South Africa.”

As the FT has reported, the industry has since 2006 more than doubled in size, as more individuals and institutions have sought to save or invest in an Islamic, or sharia-compliant, way.

Islamic Bonds Issuance 2009 - 2011 YTD

The markets is dominated by issuers -  corporate and sovereign – from the Muslim states of the Middle East and from Muslim-majority countries elsewhere including Turkey, Malaysia and Indonesia. Nigeria, where the Muslims are around half the population, has announced plans for a sovereign sukuk but has not yet launched such as bond.

But other countries are seeking to tap this source of finance.  The UK last year saw the launch of its first domestic corporate sukuk. France has made preparations for sukuk instruments as has Luxembourg.  In Asia, Thailand has introduced sukuk regulations to pave the way for bond issues. China and India have also committed themselves to developing domestic Islamic financial services.

Islamic Bonds Central Government Issuance 2009 - 2011 YTD

However, no Muslim-minority country has yet launched a sovereign sukuk. Will South Africa be the first?