Malaysia: Islamic banking players urged to expand overseas

KUALA LUMPUR: The domestic Islamic banking industry players should be brave enough to tap into foreign markets to expand their businesses and grow the industry, says Datuk Dr Mohd Daud Bakar, group executive chairman of Amanie Advisors, syariah advisory firm.

Daud said that companies were too afraid to face the potential risks in the foreign markets.

"They are too obsessed with their own success stories and tend to focus on setting up their businesses only in Malaysia. They should use their expertise to explore outside market.

"In this segment, we have the experts and many countries hope that we bring our capital as well as expertise to set up a Malaysian bank," he told Bernama.

He said Malaysia has the capability to set up banks and companies offering Islamic banking products and services as it is the third biggest Islamic banking industry player in the world after Iran and Saudi Arabia.

Unfortunately, Daud said, Malaysian bankers were not keen, for whatever reason, to go out.

"This is a big failure because they should diversify the risks.

"When you are already a hit in Malaysia, definitely you are able to survive overseas ... investing overseas would offer new exposure and bring back the money.

"If they have businesses outside the country such as Dubai, it can give them advantages in terms of income contribution despite the ringgit's depreciation as the overseas operations use the countries' currencies," he said.

On the company's expansion plan, he said, Amanie Advisors was looking to enter new markets, such as Nigeria, India and Gambia, to provide syariah products and services due to the anticipated strong demand in the next three years.

"We are going to Morocco next week to organise a national event, 'International Participative Finance Forum Casablanca 2015'.

"Our startegy is to focus on new markets as there are less competition compared with the established ones... we want to be more active in the new markets," he said.

The homegrown syariah advisory firm also aimed to be more visible and impactful in the global industry after it won the 'Award of Islamic Economy Knowledge Infrastructure' by Global Islamic Economy Summit last Monday in Dubai, he said.

"We take the award seriously because it went through a one-year process to announce the winner and we do battle with 10-15 global established firms which have their own success stories.

"In order to maintain our standard, we will motivate our people and take on new initiatives to show how impactful we are in the market," he said.

Amanie Advisors specialises in Islamic finance solutions. It offers a wide range of services including syariah advisory and consultancy, training and research and development for institutional and corporate clients.

(The Star Online // 15 October 2015)

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Malaysia Sukuk Refinancing Window Opening as Fed Wavers on Rates

Malaysia’s two biggest banks are predicting a pickup in the country’s Islamic bond sales as companies try to refinance debt before the Federal Reserve raises interest rates.

Forecasts that the Fed will keep interest rates lower for longer have given local businesses a bigger window to refinance, according to Malayan Banking Bhd. and CIMB Group Holdings Bhd. MMC Corp., a Kuala Lumpur-based infrastructure firm, started marketing 1.5 billion ringgit ($358 million) of Shariah-compliant bonds to refinance non-Islamic loans this month, said Managing Director Che Khalib Mohamad Noh.

A successful sale by MMC will push local-currency issuance this quarter to 3 billion ringgit, nearly half the 7.2 billion ringgit total during the previous three months. An index of Malaysian corporate sukuk yields rated AA- has declined this month after rising the most since 2008 last quarter, while the ringgit posted its biggest surge in 17 years last week amid a rally in emerging-market assets.

“Now is a good time for corporates to tap the market,” said Nik Mukharriz Muhammad, a Kuala Lumpur-based fixed-income analyst at the investment-banking unit of CIMB, Malaysia’s second-biggest lender by assets. “Issuers will be able to get better pricing” before the Fed raises borrowing costs, he said.

Khazanah Nasional Bhd., Malaysia’s sovereign wealth fund, kicked off third-quarter sukuk sales with a 1.5 billion ringgit offer last week that’s set to be issued on Oct. 19, according to people familiar with the matter who didn’t want to be named as the information isn’t public yet. The notes due 2022 were sold to yield 4.57 percent. Jimah Power East Sdn., a unit of state-owned utility Tenaga Nasional Bhd., is planning a 10 billion ringgit Islamic bond sale this month, people familiar with the offer said.

MMC, which has power, ports and construction divisions, hired RHB Investment Bank Bhd. as the lead arranger and manager. The offer has been rated AA-, the fourth-highest investment grade, by Malaysian Rating Corp.

