Is­lamic bank­ing ri­vals Western-style lend­ing

Helps de­vel­op­ing na­tions, Mus­lims

The Washington Times Weekly - - Geopolitics - BY CHRISTIN ROBY

ABIDJAN, IVORY COAST | It works like this: No in­ter­est on in­vest­ments, but the bor­rower and the lender share the risk and split the re­turns. This grow­ing form of bank­ing, known as Is­lamic fi­nance, is now mak­ing sig­nif­i­cant head­way into Africa, one of the fastest-grow­ing re­gions in the world.

In fact, pro­po­nents of Is­lamic bank­ing are tout­ing this al­ter­na­tive to clas­sic Western financial prac­tices as a bet­ter way to help Africa im­prove roads, de­velop state-of-the-art health care sys­tems and cre­ate a mas­sive mid­dle class to ad­dress some of the is­sues hin­der­ing growth.

“Is­lamic fi­nance of­fers ex­cel­lent prospects for the African con­ti­nent, which we should seize,” Ivory Coast Prime Min­is­ter Daniel Kablan Dun­can said last month be­fore an au­di­ence of around 500 peo­ple at the re­gion’s first Is­lamic Fi­nance Fo­rum.

Nige­ria’s se­cu­ri­ties com­mis­sion last month staged a round­table dis­cus­sion to ed­u­cate lo­cal lenders and busi­nesses about the ben­e­fits of an “Is­lamic cap­i­tal mar­ket.” The Cen­tral Bank of Dji­bouti this week is putting to­gether a two-day event billed as the In­ter­na­tional Bank­ing Sum­mit Africa, which is de­signed to boost trade and in­vest­ment be­tween the oil-rich Mid­dle East and sub-Sa­ha­ran Africa us­ing Is­lamic fi­nanc­ing prac­tices.

This form of fi­nanc­ing — Stan­dard & Poor’s es­ti­mates that Is­lamic fi­nance grew by as much as 15 per­cent in the past decade to reach $2 tril­lion glob­ally — could also be a way for rich Mus­lims from the Mid­dle East and be­yond to en­hance their port­fo­lios while ad­her­ing to their re­li­gion, which pro­hibits “riba,” or the charg­ing of in­ter­est on mone­tary loans.

Those same in­vestors might not oth­er­wise rec­og­nize the po­ten­tial in mar­kets such as western Africa, said Fabrice Toka, a South Africa-based se­nior di­rec­tor cov­er­ing sub-Sa­ha­ran Africa at Fitch Rat­ings.

“Is­lamic fi­nance doesn’t take away from that which you can al­ready do with tra­di­tional fi­nanc­ing,” Mr. Toka said. “It adds an­other pool of in­vestors.”

Rather than charg­ing the bor­rower a set in­ter­est rate for a set pe­riod, Is­lamic lend­ing is based on Shariah prin­ci­ples and works on the ba­sis of risk- and prof­it­shar­ing. The cus­tomer and the bank share the re­turns and risk of in­vest­ments on ne­go­ti­ated terms.

“There is a level of re­turn that is ex­pected,” said Nida Raza, ad­vi­sory di­rec­tor of the Saudi Ara­bia-based Is­lamic Cor­po­ra­tion for the De­vel­op­ment of the Pri­vate Sec­tor, or ICD. “The dif­fer­ence is, it’s not in­ter­est; it’s profit.”

Home to roughly a quar­ter of the world’s Mus­lim pop­u­la­tion, Africa rep­re­sents a grow­ing mar­ket for faith­ful Mus­lims to put their money to work, ac­cord­ing to an ICD re­port.

“Al­though the po­ten­tial con­tri­bu­tion of Is­lamic fi­nance in fa­vor of African eco­nomic de­vel­op­ment has long since been rec­og­nized by ex­perts, the rhythm is now ac­cel­er­at­ing,” said the re­port, ti­tled “Is­lamic Fi­nance in Africa: A Promis­ing Fu­ture.”

Ready for take­off

Eco­nomic growth in Africa av­er­ages roughly 5 per­cent a year, ri­val­ing Asia and other re­gions, ac­cord­ing to the In­ter­na­tional Mone­tary Fund.

But since 2001, at least half of the 10 fastest-grow­ing economies in the world have been in Africa. The con­ti­nent also sports 15 per­cent of the world’s pop­u­la­tion, two-thirds of the Earth’s un­cul­ti­vated arable land, rich en­ergy resources and a ris­ing youth pop­u­la­tion, ac­cord­ing to the IMF.

