- Uganda has issued first Islamic Banking License after a 20-year wait. On its part, Kenya has issued the first Islamic Bond to finance affordable housing agenda.
- The performance of Sukuk bonds in the continent is revealing untapped demand that could finance development projects.
- Estimates show global Islamic finance assets could reach $3.8 trillion by 2024.
Islamic Finance is on an exponential growth trajectory across Africa, garnering momentum by the day broadening the continent’s financial landscape. African countries are making significant steps towards bolstering access to shariah-compliant financial instruments and services, to cater to the largely financially, excluded Muslim population. This comes as figures from the Islamic Development Finance Corporation (IDFC), forecast that global Islamic Finance assets could reach $3.8 trillion by 2024.
Large swathes of African populace still remains unbanked, pertinently those shifting stance from the conventional system driven by their religious beliefs, thereby unlocking an untapped pool of investments.
Islamic Finance assets set to increase
In reiteration, the 2022 Moody’s Investors Service, reveals that Islamic banking assets in Africa are expected to increase significantly in the coming decade, given the continent’s large Muslim populations. According to Pew Research, Sub-Saharan Africa will overtake the Middle East and North Africa to become the region with the world’s second-largest Muslim population behind the Asia-Pacific, within the next two decades.
It is projected that the Muslim proportion of the population of Sub-Saharan Africa, will increase to 27 per cent by 2060 from 16 per cent in 2015.Currently, the Muslim population of Africa stands at some 530 million people, around 40 per cent of the African population.
In North Africa, the Muslim population is above 90 per cent, close to levels in Gulf countries and some way above Malaysia, where numbers are around 60 per cent.
Read also: Taking the lead: Africa’s aviation industry growth potential
The rise of Islamic fintechs
In tandem, this has set stage for the proliferation of Islamic fintechs across the continent, to harness the vast potential of the Islamic finance market. In light of this, an Egyptian startup has recently raised significant pre-seed funding, to establish itself as Africa’s first Islamic fintech company.
With the chief objective to revolutionize the industry, the company intends to blend cutting-edge technology with Islamic finance principles; to cater to the specific needs of Muslim consumers on the quest for Sharia-compliant financial solutions.
To boot, the successful pre-seed funding round is a testament to the growing interest and support for Islamic fintech ventures in the continent. With the rapid evolution of the market, more startups will continue to mushroom to meet the growing demand, by offering Sharia-compliant alternatives to a broader audience.
In addition, both smartphone and internet penetration will boost fintechs’ operations, to bring credit and insurance closer to the underserved Muslim demographics. Moreover, Nigerian Fintech Enricher recently announced its plans to embark on a global expansion to North America and the United Kingdom, to tap into the growing demand for Islam-compliant finance.
Islamic insurance
Overall, the global Islamic finance market is set for massive expansion in the upcoming years, with increasing demand for various types such as; Islamic banking, Islamic insurance, Islamic bonds and Islamic funds, according to absolute reports.
The global Islamic Finance market size was valued at $2503600.0 million in 2022 and is expected to expand at a CAGR of 12.67 per cent during the forecast period, reaching $5,122,800.0 million by 2028.
Conversely, Africa has been identified as among the growth regions where non-Muslim majority states, are developing strong Islamic finance markets. This has been primarily fueled by high-interest rates. Hence, even non-Muslims have been entering the market for interest-free Islamic banking services.
Read also: Debt-for-nature-swaps: a solution for Africa’s debt crisis
Islamic Finance roll out in Uganda
In light of this, the Central Bank of Uganda recently issued its first Islamic banking license, ending a 20-year wait. Financial institutions in the country will hence avail Shariah-compliant financial services, to Ugandans that are not fully catered to under conventional banking products.
Consequently, the country will now run a hybrid banking system, that will allow clients to access both conventional and Islamic banking products. Hence, this will boost financial inclusion by broadening the range of financial services and offering alternatives to high loan rates. Ugandans still suffer from high loan rates, typically ranging between 26 per cent and 28 per cent.
Having signed the Financial Institutions (Amendment) Act, Uganda’s President Yoweri Museveni has officially authorized sharia compliant banking in the East African nation, since the country’s parliament passed the legislation in June. He issued the license to Salaam Bank Ltd, a unit of Salaam African Bank based in Djibouti and operational in both Kenya and Somalia.
Spearheading this new financial pathway, Salaam Bank is expected to provide a benchmark, on which other financial institutions in the country will build upon to especially provide funding solutions.
Islamic Banking is governed by principles of Sharia law and prohibits the payment or receipt of interest, commonly referred to as ‘ribaa or ribit’. It stipulates that profits and losses are to be shared and split equally. Furthermore, it bars financial institutions from deploying derivatives as they are riddled with excessive uncertainty.