The company, controlled by Malaysian billionaire Syed Mokhtar Al-Bukhary, has a market capitalization of 7 billion ringgit and is forecast to post a net income of 450.5 million ringgit in 2016, up from an estimated 384.8 billion ringgit in 2015, according to the average estimate of analysts surveyed by Bloomberg. Its share price has rebounded to 2.30 ringgit since closing at a six-year low of 1.57 ringgit on Aug. 24 and 25.

MMC’s port subsidiary Pelabuhan Tanjung Pelepas sold 310 million ringgit of six-year sukuk at a coupon rate of 4.36 percent in January 2014. The securities last yielded 4.12 percent on Aug. 7.

The average yield on Malaysia’s AA- rated corporate bonds due 2020 fell to 4.973 percent on Oct. 7 after climbing 18 basis points last quarter to 4.977 percent, the highest since January 2012, according to an index compiled by Bank Negara Malaysia. Theringgit surged 6.8 percent last week.

Liquidity Flush

While borrowing costs have gone up, they’re still at a “decent level,” said MMC Managing Director Che Khalib.

“Our earnings outlook has improved and we think that there’s a good chance that we will get a rating upgrade,” he said. “The market is flush with liquidity and there’s a shortage of good quality paper.”

Malaysian banking assets that comply with Islam’s ban on interest expanded by an annual average of 17 percent in the five years through 2014 to 625.2 billion ringgit. Corporate ringgit sukuk sales, including Khazanah’s but not MMC’s, are at 33.1 billion ringgit so far this year, 35 percent less than the same period of 2014. The 7.2 billion ringgit of issuance in the third quarter was the least since 2010.

Malaysia’s expanding Shariah banking assets and a lack of good quality sukuk will ensure demand for MMC’s offer, said CIMB’s Nik Mukharriz.

There are 11.4 billion ringgit of Shariah corporate notes and 5.5 billion ringgit of Islamic and conventional loans set to mature by the end of March, according to data compiled by Bloomberg, which companies may choose to refinance before the Fed raises rates.

“Despite the volatility seen in the current market, yields are still attractive for issuers considering a sukuk issuance,” said John Chong, chief executive officer at Maybank Investment Bank Bhd., a unit of Malaysia’s biggest lender. “We expect to see pipeline deals continue to roll out.

(Bloomberg Business / 13 October 2015)

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Nigeria Urged To Tap Islamic Financial Resources

The Lord Mayor of the City of London, Alderman Alan Yarrow has urged the country to consider all sources of finance as a means for attracting investment.

In particular the Mayor during a trip to Nigeria was keen to highlight the City of London as a leading centre for Islamic finance and stated Islamic finance can provide substantial investment for Nigeria. He added Islamic financing was currently marginally more expensive when compared to conventional finance but this difference was expected to reduce as volumes increase within the Islamic financial market. The Lord Mayor suggested the North of Nigeria would in particular benefit from Islamic financial products.

Yarrow who met with financial sector regulators and operators including the Securities and Exchange Commission, CBN, Jaiz Bank Lotus Capital among other, in Abuja last week, said London with six Islamic banks and another 20 lenders currently offering Islamic financial products and services had the capacity to help Nigeria to deepen its Islamic financial system.

He said, “We want our Nigerian friends and partners to see London as Nigeria’s international companion whatever type of expertise is required. From looking at Nigeria’s legal framework, to helping to up skill your young, dynamic and ambitious population, London has the expertise, the variety and the capacity to help. And most of all, we offer the willingness.

“Only a few months ago, UK’s Chancellor of the Exchequer – which is really the name of our Finance Minister – stood beside me and the Governor of the Bank of England and he spoke about the importance of Islamic finance.

(Leadership / 12 October 2015)

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Bank Sohar reports profits on Islamic banking

Oman’s Bank Sohar reports net profits of OMR 396,000 for the period to end-September 2015 on Islamic banking, against losses of OMR 238,000 for the period to end-September 2014. AT the same time the bank showed a 12.89 per cent decline in net profit on conventional banking to OMR 20.896 million. Overall net profit was down 10.35 per cent at OMR 21.292 million.

(C P I Financial / 12 October 2015)

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EIB starts Islamic Banking index

Dubai: Emirates Islamic Bank said on Monday it has launched an Islamic Banking index, aimed at understanding the benchmark shift in the market penetration, as well as the perception, knowledge and intent of UAE consumers towards Islamic Banking.

“By analysing four key indicators [penetration, perception, knowledge, and intention], we have created for the first time a benchmark that brings together perception and reality on the status of the Islamic Banking industry in the UAE,” said chief executive officer Jamal Bin Ghalaita.

