Islamic finance grows in Africa
GLOBAL ASSET BASE COULD REACH THIS BY 2020 SA, Nigeria, Kenya, Senegal, Djibouti, Uganda and Morocco among the reformers.
Over the past five years, Islamic finance has seen great expansion across Africa with $2.3 billion (R33 million) African Sukuk, or Islamic bond, issuance providing new funding sources spanning sovereigns and financial institutions, according to a new report by Moody’s Investors Service.
Moody’s estimates that the share of Islamic banking assets – as a percentage of total African banking assets – will rise to more than 10% over the next five years (currently below 5%).
Moody’s has identified 18 African countries with the greatest growth potential for Sukuk issuance and Islamic banking, including Egypt, Morocco, Senegal, Nigeria, Sudan, and Kenya.
The global Islamic asset base grew from about $200 billion in 2003 to an estimated $2 trillion at the end of 2016; some projections show the figure crossing the $3 trillion milestone by 2020. The International Monetary Fund (IMF) estimates that in 2017, as many as 350 million Africans did not have formal bank accounts, noting that further development of Islamic finance products could significantly increase the financially underserved’s access to finance.
Montfort Mlachila of the IMF says: “Islamic finance may also help promote financial stability.
“A large portion of bank deposits are offered on a profit-sharing and loss-bearing basis and so are explicitly ‘bail-inable’ in the event of a banking sector facing distress. The underlying ethical precepts that Islamic finance provide, such as avoidance of speculative products, can help reduce banking sector risks.”
Moody’s expects growth in Sukuk issuance to be driven by increasing financing needs, especially for infrastructure projects and global investors’ growing comfort with the relatively complex legal structure of Islamic instruments.
“Sukuk issuances tied to tangible assets and projects such as roads, bridges, water and sanitation works and hospitals provide cost-efficient means for African governments to address this infrastructure development demand,” says Debashis Dey at White and Case.
Akin Majekodunmi at Moody’s adds: “The desire within Africa for stronger investment links with the fast-growing economies in the Gulf and Asia that have large Muslim populations with large pools of capital will help drive the issuance of sukuk on the continent.”
Meanwhile, Islamic finance prominence continues to gain popularity, with Senegal raising $200 million in its 2014 Sukuk bond and South Africa’s debut Sukuk fetching $500 million. Among the reformers, South Africa, Nigeria, Kenya, Senegal, Djibouti, Uganda and Morocco have all introduced legal and regulatory frameworks to foster the expansion of Islamic finance.
“Nigeria, Tunisia and South Africa are now home to Islamic banks and takaful (Islamic insurance) companies,” says Dey. “Several traditional banks across the continent have also started to offer Shari’ah-compliant banking products through Islamic windows.
“For Islamic banks, efforts by African states to support Islamic banking in line with the cultural, religious affinity of their populations will support growth in this sector as we estimate that more than 40% of the African population is Muslim,” said Moody’s.
Islamic financing also poses structural complexity, as most legal frameworks in sub-Saharan Africa weren’t designed to accommodate the financing fundamentals of interest-free offerings.
It may also help promote financial stability.