Khaled M.J. GökçezadehEVP Group Head of Treasury & Investment Banking

Bank of Khartoum

African Development Islamic Capital Market

�سم هللا الرمحن الرحمي

“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

Christians Muslims Traditional Religions

45% 40% 10%

Africa Rich with Opportunities• 2nd largest and 2nd 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

Raising / improved

Infrastructure

Poor

(2%) Nat'l economic growth(40%) of Productivity

EVERY YEAR

1% - 2% Growth in Per Capita

Infrastructure: Key to Africa’sFaster 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.

Inadequate infrastructure impedes faster growth

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% - 12%

Low-income non-fragile States 28-30 25%

Low-income Fragile States 14 36%

Infrastructure: Key to Africa’sFaster 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

Infrastructure: Key to Africa’sFaster Growth

Funding Gap:• 40% for the power, 6%

of African GDP• Water & sanitation, 3%

of regional GDP• Transport sector 2.6%

of GDP

• 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

SME: Key to Africa’sFaster Growth

Islamic Capital MarketLegal system &Tax Regulations

Stock & Bond Exchange

Over-the-Counter (OTC)

L-TEquity & Debt

Securities

Surplus FundUnits – SFU’s

Deficit FundUnits –DFU’s

RegulatorsSECs & CBs

Islamic Banks

Brokers & Sub

brokers

Credit Rating

Agencies

Custodians &

Registrars

Under-writers

Portfolio Managers

Mutual Funds & VC

FundsShari’a

Scholars & Boards

& Others

Islamic Capital Markets

• 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.

CAGR 40%2004 - 2011

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 murabahahand wakalah rates. IIBR could prove to be an alternative, or at least complementary, to pricing Islamic instruments, particularly sukuk

Islamic Capital Markets

Islamic Capital Markets - Sukuk

• Market bounces back from 2013 low : 2013 15% 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

African Capital MarketsPerformance of Equity MarketsI. 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%

African Capital MarketsPerformance 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 149.46%• 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%.

African Capital MarketsPerformance 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 2007-2009 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.

African Capital MarketsPerformance 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.

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%

Islamic Banking – Asset & Liability – African 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 & obligatorsS.A. Fcy BBB/Negative/A-2, Morocco , Nigeria, Tunisia & Senegal.

Funding Gap

Factors affecting bridging the funding

gap

Islamic Banking – Asset & Liability – African 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

Funding Gap

Factors affecting bridging the funding

gap

Islamic Banking – African 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

Funding Gap

Factors affecting bridging the funding

gap

Growth Drivers for ICM & Sukuk in Africa

Financial R&D and Professional training &

InovationGrowth

Drivers for Islamic Capital

Markets & Sukuk

Growth of Muslim population

Existing funding gaps & infrastructure requirements

High liquidity, greater market depth

Introduction of diverse instrument tenors

Legal & Tax amendments & enhanced enforcement

Growing preference for SRI & Shari’a compliance

Economic & political stability

Convergence of African exchanges & intro of Islamic

indices

Credit Rating Agencies Emphasis on risk management & governance

Clear project/business feasibility studies

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

Thank You