Islamic banks are standing up to western banks in key African markets

Demand for Sharia-compliant financial products is growing across Africa. Islamic banks are stepping up investments in key markets across Africa, mostly in markets previously dominated by Western banks. There’s also an active support base from African governments aiding the increasing growth of Islamic banking and services across the continent.

In 2009, Anouar Hassoune, a Moody analyst  stated in the Global Islamic Finance report that “Provided that the continent continues to grow at its current pace, which is the fastest in decades, incremental wealth creation will make it easier for the Islamic financial services sector, including Islamic commercial banking but also Shari’a-compliant insurance, investment and microfinance, to develop,”.

“There is a notable area of growth in Islamic banking in Africa, because many conventional banks in the continent are turning to the provision of Shari’a-compliant banking products through “Islamic Windows”. Whether it is National Bank of Egypt, Sterling Bank of Nigeria, Absa Bank of South Africa or First Community Bank of Kenya, conventional banks lining up to meet the demands of their Shari’a conscious clients. Trusted brands in association with a faith based offering are competing in recruiting both affluent and first time banking customers”.

In March,  Morocco’s central bank gave approval of a final regulatory for the launch of an Islamic finance industry in the country, with the hope of boosting liquidity in its financial markets and attracting foreign investors. Kenya also has taken another bold step to fully integrate Islamic finance into the country.

The Central Bank of Kenya (CBK) has licensed the Dubai Islamic Bank – owned by the United Arab Emirates’ largest Shariah lender Dubai Islamic Bank – to carry out operations in the country.

Dubai Islamic Bank Kenya intends to exclusively offer Shariah compliant banking services becoming the third fully Shariah compliant bank to be licensed in Kenya, after Gulf African Bank limited in 2007 and First Community Bank Limited in 2008.

In a recent report entitled “Financial Development in Sub-Saharan Africa – Promoting Inclusive and Sustainable Growth” the IMF also included a section on the use of Islamic finance within the Sub-Saharan region as a panacea for development.

Khalid Howladar, Global Head of Islamic Finance at ratings agency stated “Growth in the Islamic banking sector continues to broadly outpace that of conventional banks in most systems in which Islamic banks have been established,” says. “This is driven by strong retail demand and proactive government legislation for the industry.”

The growth of Islamic banking in Africa

Africa, where some 540m people – 50% of the population – are Muslim, is seen as a huge untapped market for Islamic banking.

Demand for Sharia-compliant products from Muslims who want to comply with their religious beliefs has been growing, and most countries, from Senegal to Uganda, Morocco Kenya Gambia and Nigeria, have already reformed banking laws to allow the setting up of Islamic institutions. However, the offer has not been keeping up with demand.

There are 38 financial institutions operating in this space in Africa. Kenya has been at the forefront: the government granted a license as far back as 2008 and now has two fully-fledged Islamic banks, which represent around 1% of banking assets. Five conventional banks have also introduced Sharia-compliant products.

More recently Nigeria’s central bank has encouraged the development of Islamic banking, granting a banking license to Jaiz International Bank to open the country’s first Islamic bank. It is also planning to launch a debut sovereign sukuk (bond).

Africa holds “tremendous opportunity for Islamic banking,” says Wasim Saifi, Standard Chartered’s global head of Islamic banking. “We have reached a point where the regulators and governments are quite conscious this a key need of the market, it has reached a stage where it is no longer considered a niche industry.”  StanChart is planning to offer Islamic banking services in Nigeria.

In South Africa, there are 1.3m Muslims, but only 10% currently use Islamic banking products. Al Baraka Bank, first registered in 1989, was the first Islamic bank in the country and now there are three. The Treasury has expressed its wish to be a hub for Islamic product development and its roll-out into other African markets. The Government is planning to issue a sukuk, which could “open the door to a source of foreign investment beyond traditional Western funding,” Finance minister Pravin Gordhan has said.

A new report by KFH Research on the future of Islamic finance in Africa identifies promising opportunities in Kenya, Nigeria, Senegal and South Africa. Africa’s economic powerhouse is a “market with great potential for Islamic banking transactions” and its banks have the capitalization, stability and regulatory discipline to be successful.

The report identifies lack of expertise as the biggest barrier to the expansion of Islamic banking in Africa. There is a dire need for competent employees who understand the products – and a great employment opportunity for young people willing to learn the right skills.