African Development Islamic Capital Market

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1 سم الله الرحمن الرحيم African Development Islamic Capital Market ICD-Thomson Reuters Islamic Finance Indicator 2014 (IFDI), total Islamic finance assets $1.658 billion in 2013 expected to grow by 15% p.a. Funding gap opportunity for ICM to lead further growth & development in Africa Khaled M.J. Gökçezadeh EVP Group Head of Treasury & Investment Banking Bank of Khartoum

658 billion in 2013 expected to grow by 15% p.a.

2 Africa Rich with Opportunities 2 nd largest and 2 nd most-populous continent 20.4% of the total land area UNs Human Development Report in 2003, the bottom 25 ranked nations (151st to 175th) were all African. 90% of the world's cobalt, 90% of its platinum, 50% of its gold, 98% of its chromium, 70% of its tantalite, 64% of its manganese and one-third of its uranium Christians Muslims Traditional Religions 45% 40% 10%

3 Infrastructure: Key to Africa s Faster Growth Overall, Africa s infrastructure upgrading and modernization needs are expected to cost US$360 billion up to the year 2040 Huge funding gap to fill. Country Typology GDP per Capita USD bn/yr Burden on Economy % of GDP Resource-rich Countries % - 12% Middle-income Countries % - 12% Low-income non-fragile States % Inadequate infrastructure impedes faster growth Raising / improved Low-income Fragile States 14 36% (2%) Nat'l economic growth (40%) of Productivity EVERY YEAR Infrastructure Poor 1% - 2% Growth in Per Capita

Country Typology GDP per Capita USD bn/yr Burden on Economy % of GDP Resource-rich Countries 28-30 10% - 12% Middle-income Countries 28-30 10% -

4 Infrastructure: Key to Africa s Faster Growth Deficient infrastructure of the power sector has retarded growth, reducing per capita growth for Africa as a whole by 0.11% and moer so for southern Africa

retarded growth, reducing per capita growth for

5 Infrastructure: Key to Africa s Faster Growth Funding Gap: 40% for the power, 6% of African GDP Water & sanitation, 3% of regional GDP Transport sector 2.6% of GDP

6 SME: Key to Africa s Faster Growth A potential financing gap of $2.1 - $3.7 bn, with a corresponding deposit potential of $3.2 - $5.7 bn across these countries. alone Untapped market segments with huge potentials 35% excluded from formal banking

7 Islamic Capital Market Legal system & Tax Regulations Islamic Banks Regulators SECs & CBs Deficit Fund Units DFU s Stock & Bond Exchange L-T Equity & Debt Securities Over-the-Counter (OTC) Surplus Fund Units SFU s Credit Rating Agencies Custodians & Registrars Brokers & Sub brokers Underwriters Mutual Funds & VC Funds Shari a Scholars & Boards & Others Portfolio Managers

(OTC) Surplus Fund Units SFU s Credit Rating Agencies Custodians & Registrars Brokers & Sub

8 Islamic Capital Markets CAGR 40% Ethical finance, which is estimated at more than USD5 trillion in assets in Europe alone as at end-2009, five times that of Islamic finance during the same period.

9 Islamic Capital Markets The indices have opened trillions of dollars worth of investment opportunities a landmark initiative the first Islamic Interbank Benchmark Rate (IIBR) an Islamic industry with its own pricing and rates mechanism based on murabahah and wakalah rates. IIBR could prove to be an alternative, or at least complementary, to pricing Islamic instruments, particularly sukuk

industry with its own pricing and rates mechanism based on murabahah and wakalah rates.

10 Islamic Capital Markets

11 Islamic Capital Markets - Sukuk Market bounces back from 2013 low : % from 2012 s $137bn & 14 e140bn More jurisdictions than ever before: new sovereigns and corporates capital flows to emerging markets, commodities and alternative investments. Forecast the sukuk demand and supply gap to narrow the next 5 years, from $227 bn in 2015 to $209 bn in 2018 to $196 bn in 2020

flows to emerging markets, commodities and alternative investments.

