How Sukuk can pull more retail investors into Tanzania financial market

Sukuk, a sharia-compliant bond-like instrument that is used in Islamic finance, is becoming more popular among investors seeking alternative investments.

“There is a notion in the public that bond markets are for big investors with a lot of money, but these new instruments show that even individuals and small businesses can be part of this asset trading,” said KCB Bank’s head of Islamic banking, Amour Muro.

With a minimum initial investment amount of Sh500,000, the bond is feasible for retail investors.

KCB Bank Plc issued the Sukuk bond on November 9 of this month.

With an offer of Sh10 billion, the three-year investment has an expected return of 8.75 percent per annum.

Last year, Tanzania’s first Sukuk bond, issued by Islamic facility Imaan Finance Limited, was privately placed and received 36 percent oversubscription after receiving Sh2.72 billion in bids against an offer of Sh2 billion.

Mr Muro said the introduction of the Sukuk bond in the market will be a blueprint for price discovery in the bond market.

According to Ahmed Nganya, capital markets manager at Vertex International Securities Ltd, the issuance allows both Muslim and non-Muslim investors to invest in public sharia-compliant financial products.

He said that Sukuk offers a more liquidity-friendly solution for investors than most products, which pay semi-annually and annually and are tax-free.

Though it is similar to conventional corporate bonds in terms of the parties involved and the purpose of the bond issuance, sukuk offers some key structural differences due to the fact that it is an economic and equitable joint venture between the issuer and the investors (Sukuk bondholders).

This means that the assets acquired by the Sukuk bond issuance will be jointly owned and managed to generate profits, which are then used to repay the participating bondholders.

According to Exodus Advisory’s chief executive, Ramadhani Kagwandi, it is encouraging that the market now offers other options apart from the usual listed equities and corporate bonds.

He said the new instrument attracts more retail participants in the financial markets.

Global Alpha Capital Limited’s chief executive, Gerase Kamugisha, said there has also been an improvement in public awareness of financial literacy, thus enticing people to participate in the market.

“Previously, banks used to inject more funds into Treasury bills and bonds, leaving little funding to the private sector… We now see a shift through the introduction of corporate bonds to specific causes; banks are now returning funds to the financing of the private sector through credits,” said Kamugisha.

With the series of online and network marketing scam schemes that have been prevalent in the country, it is safe to say it would take more than one message to convince locals to enter the financial markets.

“It’s a good strategy for financial inclusion and injecting people into the formal system, but more awareness needs to be emphasized, and this can be done by those financial institutions and the government,” says Mr Muro.

According to the Capital Markets and Securities Authority (CMSA), public awareness of financial literacy programs is one of the priorities in promoting the growth of the capital markets investor base and inclusion.

According to their Five-Year Strategic Plan for 2018/2019 – 2022/2023, these programs include media and digital campaigns and educational campaigns at universities and other higher learning institutions.