“In doing so, the index reveals more than just the attitudes and opinions of people in the UAE towards Islamic Banking — it also creates a pathway to the solutions that will enable us to drive the continued growth of Islamic Banking in the UAE,” Bin Ghalaita added.

The survey was done with a sample size of about 900 clients from the different emirates, and the main criteria was that the principal has a banking product.

“This index would help the economy in bringing more transparency and also in getting views of Muslims or non-Muslims and if they have used the products. The idea is how are we able to improve the communication with our clients in making them understand the products and services that we offer,” Bin Ghalaita said.

Banking for all

“Islamic banking is open for all, our doors are open for all. The idea is very transparent banking. If we overcharge, either it goes to charity or or it goes back to the client. So these values of banking, we need to communicate in a better manner to attract more customers,” Bin Ghalaita said.

About 50 per cent of the respondents have had heard or used an Islamic Banking product, indicating the depth of awareness.

“While many people have heard about the structures, not many people are aware about the specifics of how the structure works,” said Wael Ebrahim, chief operating officer at Emirates Islamic Bank.

Almost half of the UAE banked respondents have at least one Islamic product. While Muslim consumers have a fairly even number of conventional and Islamic products.

The survey also found out that the respondents perceive that Islamic banks support the community more and have lower transaction fees as compared to conventional banking. Overall, Islamic banks are more trusted particularly by users of Islamic banking products, the survey revealed.

About a quarter of the respondents expressed their intention to acquire an Islamic and conventional banking product in the coming six months, three-fourths said they they were open to Islamic Banking products, 21 per cent said they only look for Islamic Banking products, while 54 per cent said they kept both options open.

(Gulf News Economy  05 October 2015)

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Islamic finance to hit $3t amid headwinds

Assets held by Shariah-compliant financial institutions worldwide will expand to approximately $3trillion from the current $2trillion in the next few years, despite moderate growth and stronger headwinds Islamic finance industry faces in 2016.  

Standard & Poor's Ratings Services said 2016 would be a crossroads for Islamic finance with headwinds, including the possible negative impact of much lower oil prices and the prevailing low interest rates in most major developed countries, slowing the industry growth.

"Offsetting these negatives are factors such as advancements in standardisation for Islamic finance products that could attract new players, the potential lessons for the industry from bank resolution regimes in conventional finance, and the benefits from implementation of Solvency II for many insurance companies in 2016," S&P analysts said on Sunday ahead a conference it is hosting in Dubai to discuss "Prospects for Islamic finance."

The Islamic finance industry's current and expected trends, and the increasing role of regulation and the way it shapes and supports market development will be a particular focus of the 4th Annual Islamic Finance Conference opening today, it said.

"In our view, after 20 years of solid growth, the industry has achieved a critical mass that enables it to face increasing headwinds. Still, the reality of declining oil revenues could start to take a toll on governments' budgets and economic growth in core markets for Islamic finance. Our 2015 conference will discuss the perspectives on recent market development and regulatory frameworks," said Stuart Anderson, Managing Director & Regional head, Middle East, Standard & Poor's.  

Anderson pointed out that the industry's move toward product standardisation has accelerated over the past couple of years, with increasingly similar products and sukuk structures being used across different countries.

Higher standardisation could help in attracting new players, while leaving space for innovation. The moves in conventional finance toward the implementation of bank resolution regimes and the bail-in of certain categories of liabilities could spill over into Islamic banking. For example, Islamic banks have so far not strictly applied profit and loss sharing, which is embedded in the principles of Islamic finance, he said.

"We think that, with the rollout of bank resolution regimes in conventional finance, applying this principle more strictly in Islamic finance could be smoother," said Anderson. Global sukuk issuance volumes have dropped by about 40 per cent since the beginning of 2015. "The fall stems mainly from the Central Bank of Malaysia's decision to switch out of sukuk to other liquidity management instruments for Malaysian Islamic banks. In other countries, however, Islamic finance has continued to attract significant interest, and its ethical nature is seducing some clients beyond its natural reach", said Mohamed Damak, global head of Islamic Finance for S&P.

S&P analysts felt that the advance of Islamic finance into non-Muslim countries has stalled over the past year, mainly due to regulatory hurdles and the generally low interest rate environment that makes other funding sources more attractive.

