Is Islamic finance the key to developing Africa's infrastructure?
Fisherman Mosque, Dakar, Senegal. (Pixabay)
The development of an Islamic finance industry in Africa could help plug the region's large infrastructure gaps over the coming decade, Standard & Poor's Ratings Service said in a report published on Thursday entitled "Regulations And Fiscal Incentives Could Speed Islamic Finance Development In Africa".
However, a framework of regulation and fiscal adjustments will be necessary to foster African sukuk markets, provide wider investment options for potential Islamic investors and attract a pool of Islamic liquidity, it said.
To date, African sovereigns have issued about $1 billion of sukuk instruments, compared with global sukuk issuance of an average $100 billion per year over the past five years. Meanwhile, widening fiscal deficits and large infrastructure gaps will likely require multibillion-dollar additional financing needs over the next decade.
Experience in South Africa and Senegal has shown that a significant amount of time can elapse between governments' announcement of intent to issue sukuk and their effective issuance, as governments gauge market interests and try to address the legal hurdles and cost of issuance.
"We believe legislation gaps are the main causes of delay between a country's intent to issue and its effective issuance of sukuk," Standard & Poor's credit analyst Samira Mensah said.
The success of Malaysia in Southeast Asia as a hub for Islamic finance lies, among other things, in the strong regulatory framework to support the sector's growth. Malaysia also moved quickly in 2009 to address the standardisation of instruments and interpretation of Shariah law.
Tax regimes are equally important to consider when encouraging sukuk issuance.
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