South Africa Islamic fund potential stalled at Sukuk market

South Africa harbors one of Africa's most sophisticated Islamic fund management industries, yet it remains a fraction of its potential. At roughly ZAR30 billion ($1.85 billion), Shariah funds represent less than half a percent of a ZAR6 trillion ($369 billion) industry. One leading manager thinks that figure should be six times larger.  

“Very conservatively, the Shariah market in South Africa should be ZAR200 billion (US$12.32 billion) today,” said Abdul Davids, the head of research and portfolio manager at Camissa Asset Management, which oversees nearly US$1 billion in Islamic assets – fourth-largest in the region.  

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Despite a minority Muslim population, South Africa has managed to build one of the most robust Islamic funds management industries in the region – seven out of the region’s 10 largest Shariah fund managers hail from South Africa, according to the IFN Investor Fund Database.  

However, the industry is far from efficient. 

While the equity market is functioning - investors can access local and global Shariah-screened stocks with relative ease – the Sukuk market, worth about ZAR30 billion, is shallow and heavily dependent on sovereign supply. The government has issued just two instruments: a US$500 million paper in 2014 (matured 2020) and a ZAR20.38 billion domestic Sukuk in 2023.  

“We lag behind Malaysia and the GCC by about 15-20 years when it comes to Sukuk,” opined Abdul. Were assets to scale toward ZAR200 billion, the market would require ZAR40-50 billion (US$2.47-3.08 billion) in fresh issuance, projected Abdul – supply that simply does not exist today. 

This poses a problem in engineering Shariah funds which generally requires a combination of equity and fixed income instruments.  

However, with a very well-oiled government bond issuance engine, there is little incentive for the sovereign to diversify into Sukuk. Corporate appetite, briefly kindled before COVID-19, has since cooled. 

“That inertia is the biggest headwind that we face.” 

Investment managers floated the idea of a Shariah equivalent of the government’s successful tax-deductible retail bond program.  

One proposed solution: a retail Sukuk program modeled on the government's popular tax-deductible retail bond scheme. Abdul argues it would simultaneously deepen supply and build public understanding of an instrument most domestic investors have never encountered. 

South Africa has the potential, the managers, and the mandate – what it lacks is the market architecture that Islamic funds require to scale. Until that changes, the ZAR170 billion (US$10.48 billion) opportunity sits largely unrealized.