Daily Management Review

Islamic banking is trying to conquer Africa


07/20/2017


In 2008, the central bank of Ethiopia, known for its conservative views, decided to experiment: it allowed banking activities with no interest. Sharia law prohibits usury, so this step was seen as a desire to introduce financial services in the large and usually ower-income Muslim minority.



Marcello Casal Jr/ABr. - Agência Brasil
Marcello Casal Jr/ABr. - Agência Brasil
However, the regulator's initiative did not receive a broad response. The attempt to open an Islamic bank failed.

Nowadays, most of the major commercial banks in Ethiopia offer a number of financial products for Muslims, but they are not in demand compared to convenient banking services. The attempt to introduce Islamic banking in Ethiopia failed.

Islamic banking is in a healthier state outside Africa. In the period from 2007 to 2014, the industry has increased three-fold (although recently the growth slowed somewhat). Its total assets reach $ 1.9 trillion. Sub-Saharan Africa delivers less than 2% of the amount, although the idea is that the region should be more receptive to such services.

The Muslim population of the continent is 250 million and is increasing every year. Nevertheless, the World Bank says that about 350 million Africans do not have a bank account, writes The Economist.

Some countries are competing for the opportunity to become an African hub for Islamic finance. Kenya, having a much smaller number of Muslims than Ethiopia, has three Islamic banks, and even one Islamic insurance company. In addition, it is possible to find Sharia-compliant products in five traditional banks.

In 2016, Kenya joined the Islamic Financial Services Council (a Malaysian-based regulator).

The country also plans to issue sovereign sukuk, or Islamic bonds. This will attract investment in infrastructure projects (Sharia demands that sukuk be related to a property of a physical asset) and facilitates creation of an Islamic capital market.

Nigeria, with its only one Islamic bank, plans to follow this lead. Senegal released its first sukuk three years ago and raised $ 208 million. IIn 2014, South Africa attracted $ 500 million through issuance of the international Islamic bonds in Africa.

In 2016, the total volume of such placements in Africa amounted to $ 1.3 billion.

Sovereign sukuk is one thing, but a Sharia-compliant industry for the private sector is completely different. In North Africa, where 96% of the population belongs to the Islamic culture, the development of Islamic finance is artificially restrained by fears that the Sharia laws will be introduced into everyday life through the "back door".

In sub-Saharan countries, the challenges are mostly structural, comments Thorsten Beck of London City University. Islamic banks tend to be small: for example, they account for less than two per cent of the market in Kenya.

Despite the advantages, Islamic lenders are struggling with the same fundamental problems as their counterparts in the traditional sector. "Many projects simply are not suitable for such banks, as the assets of borrowers are difficult to use as mortgages," - notes Beck. In addition, the sources of funding for Islamic banks are mostly short-term, which makes it difficult to provide long-term investments.

Islamic contracts are difficult and require the most stringent control. "Regulators are still now sure on how to work with this sector," said Khaled Al-Aboodi of the Islamic Development Bank.

So, despite the issue of two sukuk, Senegal still did not accept special regulation of Islamic finance.

World Bank’s study shows that an average African Muslim often does not have a bank account. However, it is not yet clear whether the Islamic finance can solves the problem.

"Muslim banks are not aiming at the poorer part of the population," says Rodney Wilson of Durham University. And the poorest, no matter how righteous it is, do not want to pay extra money for peace of mind.

Meanwhile, innovations, for example, mobile banking can facilitate the task of spreading the sector on the continent. Saif Malik of Standard Chartered notes that Islamic banking is quite competitive in Malaysia, and even non-Muslims use it there. In the end, Islamic finances remain finances: they thrive when they can offer the right price.

source: economist.com






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