South Africa's Sukuk market set to go mainstream in 2020

Old Mutual responds by launching a new Shari’ah Compliant Reg. 28 Income Fund.

The intensifying demand for responsible investments and the recent stock market crash in light of the COVID-19 pandemic have resulted in increased demand for unconventional asset classes as investors are left reeling after radical declines.
Islamic bonds, also known as Sukuks, are going mainstream as both institutional and conventional investors seek socially conscious defensive assets. This is according to Maahir Jakoet, a Portfolio Manager at Old Mutual Investment Group’s Customised Solutions, following the recent launch of the Old Mutual Al Baraka Income Fund. Jakoet says that the fund will capitalise on this trend by launching with R500 million assets under management.

Earlier this year, the South African Government announced plans to issue Islamic notes to address the widening budget deficit and reaffirmed their commitment to hasten Sukuk issuance in 2020-21 for various infrastructure projects. He says that Sukuks will play an essential role in rebuilding the South African economy post the COVID-19 lockdown. “The scale of funding required to meet the financing needs of Sub-Sahara Africa post the pandemic is far beyond the scope of governments. Sukuks may then be the innovative approach we need to finance the rebuilding of the economy.”

Jakoet explains that Sukuks, or Islamic bonds, are effectively a share certificate in an income-generating Shariah-compliant commercial project such as green infrastructure, like wind or solar plants. “These ventures tend to enjoy a high social license (that is, they don’t sell tobacco, alcohol or weapons) and have a low gearing ratio (which is a measure of debt) while fostering social development in the communities in which they’re based,” says Jakoet.

According to Jakoet, conventional investors are increasingly attracted to the additional layer of diversification and stability offered by this ‘bond-like’ asset class. “The main purpose of a Regulation 28 fund is to protect the investor, in particular those investing towards retirement, against the effects of a poorly diversified investment portfolio”.

“The income from the fund will be provided through investment in Shari’ah compliant short- and longer-term South African and global non-equity securities, making it suitable for investors looking for risk-averse assets, such as retirement savers, seeking relative capital stability over time,” says Jakoet.

Unlike bonds, Sukuks are backed by a physical asset and are not an intangible debt obligation, providing investors with an additional layer of security. “Sukuks are more difficult to manipulate as the value and risks are always related to real assets that have a tangible value rather than the artificial manipulation of debt and credit ratings,” says Jakoet.

He goes on to say that in the case of bonds, one deals with interest; however, in the case of the Sukuk, investors receive a share of the profits and also accept a share of the loss, which promotes greater risk sharing.

“Sukuks provide an ideal way of financing projects that improve and promote sustainable development without falling into interest-based debt. This strategy goes hand-in-hand with bolstering economic growth and meeting a range of social needs, including education, health, social protection and job opportunities,” says Jakoet.

He says that the new fund will complete the existing range of Old Mutual Shari’ah-compliant funds, allowing investors to blend their investment portfolio for every life stage. “In keeping with our commitment to being a responsible steward of capital, these range of funds provide investors with access to an alternative financial system that, among several other restrictions, seeks greater good, prohibits charging interest, and forbids unethical transactions.”

In conclusion, Jakoet believes that local Sukuks will generate above-average returns for investors and at the same time, benefit all stakeholders.

“To promote sustainable economic growth, we need to transform our investment mindset, particularly in terms of how we think about alternative assets such as Sukuks from the perspective of conventional investors. Strong demand for these asset classes will encourage the launch of more Sukuks in South Africa and increase the variety and depth of the ventures on the market,” concludes Jakoet.