Picture: ISTOCK
Picture: ISTOCK

In a first for the country, Al Baraka Bank has successfully raised R200m from retail investors via a shariah-compliant instrument called a sukuk.

The development comes at a time when global sukuk issuance is growing rapidly, and which may offer another avenue for SA's cash-strapped government to raise money.

“With the successful launch of the sovereign sukuk, this creates a great opportunity to source funding from the Middle East. But more importantly, the SA government has indicated it wants to issue a domestic sukuk and I do believe this creates a fantastic opportunity to address some of the funding requirements,” says Al Baraka CEO Shabir Chohan.

According to the International Islamic Financial Market Sukuk Report, global sukuk issuances increased by 33% in 2017 to $116.7bn.

Durban-based Al Baraka Bank based is the local arm of the larger Bahrainian-based Al Baraka group, which has assets of about $25bn. It is also the only fully fledged Islamic bank serving the country’s estimated 1.5-million to 2-million Muslims through a range of shariah-compliant banking products.

The bank raised R200m from 94 individuals and entities through the sukuk issuance. The product has a term of 10 years and will count towards the bank’s tier-two capital.

A sukuk — the Arabic for investment certificates — is a financial instrument with a fixed term that pays a variable return. It is tradeable and represents an undivided share in the ownership of an underlying asset, in this case, the advances book of Al Baraka Bank.

“The returns generated by the sukuk are variable and are currently paying a return of 10% annually. As required under Islamic law, the returns must be generated from the profit of an underlying asset. Second, the returns are paid monthly over the term of the sukuk, so investors receive monthly cash flows on the first working day of each month,” says Al Baraka’s financial director, Abdullah Ameed.

Under Shariah law, an Islamic bank may not to charge interest. Instead, the bank enters into purchase and sale agreements with clients. Islamic banks are also precluded from transacting  in certain industries, including gambling and alcohol.

SA issued its first sovereign sukuk in 2014, a $500m issue for a five-year term that was four times oversubscribed. In contrast with foreign-currency bonds, in which investors from the western world make up the largest allocations, the sovereign sukuk was largely taken up by Middle Eastern and Asian investors.

thompsonw@businesslive.co.za