De­vel­oped na­tions such as the United States, Ja­pan and China have ac­tively wooed African coun­tries in re­cent years, typ­i­cally with high-pro­file sum­mits in which bil­lions of dol­lars in deals and fi­nanc­ing projects have been struck. Last week, In­dia hosted its first such gath­er­ing for 54 African coun­tries, in­clud­ing 41 heads of state, an­nounc­ing a dou­bling of sub­si­dized loans to the con­ti­nent to $10 bil­lion over the next five years, along with some $600 mil­lion in grants.

But around 340 mil­lion peo­ple in sub-Sa­ha­ran Africa still lack re­li­able ac­cess to tra­di­tional banks, the ICD re­port noted.

Those trends have led the ICD to boost its fund­ing in Africa by more than dou­ble to around $12 bil­lion in the next five years.

“Africa has the high­est growth in the world. It needs more fi­nances to back up the growth,” said Is­lamic Cor­po­ra­tion CEO Khaled Al-Aboodi. “Ac­cess to fi­nances presently here are scarce and dif­fi­cult to at­tain.”

Is­lamic fi­nanc­ing can take dif­fer­ent forms. An “ijara” in­vest­ment in­volves a bank buy­ing an as­set — such as a trac­tor — that is leased to the debtor, who uses it for busi­ness. In “murabaha” lend­ing, banks pur­chase goods and re­sell them to cus­tomers, who make in­stall­ment pay­ments on the goods at markups. In a “musharaka” deal, the bank and its cus­tomer launch a joint ven­ture and share the re­sult­ing prof­its or losses.

Ms. Raza said Is­lamic bank­ing pro­tects debtors from in­ter­est charges that cut into debtors’ rev­enue whether or not they are op­er­at­ing in the black. Is­lamic fi­nanc­ing also gives lenders more flex­i­bil­ity when debtors en­counter hard­ships and threaten de­fault, she said.

“The ma­jor­ity of Is­lamic fi­nance trans­ac­tions do carry a level of riskshar­ing,” she said.

Ms. Raza noted, how­ever, that debtors couldn’t nec­es­sar­ily ex­ploit banks in Is­lamic fi­nanc­ing. Banks can quickly re­pos­sess as­sets loaned un­der the terms of most trans­ac­tions, for ex­am­ple. “There are de­ter­rents put into place dur­ing the struc­tur­ing process to avoid any sort of mis­use of the flex­i­bil­ity that Is­lamic fi­nanc­ing is sup­posed to en­sure,” she said.

In West Africa, where at least 80 per­cent of the pop­u­la­tion is Mus­lim, Is­lamic fi­nanc­ing has grown in pop­u­lar­ity. Since 2014, Ivory Coast, Nige­ria, Niger and Sene­gal have is­sued “sukuks,” or Is­lamic bonds, to­tal­ing al­most $800 mil­lion, ac­cord­ing to the coun­tries’ financial fil­ings.

A sukuk pays a div­i­dend based on a re­turn from a tan­gi­ble as­set. It is sim­i­lar to a tra­di­tional Western-fi­nanced bond, with­out the in­ter­est. Pro­ceeds from sukuks of­ten fi­nance large state de­vel­op­ment projects for pur­poses such as ed­u­ca­tion, agri­cul­ture and in­fras­truc­ture.

“With th­ese tools, we could build a freight ter­mi­nal at the Felix Houphou­etBoigny Air­port,” Ivory Coast’s Mr. Dun­can said at the fo­rum. “Cote d’Ivoire can use th­ese fi­nances for in­fras­truc­ture de­vel­op­ment.”

De­spite its prom­ise, Mr. Toka said, it will take more than a new fi­nanc­ing mech­a­nism to bring pros­per­ity to a re­gion that has strug­gled with is­sues such as po­lit­i­cal in­sta­bil­ity and cor­rup­tion, epi­demics such as Ebola and ter­ror­ist threats from Is­lamic ex­trem­ist forces such as Boko Haram.

“For Is­lamic fi­nance to thrive, we need to pro­vide the le­gal and reg­u­la­tory frame­work that goes with it,” he said. “Coun­tries need to have those frame­works put into place so it can ac­tu­ally help with the ex­pan­sion of Is­lamic fi­nance in Africa.”

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