"We anticipate that assets held by Islamic financial institutions worldwide - currently totalling about $2 trillion by our estimates - will expand to approximately $3.0 trillion in the next few years. We expect the pace of Islamic finance growth will moderate in 2016, compared with advances over the past couple of years, chiefly because of the now less supportive economic environment in the industry's two major growth engines, Malaysia and the GCC."

In the UAE, Shariah-compliant assets have crossed the $100 billion milestone for the first time. Islamic banking penetration in the UAE currently stands at 21.4 per cent and represents a 14.6 per cent share of the global market. The industry in the UAE is growing at more than twice the rate of conventional banking, according to EY's report based on a study. The Islamic banking sector in the Emirates is on track to achieve $263 billion of Shariah-compliant assets by 2019.

The projected size of the Islamic banking sector in the UAE is expected to account for almost 15 per cent of the world's six core Islamic markets estimated to hit $1.8 trillion by 2019. Global Islamic banking assets witnessed a compound annual growth rate of around 17 per cent from 2009 to 2013.

(Khleej Times / 05 October 2015)

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Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Malaysia sukuk drought seen easing this quarter

KUALA LUMPUR: Malaysian companies building railways and power plants under Prime Minister Najib Razak’s US$444bil development programme will help revive sukuk sales from the slowest quarter since 2010, said AmInvestment Bank Bhd.

Corporate issuance could rise to as much as RM60bil (US$13.5bil) for the full year, said Mohd Effendi Abdullah, head of Islamic markets at Kuala Lumpur-based AmInvestment Bank, after sales slumped to RM7.2bil in the third quarter. While the forecast would mark a pick-up from the RM31.5bil sold so far this year, offerings would still remain below levels for the past three.

More syariah-compliant bond sales are likely to be announced once the United States goes ahead with an expected interest- rate increase, removing an uncertainty that’s stifled issuance, said Mohd Effendi. Jimah Power East Sdn Bhd, a unit of the state electricity company, plans to sell RM10bil in October in what will be Malaysia’s third biggest sukuk sale of all time. DanaInfra Nasional Bhd, which is financing a new subway system in Kuala Lumpur, is due to announce a RM40bil programme in the fourth quarter, according to people familiar with the matter.

“The sukuk pipeline looks better now,” said Mohd Effendi at Malaysia’s third-biggest Islamic bond arranger of 2014. “If demand is healthy, this could encourage moreissuers to tap the market.”

Islamic bond sales in the world’s biggest market for the debt dropped 56% in the third quarter from the previous three months, according to data compiled by Bloomberg.

Issuance in the first nine months of 2015 declined 37% from a year earlier. Offerings totalled RM65.1bil last year.

“It’s a challenging time for arrangers and issuers,” said Mohamed Azahari Kamil, Kuala Lumpur-based chief executive officer of Asian Finance Bank Bhd, the Malaysian unit of Qatar Islamic Bank SAQ. “So long as the ongoing uncertainty in the local and global markets persists, sukuk sales are unlikely to pick up substantially.”

The United States refrained from increasing interest rates in September, keeping markets in limbo as to when it will tighten monetary policy. Fed officials have indicated they may make a move at either one of this year’s two remaining meetings, in October and December.

Prospects of higher US interest rates have drained capital from emerging markets and pushed up borrowing costs for bond issuers. In Malaysia, yields on top-rated, 10-yearconventional corporate notes climbed 25 basis points to a four- year high of 4.87% in the third quarter, a central bank index shows.

That was the biggest three-month increase since March 2014.

AmInvestment’s Mohd Effendi said sukuk issuers that need the funds will still go ahead with sales even if market conditions are tough because they can structure longer-maturity debt to appeal to pension funds and insurers.

Prime Minister Najib is farming out infrastructure projects to the private sector as well as government-linked companies. He is seeking to transform Malaysia into a developed economy by 2020 and announced last October that the nation will start work on projects valued at RM75bil this year.

“We expect large infrastructure and utility issuance in the fourth quarter, but sales are anticipated to be 25% lower than 2014,” said Angus Salim Amran, Kuala Lumpur-based head of financial markets at RHB Investment Bank Bhd, a unit of Malaysia’s fourth biggest sukuk arranger last year.

(The Star Online / 02 October 2015)

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Islamic Investment Malaysia: www.islamic-invest-malaysia.com

China turns to Islamic finance to expand economic clout

Islamic finance is gaining prominence as a channel for China to expand its economic influence abroad as banks strengthen ties with Muslim-majority countries and Chinese companies start to tap offshore pools of Islamic funds.

