Massive Investment Uptake Results in 24% Over-subscription Of Al Baraka Bank’s Sukuk Issuance

08 September 2022 

Al Baraka Bank’s recent issuance of a Sukuk (investment certificates), a Shariah-compliant investment and attractive alternative to conventional bonds, was 24% over-subscribed, raising an impressive R124 million in just one month. 

The additional Tier 1 Sukuk subscription process commenced on 01 July and ended on 31 July this year and, as with its previous such issuance of Tier 2 Sukuks, drew massive and rapid support from investors. The previous issuances raised R307,7 million in 10 tranches between 2016 and 2019. Although fully-subscribed by 2019, numerous prospective investors showed continued interest in the investment concept, leading to Al Baraka Bank’s decision to institute this second issuance as part of its Capital Plan. 

Al Baraka Bank is a bank servicing SME and smaller corporate organisations and its latest issuance decision reflects an international trend, with the Sukuk market globally demonstrating considerable growth in recent years. Sukuk is Arabic for investment certificates, issued for the purpose of raising money for utilisation within a corporation or Government entity.  

Commenting on the Sukuk issuance, Al Baraka Bank's Financial Director, Mr Abdullah Ameed said: "We have been hugely encouraged by the demand this issuance has generated, traction was immediate and most impressive, with investors quick to take advantage of this, our additional Tier 1 Sukuk issuance. This clearly indicates that South Africans have quickly embraced the benefits of this relatively new form of investment to this country.” 

The Sukuk investment concept which, based on the risk involved, yields an encouragingly high rate of return to holders and, once established as a vehicle, is tradable between willing buyer and willing seller. Sukuk instruments are often transferable and amalgamate the characteristics of debt and equity. 

Its continued utilisation of the Sukuk concept has enabled Al Baraka Bank to look beyond share capital - its traditional source of capital - and brings a third element to its capital mix, mirroring larger, more established banks. 

Mr Ameed said that the R124 million Sukuk would allow for a further R1 billion growth in risk weighted assets, providing sufficient capital for the bank to fund its growth for the next 24 months. 

The bank experienced a significant increase in deposits during the early part of the COVID-19 pandemic and, especially, the hard lockdown period, as clients increased their savings and held back on capital expansions. With the easing of COVID-19 restrictive measures in June 2021, the bank began deploying the additional deposits into advances across all its offerings (Commercial and Residential Properties, Trade, Equipment and Motor Vehicle Finance). 

Mr Ameed said: “In planning our capital for the next two to three-year growth, we sought to enhance the current composition of capital, which comprises share capital and reserves and Tier 2 Sukuk, to include additional Tier 1 capital. We accordingly applied to the South African Reserve Bank for approval to issue this type of capital in 2021.” 

Growth in the bank’s advances in the past 12 months was a little under 30% and exceeded R1,2 billion. 

“As our financing is on a Shariah basis, it is always asset-based, which lends value to the true economy by creating employment, improving infrastructure and establishing trade. In a period of low GDP, the Sukuk will enable the bank to increase its financing to clients, thereby increasing the value added into the economy and providing support for the growth of smaller businesses,” Mr Ameed added. 

He stressed: "We are most grateful to our Sukuk investors. We look forward now to growing the South African market for the mutual benefit of all our stakeholders, including prospective new customers." 

Islam's prohibition of interest precludes Muslims and Islamic financial institutions, such as Islamic banks, equity funds and Takaful (Islamic insurance) companies, from investing in interest-bearing bonds. The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) defines Sukuk as certificates of equal value that 'represent undivided shares in the ownership of tangible assets, usufruct and services.' As in the case with bonds, Sukuk holders receive regular income streams. In contrast to bonds, however, these income streams are not guaranteed, because Sukuk represents an undivided share in the ownership of the underlying asset. The generation of income streams and terminal values are, therefore, wholly dependent on the underlying asset's performance. 

Islamic finance and Shariah-compliant banking are making appreciable gains in the South African and African markets. The South African Government has, in recent years, made amendments to financial legislation here to better accommodate Shariah-compliant banking and investment products and services, leading to enhanced public recognition of the attractiveness of Islamic banking amongst, especially, but not exclusively, the country's Muslim community.