Kenya

Markets

Gold-backed Sukuk the way forward for East Africa

  • share this article

Prof. Luqman Abdi Ahmed, Senior Adviser & Consultant, Al Amanah Consultancy speaks to Islamic Business & Finance about his plan to help aid in East Africa’s development

editor's pickTuesday 06, November 2018

There is a challenge of a lot of African countries of a cycle of poverty. This has a lot to do with development, and development is very much connected to governance and transparency. The question is where to start? You’re not going to fix corruption unless there is business.

The continent of Africa has many natural resources. What I propose is to utilise the natural resources and, before you get them out of the ground, to get an in-grown asset certificate. There are some organisations that will issue a bankable document to say that you own these resources, whether it’s gold, platinum, iron or whatever it may be. It goes through a lot of verification through geological companies. They can even say the volume, saying you have however-many tonnes of this metal, with a certain market value.

There are mining companies that are looking for proven gold. They will invest. You can say where it is, how much there is, and how much it is worth. I then propose Sukuk issuance at that stage. The Sukuk’s purpose is to either get the resources out, or to partner with the mining company in a public-private partnership. The end result is to get continuous sales out of the mine.

This producing mine can have a 20-year lifespan in which every year they will produce a set number of tonnes which will meet the conditions of the fixed income of every year. Once we structure that, you would be able to pay back the investors, and the majority of the money will go to infrastructure development. The whole idea of this is to finance the mining, get paid, and to give money to two areas that normally do not get funding.

Who benefits?

One area in dire need of funding is SMEs. They are a high-risk group, not a good place to invest money, but they are 70 per cent of the economy. The entire economy rests on the SMEs but they do not qualify for any kind of loans from the banks—everybody doesn’t like them. This government-supported funding will aid the SMEs and aid the infrastructure that is a made up of huge projects that are very difficult to get funding for because of the credibility of the governments themselves.  But once the government says they have, for example, 300 tonnes of gold in one site with a market cost to go along with it, this conversation will get easier.

Sukuk means an ownership of the underlying asset, so the owner of the Sukuk owns a share of the product. Many investors will be attracted to a gold-backed Sukuk. That is why we’re going to pitch this. Once you unlock the in-grown asset, then you unlock a lot.

The overhead to get this process started is so high that many people are scared off. No one wants to look for gold and not find it. That is where we found a solution. But there is a novel technology—a breakthrough—that is satellite imaging. This will make it possible to pinpoint the deposit, to an accuracy of 90 per cent. This study hasn’t been accepted because it is new, but in correlation with the hard science, I expect it to be accepted. The cost of doing this is less than five per cent the real cost of doing it, and timewise, instead of three years, it can be done in three months. You can go to the area now, and because it is so arid, you can dig holes in these areas with real knowledge. This time, you will not go to the wrong place and mess with the environment. This can make the process so much more streamlined. Instead of digging thousands of holes, you can dig maybe 100 holes. It reduces spending, reduces risk, and is something that any government can afford to do.

How to set up the Sukuk

 

Instead of granting loans to a country to pay for something, part of Shari’ah compliance is governance. The Islamic Development Bank (IDB), for example, can come in and oversee the whole process. This would make the entire process transparent. At the moment, money to do projects is disappearing. This would make all involved comply. The World Bank has also gotten very good at checking for these sorts of things.

Global collaboration

The good thing about Sukuk is that the arranger of the Sukuk can be in Arab countries, the deposit can be in the Congo, and the buyers can be in London, for example. You do not have to have the asset, buyer and issuer in the same place. The IDB can issue it on behalf of the Somali Government. The IDB, then, has lots of channels to sell. People will then buy all of the world, but the assets are in Ethiopia, Somalia, or other countries that really need to raise funds for the projects. Once the gold is out, buyers in other countries are going to generate sales as well. The assets can be sold anywhere. In terms of the Sukuk, when buyers looking for a long-term secure vision hear that it is gold-backed, they will buy it.

Where to begin…

In most countries, if this model kicks in, the central banks and the mining department of the companies will be the first ones interested. Once this asset becomes a guarantee then it becomes something in their coffers. Having $20 billion in assets is like having $20 billion in their safe. Next it will be the ministries of infrastructure.

I have talked to many countries. The country that is the closest to adopting it is Ethiopia. I just spoke to the ambassador. Ethiopia would love to be a part of this, but Ethiopia is not a member of the IDB. IDB would be very good for this, but this can be intermediated by the African Development Bank or the World Bank. Ethiopia is the closest to this because they are the most transparent country in East Africa, they have the fastest-growing economy and they need to raise capital to fund the world’s largest dam for hydropower. Ethiopia would be ideal in East Africa.

 

TAGS : islamic finance, Sukuk, Luqman Ahmed, Gold, East Africa

print this article