‘The medium- to long-term outlook is positive amid intact Islamic investor demand, issuer refinancing needs and government support in core markets.’ That was from a note issued at the beginning of last year by Fitch Ratings concerning global sukuk bonds sentiment. Sukuk, or Islamic bonds, provide an avenue for nations and corporates to access capital while adhering to Shariah-compliant financial principles. Unlike conventional bonds, sukuk represent ownership in tangible assets, projects or services, aligning with Islamic finance’s prohibition of interest (usury). This facilitates infrastructure development, economic growth and poverty alleviation in a manner consistent with Islamic ethics.

‘Investor interest in sukuk bonds has been encouraging, with investors seeking to expand their fixed income holdings in an economic environment where regular returns are increasingly preferred,’ according to Samuel Mokorosi, the JSE’s Head of Origination and Deals. ‘The latest sukuk bond issue from the South African government in November 2023 can be used to gauge investors’ appetite for this asset class. The auction was 1.74 times oversubscribed, with demand for the rand-denominated instrument largely comprising domestic banks. National Treasury raised a substantial R20 billion, making significant inroads in funding the budget deficit.’

Mokorosi says that on the international front, sukuk bonds are ‘now firmly a part of the debt market’, most notably in the Middle East, Asia and broader Africa.

He adds that the JSE is collaborating with financial institutions, both locally and internationally, to support the issuance and trading of sukuk bonds on the exchange. ‘The bourse is open to collaborating with a broad number of stakeholders, including on the topic of sukuk bonds. Recently, we have been engaging with a number of international DFIs [development financial institutions] on the asset class and are looking to expand their issuance and trading on the exchange.’

Mokorosi says the JSE’s existing regulatory framework will support the issuance and trading of sukuk bonds on the exchange. ‘The JSE is committed to providing an orderly marketplace for trading in these securities and regulating the market accordingly,’ he says. ‘Sukuk bonds are self-labelled and the issuance and trading thereof need to align with the JSE debt listing requirements. The issuer will also need a debt sponsor to interact on their behalf with the JSE through the listing process.’

He says the JSE believes sukuk bonds can be seamlessly integrated with other asset classes traded on the exchange, attracting not only funds from Islamic investors but also diversifying the investor base, thereby enhancing global capital inflows.

‘The listing of the Agrarius Sustainability Engineered Shariah-compliant sustainability-linked sukuk on the JSE late in 2022 is a great example of how we have integrated sukuk bonds with other asset classes on the bourse. The listing of the sukuk constituted the inaugural issuance by Agrarius, under its R10 billion Shariah-compliant sustainability-related, asset-backed note programme focusing on the agriculture sector.

‘The JSE encourages product innovation, and this issuance showcased an investment approach that differs from traditional models. We welcome the mechanisms to enable access to funding to grow pivotal sectors within the South African economy. We are open to expanding the Islamic finance ecosystem, given increasing investor appetite in the segment.’

Mokorosi says the JSE is engaging with market participants, including issuers and investors, to educate them about the features, benefits and considerations of sukuk bonds, and will continue to do so.

‘The JSE has access to a broad array of experts and offers a range of training courses for company directors, C-suite executives, investor relations and communications teams, and senior and middle managers on a consistent basis. Our latest engagement has been around facilitating a knowledge-sharing session with several African DFIs on listing sukuk bonds, which we hope to run in the new year.’

By Patrick Farrell
Image: iStock Images