Islamic finance growth in Africa: Still a mixed picture

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Bangkok

The development and growth of Islamic finance in Africa has been lauded manifold in recent times and there have indeed a wealth of initiatives been implemented, but overall, the sector represents still a mixed picture, and there is a significant difference in the industry between northern African countries and sub-Saharan nations.
First of all, despite countries in North Africa having set a range of campaigns to develop regulations and create legal frameworks for Islamic finance in recent years, growth still remains subdued. The share of global Islamic finance assets of Muslim-majority North African countries is estimated at just around 1%, according to calculations by Standard & Poor’s.
So far, just a few Islamic retail banks with a limited scope of products and services operate in North Africa, and corporate Islamic banking is almost non-existent despite a substantial need for project finance given the poor state of much of the region’s infrastructure and utility services. In terms of asset size, Tunisia, Egypt and Algeria are leading the ranks. Those are also the countries with the highest liquidity and the most vibrant capital markets in the region.
A number of Islamic banks, or participation banks as their locally called, have also opened their doors in Morocco since May 2017 and the government in Rabat issued a debut sukuk, a five-year local currency-denominated Islamic bond at a volume of $106mn, in 2018. Tunisia is in the midst of enhancing its regulatory framework to support further expansion of the Islamic banking industry’s 5.1% market share in the country, while Algeria has been putting in place regulatory guidelines that allow banks to open Islamic banking windows. Similarly, in all those countries, takaful regulations are presently being drafted.
However, in terms of sector development, they are still laggards. Political divisions have slowed growth in Islamic finance, and in most countries the regulatory environment in which Islamic banks operate is not entirely clear, while supervisory by central banks remains rudimentary. Issues on banking establishment, operations and guarantee mechanism for depositor assets add to the picture.
There are also challenges in terms of profitability and returns. For example, the overall return of Morocco’s debut sukuk issued in 2018 – which also has one of the lowest profit rates of 2.8% of sovereign sukuk issued that year – has since been negative, presumably putting off other countries in the region from issuing more sukuk.
“Islamic banks have not met the objectives of the government for the very competitive banking sector,” said Nabil Badr, deputy director of Banking Supervision at Morocco’s central bank, adding that limited incentives and poorer services of Islamic banks, as well as the fact that not many Moroccans were familiar with Islamic financing mechanisms have been counterproductive and Islamic banks have not yet received much approval from Moroccans.
Sub-Saharan Africa presents a different picture, although its current share in global Islamic banking assets of just 0.8% is even lower than North Africa’s. However, the region is seen to have a bigger growth potential, given the large number of unbanked or underbanked people, the substantial need for infrastructure financing and other essential services such as microfinance.
Overall, Botswana, Kenya, Gambia, Guinea, Liberia, Togo, Niger, Nigeria, South Africa, Mauritius, Senegal and Tanzania all have Islamic banking activities at different degrees. There is also development in Zambia, Uganda, Malawi, Ghana and Ethiopia, as all but Zambia has relatively large Muslim populations.
Many central banks in the region have started amending their banking regulations to allow for the establishment of Islamic banks and Islamic financial services with the result that the majority of jurisdictions in the region recorded a double-digit growth in assets in the recent past.
As per the latest developments, Uganda is set to operationalise its Islamic banking regulation, which was introduced in early 2018, while Kenya is considering a proposed Islamic banking regulatory framework that aims to encourage growth of the sector and attract foreign cash inflows to a country that is already home to three Islamic banks and a number of Islamic windows.
In addition, with the support of multilateral organisations, Islamic banks have been established in several African countries including Benin, Côte d’Ivoire, Mali and Senegal recently. The Islamic banking sector in Nigeria, which has the largest Muslim population in the region, has maintained its share of total domestic banking assets at 0.3% over the past years.
The most developed Islamic finance sectors in the region can be found in South Africa, which was the first Sub-Saharan African country to establish itself as a potential hub for Shariah-compliant finance in the region as early as 1989 and has since reached a market share of Islamic finance assets of around 3.6% with several sovereign sukuk issued, as well as in Sudan, which is unique on the African continent as it operates a 100%-Shariah compliant financial system. Sudanese banks registered one of the highest growth figures globally, with assets growing by 87.9%, deposits by 114% and financing by 60.5% in 2018, according to the Islamic Finance Services Industries Stability Report 2019. These figures, however, come on the back of inflation rates that have climbed gradually from 14.3% in 2016 to about 74% 2018. Economic pressures in Sudan appear to be persisting into 2020 and will continue to affect the banking system.—Gulf Times