12 African Capital Markets Performance of Equity Markets I. Market Capitalization: 15 African stock exchanges which represents 65% of the total population of African Stock Exchanges. Kenya, Ghana, Egypt, Morocco, Nigeria and South Africa, which constitute of approximately 90% of stock exchange activity in the region. S.A. alone constitutes of approximately 70% of stock market activity in the region. As of Dec 2009 African stock market capitalization accounted for a meager 2% As of Dec 2009 ranking of stock exchanges according to M-Cap: SA, Egypt, Nigeria and Morocco, Kenya, Ghana. II. Number of listed companies: On a global front, African stock markets = 3% of listed companies as at end of 2009 S.A. with 396 listings (26%) & Egypt with 313 (21%), Nigeria 216 listings (16%) followed by Morocco & Zimbabwe & Kenya top 6 account for 76%

As of Dec 2009 African stock market capitalization accounted for a meager 2% As of Dec 2009 ranking of stock exchanges according to M-Cap: SA, Egypt, Nigeria and Morocco, Kenya, Ghana. II.

13 African Capital Markets Performance of Equity Markets III. Market Capitalization as a % of GDP: Mean M-Cap (as a percentage of GDP) of 37.89% (28.75% excluding S.A.) pales in comparison to that of Malaysia of % The mean for Africa growing from 17% of GDP in 1991 to 38% in 2009 S.A. leads with an average M-Cap to GDP ratio of 212%, followed by Ghana 61%; Morocco 59%; Egypt 55%; Mauritius 54%; Botswana 32% and Kenya at 31%. IV. Equity Turnover: S.A. accounts for +70% of all African stock exchanges turnover= most liquid market. Egypt 17%, Morocco 4%, Nigeria 3%, Tunisia 0.5%, Kenya 0.2% Africa s contribution to global equities turnover approximately 0.005% V. Volume: Dominated by Nigeria of which accounts for 61% of total African stock exchanges share volume in 2008, followed by S.A. 26%, Egypt 8% and Kenya 1%.

IV. Equity Turnover: S.A. accounts for +70% of all African stock exchanges turnover= most liquid market. Egypt 17%, Morocco 4%, Nigeria 3%, Tunisia 0.5%, Kenya 0.

14 African Capital Markets Performance of Equity Markets VI. Turnover Ratio : Mean turnover ratio for African stock exchanges was 13.09%. South Africa 55%; Egypt 41%; Morocco 40%; Nigeria 21%; Kenya 11% VII. Equity Turnover as a % of GDP: S.A. registered a mean of 63% in 2008, followed by Egypt 57%; Morocco 29%; Namibia 18%; Nigeria 7%; Mauritius 5% and Kenya 3% VIII. Annualized Dollar Index Returns: For the period greatly affected with only Ghana, Tanzania, Tunisia and Zambia registering positive returns for the 3 year period IX. Annualized Growth in Market Capitalization: Av. annualized percentage growth of market capitalization registered mixed performance.. In 2008, only three markets registered positive performance however, there was a marked improvement in 2009, with only 5 African markets registering negative growth.

Annualized Dollar Index Returns: For the period 2007-2009 greatly affected with only Ghana, Tanzania, Tunisia and Zambia registering positive returns for the 3 year period IX.

15 African Capital Markets Performance of Bond Markets I. Turnover : Bond Exchange of S.A. accounts for 96% bond turnover in the continent. The rest of Africa s bond markets numbers are simply negligible 2008, the total value of bonds traded was USD 2,416 bn. Africa accounted for 2% of global bond turnover II. Bond Turnover as a % of GDP: S.A. bond market turnover is 8 times the size of its GDP with other African markets having marginal bond market activity Senegal s & Kenya s sovereign issuance earmarked for infrastructure projects, Nigeria s for the power sector & construction of schools & S.A. inaugural Sukuk Mauritania, Morocco, Egypt and Libya have all introduced Islamic finance legislation While Sudan and Gambia have issued short-term Sukuk. Diaspora bonds.