With a Muslim population of about 20 million, China has little reason to develop Islamic banking at home. But there are powerful reasons for it to get involved in the sector overseas.

China wants to build stronger trade ties with Asian countries under its "One Belt, One Road" strategy to rebuild Silk Road trade links with Asia and Europe.

The network will include the world's main centers of Islamic finance, the Middle East and Southeast Asia, where sharia-compliant assets account for as much as a quarter of total banking assets.

"With 'One Belt, One Road', (Chinese) state-owned enterprises and private companies are now more willing to explore Islamic finance," said Hong Kong-based Ben Ping Chung Cheung, Asia Pacific head of consultancy Shariah Advisory Group.

The firm is advising conglomerate HNA Group [HNAIRC.UL] on what could be the first Islamic financing by a mainland firm: a $150 million deal to buy ships. HNA also plans an offshore issue of sukuk (Islamic bonds), Cheung said.

A railway project in the eastern province of Shandong is also exploring issuing sukuk to raise as much as 30 billion yuan ($4.7 billion) for a high-speed rail link, said Cheung.

If successful, such a deal would rank among the largest sukuk ever issued. Hurdles remain, however, as discussions were still preliminary and any financing would face stiff competition from domestic banks, Cheung added.

In July, Singapore-based adviser Silk Routes Financials said it had been mandated by a unit of state-owned Sichuan Development Holding Co to advise on Islamic financing options.

"There is certainly some momentum, a consequence of the large and growing trade links between China and the Gulf," said Jonathan Fried, a partner at law firm Linklaters in Dubai.

Such plans are ambitious as Chinese firms face a steep learning curve in Islamic finance, which obeys rules such as a ban on paying interest and uses formats that can be morecomplex than conventional finance.

For their part, Islamic investors have plenty of money to buy into dollar-denominated sukuk, but historically have tended to invest in top-rated issuers.

"The attraction would be if sukuk is cheaper for issuers, and clearly there are a lot of companies in China within the right industries, the right structures for it," said Kalai Pillay, head of North Asia industrials at Fitch Ratings.

GOVERNMENT LEVEL

At a governmental level, Chinese participation in Islamic finance may be mainly via the Asian Infrastructure Investment Bank (AIIB), a new multilateral lender backed by Beijing.

The AIIB has discussed using Islamic finance with the Saudi Arabia-based IslamicDevelopment Bank (IDB), two lenders which have 20 member countries in common.

Islamic deals could help AIIB differentiate itself from rivals such as the World Bank and Asian Development Bank.

China's state-owned banks are already raising their profile in the Gulf. In the past year, Agricultural Bank of China, Bank of China and Industrial and Commercial Bank of China (ICBC) have issued conventional bonds listed on NASDAQ Dubai.

"The next stage will be sukuk issuance by Chinese entities, facilitated and co-managed by these banks," said Fried at Linklaters.

(Reuters / 22 September 2015)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Indonesia prays for Islamic banking boom

Indonesian teacher Nina Ramadhaniah hopes for "blessings from Allah" by opening a sharia bank account -- the sort of pious customer the world's most-populous Muslim-majority country is praying for as it launches an Islamic finance drive.

Indonesia, Southeast Asia's biggest economy, has a Muslim population of around 225 million, but this huge number of faithful has not translated into success for sharia banks – institutions required to do business in line with Islamic principles. Now regulators have launched a plan aimed at growing the sector, which currently accounts for less than five percent of banking assets, compared to a quarter in neighbouring, more developed Muslim-majority Malaysia and around half in Saudi Arabia. Authorities believe it is a good moment, with many Indonesians getting wealthier after years of strong economic growth and an increasing trend towards piety across broad sections of society.

Many of those without bank accounts, estimated at about 40 percent of the population, are soon expected to open one. "The situation is an opportunity for the Islamic banking business to get bigger," said Nasirwan Ilyas, a senior official from the Islamic banking division of the Financial Services Authority (OJK). The OJK is spearheading the drive, and unveiled a five-year roadmap earlier this year that included plans to educate the public about sharia lenders and the establishment of an Islamic finance committee to better manage the sector.

