Slowly but Surely; Islamic Finance showing promising future in Africa

In its World Islamic Banking Competitiveness Report – Participation Banking 2.0, EY stated that the global profit pool of Islamic banks is set to triple by 2019. Such is the growth of Islamic financing which is also spreading in Africa with incredible momentum. It is now venturing beyond its traditional space of Muslim investors and slowly gaining widespread acceptance on the continent.

Although Africa’s unbanked population is large, it is expected that the growth of Islamic banking will increase financial inclusion on the continent as the ideological and practical richness and relevance of this form of alternative banking continues to whet the appetite of Africans for financial products that comply with the Shari’a. More so, the continent is home to the world’s second largest population of Muslims (over 400 million).

With high interest rates often discouraging individuals and corporations needing finance for growth from accessing it, Islamic banking becomes an easy alternative. This form of banking obeys two basic principles which are the sharing of profit and loss and the prohibition of the collection and payment of interest. Islamic financing has thus expanded across Africa.

Islamic Capital Markets have also significantly expanded following the development of Islamic finance instruments and Islamic accounting standards. The global market for Sukuk (Islamic bonds) has expanded rapidly in response to increasing demand from governments, organisations and individual investors for Shariah compliant equity. Senegal, Sudan, South Africa and Gambia have all sold Sukuk with other countries like Ivory Coast gearing up to join the sukuk train. The two sovereign Sukuk issuances in Africa (Senegal and South Africa) have been oversubscribed. This sector has continued to grow and attract global investors due to increased international issuance. Africa received at least $14 billion in Islamic project finance and $1.6 billion from Sukuk issuances on international markets over the period 2005–2012.

Today, there is a Dow Jones Islamic Index — which includes companies that do not produce alcohol, tobacco products or other items forbidden by Islam and have a very low level of debt or earnings from interest — as well as Islamic mutual funds running into dozens. Islamic financing has proven over the past few years to be very important in addressing Africa’s infrastructural needs.

Some countries in Africa have been identified as prime markets for Islamic finance due to the structure of their financial markets. “Islamic banking tends to do better in markets that have an established financial market infrastructure and appropriate enforcement mechanisms such as South Africa and Kenya,” says Anouar Hassoune, a Moody’s analyst and author of the report “Islamic Finance Explores new Horizons in Africa.”

Kenya’s Islamic banking success rode on the back of appropriate regulatory changes. This is the same for South Africa and other countries on the continent that are embracing the alternative banking system. In Nigeria, Africa’s largest economy, Jaiz Bank, the first non-interest bank in the country has grown its branch network to more than 10 over the last four years with plans to expand to the 36 states of the West African country.

More fully-fledged Islamic banks are entering the continent’s financial sector as existing commercial banks are increasingly introducing Shariah compliant windows.

Islamic finance can be a major tool of mobilizing much needed FDI into Africa, in order to boost economic growth and sustainable development. Recent statistics on the impact of Islamic finance show that it may be in Africa’s best interest to embrace Islamic finance.

Ahmed Othman, Governor of the Central Bank of Djibouti where the International Islamic Banking Summit Africa slated for November 4-5 will hold, notes: “Although the Islamic financial services industry in Africa is currently still in the early phases of development, huge growth potential exists in the banking and Sukuk segments, as well as in the asset management and Takaful spheres.”