SGR construction: Uganda set to raise sh1.7 trillion through Sukuk instrument

KAMPALA - The Government of Uganda says it is in advanced stages of issuing the inaugural Sovereign Sukuk to finance 15% of the total cost of Euro 2.7 billion required for the construction of the Standard Gauge Railway (SGR).

The finance ministry expects to raise at least €405m (about sh1.72 trillion) for the development of the Standard Gauge Railway (SGR) project through sovereign sukuk.

Sukuk aka Sharia-Compliant Financial Instruments, are Islamic financial certificates that mirror bonds in Western finance but adhere to Sharia principles.

Unlike traditional interest-bearing bonds, sukuk involve selling certificates to investors, who then gain partial ownership in an asset purchased with those funds, according to Investopedia.

In March, the Government announced that it had commenced consultations that are expected to culminate in the issuance of a sovereign sukuk bond worth €405m, representing at 15% of the total project cost, expected this May.

The Government is intending to issue a seven-year Sukuk that will be listed on Uganda Stock Exchange with an annual rental rate of 10.5% payable semi-annually.

According to a statement by the Ministry of Finance, Planning and Economic Development, the Sukuk instrument will be denominated in multiple currencies like the Uganda shilling, US dollar, Euros to expand investor access and participation.

“The instrument will be fully Sharia-compliant, asset-backed, and supervised by a Sharia Supervisory Board in line with recognised Islamic finance standards. Proceeds will be linked to clearly identified SGR infrastructure assets, ensuring transparency, accountability and sound governance,” the finance ministry statement stated.

In 2014, Uganda, with its Northern Corridor Partner States of Kenya, Rwanda and South Sudan, signed a regional SGR protocol to develop a seamless transport system interconnecting their cities and connecting the landlocked countries to the coast.

Uganda in 2015 handed the contract for development of the 273-kilometre Malaba-Kampala leg, the first phase of the project, to a Chinese majority state-owned firm China Harbour and Engineering Company Ltd (CHEC) for $2.2b.

The contractor was obligated to help Uganda source financing for the project but the East African country was frustrated by the Chinese firm’s failure to do so.

At the end of 2022, the Ugandan government wrote to its Chinese counterpart terminating CHEC’s contract after eight years of non-performance.

Uganda has since contracted Turkish firm Yapi Merkezi to construct the Kampala-Malaba SGR leg at a total cost of €2.7b (about sh2.7 trillion).

According to the finance ministry, Cabinet approved the SGR financing structure in January 2025, reflecting the proportion and amounts to be mobilised: 60% of the Euro 2.7 billion will come from Export Credit Agencies (ECAs),15% from Sukuk and the balance of 25% will come from Development Finance Institutions (DFIs).

Alternative financing

For long, the Ugandan government has relied on development partners and multilateral lenders like the World Bank and International Monetary Fund in its endeavours to finance its infrastructure projects.

But of late, the taps from these financiers are dwindling, making the country reconsider its finance sourcing alternatives.

Additionally, the government says the planned issuance of the Sukuk instrument marks a significant milestone in diversifying Uganda’s financing sources and attracting a broader investor base, particularly from the Islamic finance markets.

Sukuk are Shari’ah-compliant capital markets financial instruments used globally for project financing where investors are beneficial owners of the asset, project or service.

Adoption of Shari’ah-compliant financial services in Uganda was enabled by the passing of the Financial Institutions Amendment Act, 2016 introducing, among others, the concept of Islamic banking in the country.

Since then, Uganda has commenced operations of Shari’ah-compliant financial services like Islamic banking and Islamic insurance known as ‘takaful’ and is now marching towards the issuance of Sukuk, a capital markets instrument.

Shk Issa Mohamed Hemed, a certified Sukuk professional and the lead consultant on the issuance, explained that Sukuks are investment certificates of equal value in which investors become beneficial owners of tangible assets, projects or services.

He added that unlike other financing instruments like bonds, Sukuks are either lease-based, equity-based or agency-based instruments where return on investment is from asset's lease rentals, equity, agency fee or profits from sales transactions.

He described the instrument that goes as far back as 1990s and whose current global value is estimated at $4.9 trillion with an annual growth rate of 20%.

“There are nations that are far ahead. They started issuing Sukuk in 1990s. we are trying to catch up. Sukuk is recognised by multilateral development banks like the World bank, International Monetary Fund and the United Nations Development Programme,” Hemed said.

How it works

They explained that the originator, the government of Uganda, represented by the finance ministry in this case, forms a special purpose vehicle that will in turn issue the Sukuk.

In this case, it’s the special purpose vehicle will be the entity charged with interacting with the investors, and it must have assets that are equivalent to the amount of money that is being sought.

In this case, the SPV must have assets that are equivalent to €405m that the government intends to borrow to act as security for the borrowed funds.

He cited several countries and companies that have issued Sukuks, including Zanzibar, Nigeria, Britain, and Saudi Arabia as those that have issued Sukuks for several purposes like infrastructure development.

“Emirates is one of the successful global brands that has issued Sukuks to further their infrastructure development, including development of their headquarters and acquiring several aircraft,” Hemed said.

What they say

Abubaker Mayanja, an economist with ABL Associates, described the move as a good one that enables Uganda to diversify its financing sourcing options.

“Some of the countries in the Middle East have really grown and they have sovereign wealth funds that are limited in their investments to Shari’ah-compliant instruments. Uganda thus far has been using loans and bonds but conventional bonds carry an interest rate which is forbidden for these funds.

So, using Sukuk allows us to diversify the financial market by creating new instruments, tap into other investors who are constrained by the inability to invest in interest-bearing instruments,” Mayanja said.

He, however, emphasises that the success of this financial evolution relies on inter-institutional teamwork and a robust legal structure to ensure these products are competitive and well-regulated.

“I think the public perception would depend on the quality of the project rating and the structuring. People who invest money to the tunes that we are looking for are going to do due diligence and look at your legal structure and investor protection,” he said.

Sophia Kigozi, a commercial lawyer specialising in Islamic commercial law and project practice, described the plan as a further step towards operationalising the Islamic finance ecosystem.

“This is a practical demonstration of political will and pragmatism, which are required to decide the issuance of a sovereign Sukuk. This is a huge towards financial inclusion and enhancement of economic competitiveness across the region and the world at large.

This instrument will ensure that our country opens up to external investment, especially in the Muslim world, to ensure that we put together financing that is required for a project whose purpose is to enhance infrastructure in this country,” Kigozi said.

She equally says there is need for mass sensitisation since this is a new product that is not understood by the masses.