Key features of sharia banking include the prohibition of interest on loans or customer deposits, and a ban on investing in "non-Islamic" businesses, such as those involving pork or alcohol. For teacher Ramadhaniah, who has an account with Indonesia's biggest Islamic lender, Bank Syariah Mandiri, the ban on interest is a key attraction. "Charging interest is haram (against Islam), ill-gotten gains that will not bring me any blessings from Allah," the 44-year-old told AFP. "I don't want to live in sin."

Sharia accounts often work on a "profit-and-loss sharing" model, meaning customers get a windfall when the bank does well, but can lose out when it does badly. There are obvious disadvantages. Sharia lenders generally offer lower returns on investments and their modest size often means they provide fewer services than larger, conventional peers – many shops are not equipped to accept their debit cards.

Nevertheless, Islamic banks have proven popular in recent years, with the sector expanding on average more than 40 percent a year between 2008 and 2012, according to the OJK. The growth came after laws were changed to make it easier to establish an Islamic bank, and there are now a plethora of stand-alone sharia lenders, Islamic banking units attached to conventional banks and smaller Islamic financial institutions in the countryside. Growth in the sector has lost steam due to a broader slowdown in the economy, which is expanding at six-year lows – giving authorities another reason to launch their drive.

Central to the overhaul is a plan to set up a National Islamic Finance Committee this year, to oversee the sector by bringing together representatives from different government agencies and act as a contact point for potential foreign investors. Currently, responsibility for the sector is spread around different bodies, such as the OJK, the central bank and the finance ministry, according to the OJK's Ilyas. It is modelled on similar bodies in other countries, such as the International Islamic Financial Centre in Malaysia, where the sector is already far more developed as the government started supporting it some years ago.

In addition to the OJK roadmap, the government has announced plans to merge the Islamic banking subsidiaries of four state-owned banks to create an Islamic mega-bank, which should be able to provide better services than the current Islamic lenders.

While observers have broadly welcomed the plans, they concede that many difficulties remain. Khalid Howladar, Moody's global head of Islamic finance, said it would be "quite a challenge" to grow the sector to a substantial level. "The market is growing faster than the conventional but from a very low base," he said, adding Islamic banks in Indonesia did not offer "substantive competition" to their non-sharia peers.

But for Ramadhaniah and a growing army of devout Indonesians with new-found spending power, Islamic banks remain the only choice. "I really don't care that I'm not earning anything or getting lower returns on my investments," she said. "I can live in peace.

(Qantara  / 30 September 2015)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Islamic finance: Sukuk for Senegal

When Senegal issued a 100bn CFA franc ($168m) sovereign Islamic bond in June 2014, it beat economic giants Nigeria and South Africa to market and began a race to create a hub for Islamic finance in Africa.

Following Senegal's Islamic bond, or sukuk, Nigeria, Niger and Côte d'Ivoire have also expressed interest in developing a sharia-compliant sector of the market in a bid to attract investment from the Gulf states.

Senegalese officials are optimistic about the country's prospects. "We have a dynamic financial centre in Dakar," says Alioune N'Diaye, the finance ministry's director for money and credit.

"We have an Islamic bank in Senegal, the Banque Islamique du Sénégal, we have the advantage of a good relationship with the Islamic Development Bank (IDB) and we are the first country to explore these opportunities in the region. We have a population of 95% Muslim people as well. It has been a long time in planning, but we think that we can be a hub for Islamic finance in Africa."

Traditionally, Senegal has looked towards the West for loans, borrowing from lenders such as the World Bank, the International Monetary Fund and France.

In 2011, Senegal issued a $500m eurobond, marking a change of course in its borrowing patterns.

But with a gradual readjustment of tax and other laws to be able to accommodate sharia-compliant financial instruments and growing ties with Gulf states such as Saudi Arabia, Kuwait and the United Arab Emirates, Senegal could become a prime destination for Arab investors who are looking for higher returns on their money.

Resilience

"We saw that the Gulf countries had an excess that they wanted to invest but in a sharia-compliant way," says N'Diaye.

"To attract this investment, we set up sharia-compliant instruments. With the debt crisis in Europe, we saw that Islamic finance was more resilient. The 2008 financial crisis was due to speculation, so we can see that Islamic finance is more attractive."

Islamic financial instruments take into account basic investment principles set out in Islamic law, or sharia.

These include not charging interest, not investing in sectors forbidden by Islam, investing in a tangible asset and the sharing of profit and loss between the lender and borrower.

In Senegal's case, the 2014 sukuk used the finance ministry's administrative building as the asset in which to invest.

