Commercial banks to issue sharia compliant bonds
Sukuk is one of the major Islamic Sharia compliant financial instruments which provide an alternative source of financin ...
The advent of Islamic banking in Uganda will not only broaden government financing options, but also ease its borrowing from the private sector, through the Sukuk bonds.
Sukuk is one of the major Islamic Sharia compliant financial instruments which provide an alternative source of financing, especially for sovereign entities.
According to the managing director, ABL Dunamis ltd, Abubaker Mayanja, Sukuk funding will be available for government infrastructure projects; as long as they meet sharia requirements and the funds are invested directly into the project.
"The banks will not extend cash to government, but will channel the money into the project procurement process and eventually hand over a finished project to government at the agreed time," he said.
He said unlike the conventional bonds, the Sukuk is not interest seeking and therefore cheaper in the long run, as an alternative financing source for government projects.
"These will be issued by all commercial ,banks, regardless of whether they are Muslim founded or not," he said.
In January 2016, government passed the Islamic banking and finance law, although the product will still have to wait for supporting regulation from finance and the central bank in order to take root.
"To a large extent, Sukuk seeks equity of the underlying assets rather than debt, and is therefore not interest based. On the other hand, conventional bonds do not allow such type of ownership since the securities are considered debt obligations," he said.
Mayanja said that conventional bonds are merely interest seeking debt obligations issued to the bond holders by the issuer as a proof of the existence of a debt and as such expensive in the long run.
Data from the ministry of works shows that Uganda has a planned$11b (sh36.63trn) infrastructure overhaul program over the next ten years, which will be implemented through public investment and public-private-partnership arrangements
Also, during the 2015/16 budget reading, Finance minister Matia Kasaija said the country's debt stock had increased due to an increase in borrowing to finance infrastructure investment, which according to Mayanja can be addressed through Sukuk bonds.
According to Moinuddin Malim, founder of the Alternative International Management Services, the presence of Sukuk in Uganda will attract big Islamic banks and corporation to Uganda, with enough money to finance government projects.
"These banks and corporations are looking for places to invest the money, but can only have it invested in a Sharia enabling environment through Sukuk. Once your government passes supporting regulation, they will certainly rush to take part in Uganda's development process," he said.
According to a senior economist at the Islamic Research and Training Institute, Ousmane Seck, the global Sukuk market has been growing at approximately 10-15%, reaching more $ 200b in outstanding portfolio as at the end of 3rd quarter 2015.