Africa needs conducive economic, regulatory environments

Islamic finance could contribute, at least modestly, in helping the continent achieve many challenges


Investor base diversification, or offering banking services at a competitive cost, could attract the attention of African regulators and policymakers towards Islamic finance.

At the crux of the matter, Islamic finance also has to show African countries a benefit beyond compliance with Shariah, S&P Global Ratings said in a new report on the sector.

“Islamic finance could contribute, at least modestly, in helping the continent achieve many challenges from making banking services more accessible to the financing of infrastructure needs,” said S&P Global credit analyst Samira Mensah in a statement.

In the report entitled “Islamic Finance in Africa Needs Conducive Economic and Regula- tory Environments”, it was noted that to help the development of a local Islamic finance industry, conducive economic and regulatory environments are the first step in any jurisdiction.

Over the years, South Africa, Senegal and Kenya have taken significant measures to advance its Islamic finance services, while countries such as Uganda, Ethiopia and Zambia are currently exploring and developing the system, observed the Economist Intelligence Unit.

One of the recent developments in the continent took place when Uganda released its Islamic banking regulations which, among others, called for the establishments of a Central Shariah Advisory Council at the central bank level and a Shariah Advisory Board at the individual bank level.

Published in the Uganda Gazette in February and available at the Bank of Uganda website, the new piece of legislation, an 18-page regulation known as the “Financial Institutions (Islamic Banking) Regulations 2018”, noted that the regulation was intended to provide for the “regulation of financial institutions conducting Islamic financial business”, as well as provide “a regulatory framework for Islamic financial business”.

The newly approved regulation allows Uganda — the third-biggest landlocked economy in East Africa — to join peers Tanzania and Kenya in making available Islamic finance products and services to the nation of a population of 44 million, with Muslims accounting for 13%.

Meagre Contribution

Freeing up financing capacity on the balance sheets of multilaterals active in the continent could also be an alternative route, especially at a time when some of them face significant capital constraints, according to the report.

S&P Global estimated the assets of the global Islamic finance industry at about US$2.1 trillion (RM8.53 trillion) as at end-2017, of which US$1.7 trillion is banking assets.

Africa’s contribution “remains meagre” with less than 2% of global consolidated assets and 1% of sukuk issuance. Only a handful of Islamic banks have licences to operate in the continent and very few countries have issued sukuk over the last decade, the report said.

It expects Islamic banks to continue playing a modest role in the continent in the next few years.

“While some African customers might naturally lean toward Islamic financial solutions, if they were available, we are of the view that most clients will become more sensitive to the economic benefits,” Mensah said.

Multilaterals could help pave the way to that end by helping African countries design the appropriate strategies and reforms, the report added.

Impetus for Growth

The origin of Islamic finance in Africa can be traced back to the 1960s with Egypt being the first African country offering Islamic banking under a low profile for political reasons, accor- ding to a paper published in 2013 in the Review of Development Finance.

Islamic banking has been developed using two different models in Africa. The first model consists of setting up fully fledged Islamic banks, while the second model consists of set- ting up windows dedicated to Islamic finance within conventional banks. So far, the first model prevails, the report said.

Back then, the report documented strong variations in the type of Islamic financial services available in African countries. While South Africa has been successful in developing Islamic investment funds, West African countries have been more successful in developing Islamic micro-finance, it said.

Realising the opportunities of Islamic finance, the Emir of Kano had recently advocated Islamic finance for Nigeria to improve the rate of its financial inclusion in Africa, especially in terms of households and firms accessing bank credit to finance investment, according to a Bank Negara Malaysia report titled “Islamic Finance in Africa: Impetus for Growth”, released in June 2017.

The country aims to establish an international financial centre, which includes the pro- visions of Islamic financial products, such as takaful and interbank lending products, by introducing regulatory initiatives for such products. Furthermore, it said two Islamic takaful insurance firms began their operation in Nigeria, becoming the first set of fully-fledged takaful companies in the country, the report added.

The 13-page report noted that Islamic finance is also expected to increase the access to financial services for Muslim populations which are underserved by conventional finance to serve the rising appetite for Shariah-compliant financial products. It observed that a large percentage of population in many African countries borrowed from family and friends rather than formal financial institutions.