Senegal's stability is what makes it an attractive investment opportunity for Arab countries, says Mouhamadou Lamine Mbacké, the managing director of the Dakar-based Institut Africain de la Finance Islamique, an advisory and training organisation that has worked with the government on developing Senegal as a centre for Islamic finance.

"West Africa is a natural destination for Islamic finance. And in West Africa, Senegal is probably the most stable country. I think we can attract a lot of direct investments."

Mbacké argues that there is a cultural shift happening in the region, with countries such as Senegal throwing off their traditional connections and turning instead to countries with whom they share ideological principles.

The launch of the sukuk gave Senegal a huge amount of publicity in the Gulf and has opened the doors for investors in other areas of Islamic finance.

"I don't think that Senegal is very well known as far as investors in Islamic finance are concerned, because it is more the English-speaking countries [that are known]," says Mbacké.

"But the sukuk gave a lot of attention to Senegal. I think from the issuance of the sukuk, many Islamic finance investors are now coming to Senegal."

Enthusiastic lenders

According to the government, which in 2014 launched its five-year Plan Sénégal Emergent (PSE) to grow Senegal's economy significantly by 2018, Arab investors are now one of the main lending groups in the country.

At the PSE meeting in Paris in 2014, at which donors pledged 3.7trn CFA francs of new money to help Senegal with infrastructure development, 38% of the money promised was from Arab investors.

"The IDB pledged 550bn CFA," says Moustapha Ba, the director general in charge of finance at the ministry of finance, "and after one year we have received 182bn CFA francs of that money. The IDB is now the main lender in Senegal. There is a very strong trend towards non-traditional Arab lenders."

But while Senegal seeks to position itself as sub-Saharan Africa's first choice for Arab investors on the continent, obstacles still remain.

"You need a regulatory framework for Islamic finance to take place so that investors are not disadvantaged from a taxation standpoint," says Samira Mensah, a financial services analyst specialising in Islamic finance at Standard & Poor's.

"Senegal used the existing conventional regulation of the Union Economique et Monétaire Ouest Africaine as well as regulation specifically introduced by the ministry of finance to be able to issue the sovereign sukuk. Senegal hasn't yet met the conditions to become an Islamic finance hub. They need time to develop Islamic finance alongside conventional finance and to deepen the offer of Islamic instruments, otherwise investors won't buy into it."

However, Mensah says, Islamic financial instruments such as sukuk are suited to the Senegalese economy. "The idea of issuing the sukuk was to develop infrastructure projects, so this is a very good fit. Africa in general is a good fit for Islamic finance. To develop infrastructure you need long-term funding and to diversify your funding base, and to provide investors with investment opportunities. 

To issue sukuk, you need real estate assets, and Senegal has plenty of land which is not yet developed. It is a perfect match."

Mbacké agrees: "Investing in [sub-Saharan Africa] is more profitable than investing in the Western world because the cost is lower, the return is higher and everything has yet to be done in Senegal." Mbacké's organisation has its sights set on opening an Islamic bank in Senegal and will begin by starting an Islamic microfinance institution later this year to provide small businesses with sharia-compliant loans.

"Microfinance is a big industry," he says, "but interest rates are going over 30%. We think that Islamic finance is the solution because there are no interest rates and also because we finance assets, not money. We think that Islamic finance will keep the advantage of the conventional microfinance and that it will take away the bad parts,which is the interest rates."

If, after two years, he says, the microfinance institution is going well, they will look for investors to start a bank.

More bonds to come

One Senegalese microfinance institution has already had some success.

Le Millénium Compagnie Islamique du Sénégal started off under another name in 2002 and had 14 outlets and about 7,000 customers by 2011.

According to Standard & Poor's, worldwide sukuk issuance could reach $115bn in 2015, with Malaysia and Saudi Arabia leading the market.

In March, Senegal's President Macky Sall said the government would sell $500m of standard bonds in the international market and could issue more Islamic bonds to help finance the budget.

In April, the government voted in a law to allow waqf, or funds that distribute resources for social projects.

The Senegalese government is also in the process of launching a project with the IDB to modernise the country's daaras, or Koranic schools.

"We are thinking about complementary ways of diversifying our economy," says money and credit director Alioune N'Diaye.

"Conventional finance has its place and will keep that place, but we will also have the opportunity to use Islamic finance. Islamic finance is a really dynamic force today, which we hope will bring results.

(The Africa Report  30 September 2015)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com