South Africa's plans for a sovereign sukuk issue could make it the first country with a miniority Islamic population to tap the asset class. And it could be the start of a healthy trend, paving the way for countries with modest debt funding requirements and open-minded regulation to benefit from diversifying into a ready and willing alternative investor base.
The country certainly offers a different prospect to the heavily indebted eurozone countries that some market participants have suggested might benefit from an experiment with sukuk. After all, South Africa has a manageable $30bn overall funding requirement in 2012. The IMF reckons real GDP growth will be 4.3% next year.
A sukuk issue would be good news for South Africas government, allowing it to diversify funding and become less susceptible to problems in Europe and the US. This will reduce political risk and the threat from market-led sell-offs that periodically destroy liquidity. That's not a bad thing, given 2012 economic predictions and the US presidential election.
Secondly, it will also be great news for local Shariah compliant investment funds. Its a common complaint amongst Islamic managers that there are too few permissible securities to be had. But here they will have the additional benefit of taking something home-grown to investors.
Finally, the deal should grab the interest of cash-rich Middle Eastern and Asian investors who are also looking to diversify away from Europe and US exposure. By some estimates, about 75% of all Islamic banking assets are in commodity murabaha on the London Metals Exchange. That equates to at least $700bn. It's not hard to see why the concentration is so high there just aren't enough sukuk to give investors the assets they need.
More important still might be the encouragement a South Africa deal would give to other African countries that are looking at Islamic finance like Nigeria and Kenya. The development of Islamic micro-finance technology could follow.
And it won't stop there. Large non-African economies such as Brazil and Australia might also take note if they see Islamic finance as a useful way to broaden their investor base.
None of this is going to happen overnight. The South Africa deal is unlikely to come before April 2012. But when it does, it could unleash a world of opportunity and finally open up the Islamic finance sector to the diversification that investors want so badly.