16 Islamic Banking & Takaful Spread Takāful market is highly concentrated across countries such as Malaysia and the GCC states. However, there are a number of other jurisdictions, especially across Africa and Central Asia such as Nigeria, Gambia, Kazakhstan and Senegal, where there is growing interest in a Sharī`ah- compliant insurance mode More than 110 financial institutions in 23 countries in Africa have Islamic bank or windows or takaful companies. Sudan alone has hosts more than 45%

However, there are a number of other jurisdictions, especially across Africa and Central Asia such as Nigeria, Gambia,

17 Islamic Banking Asset & Liability African Gap Funding Gap Factors affecting bridging the funding gap Islamic capital market industry: More Islamic participants & providers More Shari a Compliant Instruments Different tenor instruments Liquidity in the investment sphere Diversified investment opportunities Infrastructure projects: Water, Electricity, Roads & Railways & Ports etc Lack of credit rating for instruments & obligators S.A. Fcy BBB/Negative/A-2, Morocco, Nigeria, Tunisia & Senegal.

the investment sphere Diversified investment opportunities Infrastructure projects: Water, Electricity, Roads & Railways &

18 Islamic Banking Asset & Liability African Gap Funding Gap Factors affecting bridging the funding gap Standardized contracts Quick & just legal systems well versed with shari a and better enforcement More economic & timely information Investor protection Increase means of trading in these markets online trading. Funding gap opportunities: Agro industry Animal Industry Commodities Bourse Shortfalls in: Shari a versed professionals Communication & awareness

information Investor protection Increase means of trading in these markets online trading.

19 Islamic Banking African Gap Funding Gap Factors affecting bridging the funding gap Shorter settlement cycles, Dual listings to reach more investors Lower trading and settlement costs Creation of a Sharī`ah-compliant lender of last resort (SLOLR) facility for the Islamic financial institutions in various jurisdiction Limited products & tenors available Lack of Islamic indices Lack of quality data & information about infrastructure; Absence of a clear and agreed investment benchmark for illiquid assets

facility for the Islamic financial institutions in various jurisdiction Limited products & tenors available Lack of Islamic

20 Growth Drivers for ICM & Sukuk in Africa Clear project/business feasibility studies Legal & Tax amendments & enhanced enforcement Growing preference for SRI & Shari a compliance Financial R&D and Professional training & Inovation Existing funding gaps & infrastructure requirements Credit Rating Agencies Growth Drivers for Islamic Capital Markets & Sukuk Convergence of African exchanges & intro of Islamic indices High liquidity, greater market depth Emphasis on risk management & governance Growth of Muslim population Introduction of diverse instrument tenors Economic & political stability

Agencies Growth Drivers for Islamic Capital Markets & Sukuk Convergence of African exchanges & intro of Islamic indices High liquidity, greater

21 African Capital Markets - Sukuk Financial inclusion Sovereign issuances by new jurisdictions (Libya, Egypt, Tunisia etc). Corporate issuances set to continue Introduction of retail Sukuk issuances Spectrum of tenors & issues More Basel III-compliant sukuk Increase interest in Shari a complaint & socially responsible investment (SRI) Improving track record of Islamic funds Awareness elevated Capacity building: Public & Professionals Strengthening accounting, auditing & disclosure standards Introduction int l standards set by IFSB & AAOFI including prudential standards Taxation issues

22 Thank You

Islamic Finance in Africa

Islamic Finance in Africa Rundheersing Bheenick Governor Bank of Mauritius 2 nd Islamic Finance Conference Doha, 10 October 2011 1 Islamic Finance in Africa Contents The Global Islamic Finance Industry