Sukuk issuance from outside of the Islamic world is rare, and for a reason: the process is difficult and lengthy. But Benin, which debuted in the sukuk market last week, will find the effort was worth it in the short and long term.
Benin raised $500m via a seven year sukuk on January 22, its first in the format. It adds a third weapon to its armoury, having issued conventional dollar and euro bonds in the past.
Structuring a sovereign sukuk is time consuming and expensive. Laws need to changed and there can be political considerations that bank or corporate issuers do not have to worry about.
Some suggested it would be better for Benin to stick to the core dollar and euro bond markets, where there is ample liquidity for its needs.
The only sub-Saharan African sovereign to have issued a sukuk before Benin is South Africa, which did one in 2014 and has not revisited the market since.
Some of the criticisms of that sukuk, including from this publication, were that it secured no pricing benefit versus bonds, rendering the exercise pointless, and that South Africa has no strong links to the Islamic world.
Times have changed in the bond and sukuk markets, however. Neither apply to Benin in which 28% of the population is Muslim, according to the 2013 census, compared with just 1.6% in South Africa according to its 2023 census.
Sukuk are often priced inside conventional bonds now whereas they were not in 2014. Benin priced its sukuk, according to the leads, 25bp inside its conventional curve. Some of that may have been down to the unreliability of the secondary bond market in offering a pricing reference but some was undoubtedly down to the sukuk discount.
Benin allocated about 20% of the $500m sukuk to investors in the Middle East, although the percentage of the order book from that region was higher. Benin wanted to satisfy the demand of investors with whom it had already had a long relationship.
But the next time Benin issues a sukuk the Middle East allocation will be higher.
Those Middle Eastern investors who bought this time around will put in bigger orders next time, if the sukuk does well. Others who decided to stay out might feel they missed out, and will buy the next one.
Familiarity anx track record are important characteristics for borrowers. A debut issuer in any format needs to be generous to investors, but investors will return that generosity in future with lower pricing if they are happy with the credit.
And Benin is a steady and improving credit. Its ratings from Moody’s and Fitch have positive outlooks and are creeping towards investment grade. Perhaps, years in the future, Benin will reach that milestone and open up a new pool of investors — both conventional and Islamic, maximising its pool of buyers.
And Benin has not just tapped a new investor base for its sukuk. Many of those who bought it will also buy Benin bonds, reducing yields and lowering Benin’s borrowing costs in the conventional market.
The past four years have shown that the more options an issuer has in the debt market, the better — and this is particularly so for sub-Saharan African sovereign issuers. Many, if not most, lost dollar bond market access for a considerable period of time from 2022.
Benin recognises this, and it now has access to a sukuk market that is less volatile than conventional bond markets and more resilient to external volatility. It is an umbrella for a rainy day, and African issuers suffer more rainy days than most others, often through no fault of their own.
It might have taken many months of long, complex work with lawyers, bond structurers, Islamic scholars and Middle Eastern investors who may have known almost nothing about the country.
But Benin will only have to do that once, and it will reap the rewards of its diversification in the future.