Lack of supporting structures
“Islamic banking does not charge interest, this makes it a more sustainable form of banking, and it is well-suited to the needs of many Ugandans and will help encourage financial inclusion,” noted the bank of Uganda Deputy Governor Michael Atingi-Ego.
Despite Islamic banking being made possible by the 2016 amendment to the Financial Institutions Act, its implementation was constrained by the lack of supporting structures such as a Central Shari’ah Advisory Council. This had additionally held off some banks in the country that had expressed interest in offering Islamic banking products.
However, the passing of relevant tax bills including Income Tax, Value-added Tax, Stamp Duty and Excise Duty between 2022 and 2023, and repealing of the requirement of the Central Shari’ah Advisory Council, has enabled implementation of Islamic Banking.
Also Read: Climate financing: Africa’s green bonds uptake on a roll
Kenya’s first Islamic bond to fund housing
Crossing over the border to Kenya, the country has recently given a nod to the issuance of the first ever Islamic bond via the Kenya’s Capital Markets Authority (CMA). Linzo Finco Trust, is the issuer of the Sukuk bond which aims to raise $20 million for the construction of some 3,069 housing units, at a return of 11.13 percent to back the government’s affordable housing agenda.
This is in a move to harness the untold potential of sharia-compliant financing and positioning the sector as a viable key to unlock the diversification of East African capital markets.
Furthermore, the bond will avail inclusive investment channels for both potential local and foreign ethical investors. With a goal to raise finance from the international markets, Kenya has been prospecting the issuance of a sukuk sovereign bond in readiness to settle the $2 billion Eurobond set to mature in June 2024.
“This financial initiative presents both a new investment opportunity and a major leap towards addressing the housing deficit in Kenya,” noted CMA’s CEO, Wycliffe Shammiah.
Given that countries in the region mostly subscribe to Christianity, Sukuk bonds have seldom been issued. To reiterate, in Kenya, just about 9.7 per cent of the population is Muslim, for the case of Uganda and Tanzania, an estimated 11.5 per cent and 31 per cent respectively subscribe to Islam.
Sukuk bonds uncommon outside Malaysia
Overall, according to findings from a recent research conducted by the World Bank; Sukuk bonds are uncommon outside Malaysia and the Middle East because in many markets, there has scarcely been any sovereign issuances. The bank highlights that investors are forced to hold their Sukuk bonds to maturity due to challenges in finding others.
Never before has such a financial instrument been deployed in the country’s capital market. This should serve as a “benchmark yield curve” to instill market-access confidence in other investors and issuers.
Moreover, another major roadblock has been difficulties encountered in buying and selling assets given the gap in secondary markets, which result in illiquidity. Typically, Sukuk bonds are governed by Islamic law and advocates for businesses that are considered lawful, forbidding both interest charges or suspicious transactions.
Kenya ranked highly among the 18 African countries which have a massive positive ‘growth trajectory’ for Sukuk issuance according to a 2018 report by the Moody’s Credit rating agency.
Scaling Africa’s Islamic finance landscape
Islamic financial instruments such as Sukuk, could come in handy in financing Africa’s infrastructure gap. With case studies witnessed in Malaysia and Indonesia where they have been deployed to finance infrastructure projects; the same model could attract investors from such countries to Africa.
The performance of Sukuk bonds in the continent have revealed an untapped demand for the product. Islamic finance calls for transparency in both the economic activities involved and consequent transactions. They have to be linked to a tangible, identifiable asset, which is advantageous in terms of infrastructure financing.
The Islamic Development Bank (IsDB), is a development financial institution headquartered in Jeddah, Saudi Arabia and has sank its tentacles in the African market, with 27 African countries among the 57 member countries.
The Bank has been providing credit and loans to member countries, to support infrastructure and private sector development. Since its inception in 1975 up to about the end of June 2022, the IsDB has advanced financing to African countries to the tune of $65 billion, including about $20 billion for trade-financing activities.
Most of the financing also went into projects in sectors such as health, education, road transport and energy. However, the legal, regulatory and tax regimes for the Islamic finance industry across the continent, are in the early stages of development.
Next Read: Investment growth in Africa’s automotive market
Review of Islamic Finance in African markets
According to Fitch ratings, Nigeria boasts the largest Sukuk market in Africa, with an outstanding issuance of $ 1.6 billion. The size of the Nigerian Islamic finance industry was estimated at $2.9 billion at end of 2022. The long-term potential is notable given that Nigeria has the largest Muslim population in Africa with a large unbanked population.
With a population of well over 23 million people, 40 per cent being Muslims; Ivory Coast is growing to become an eminent player in the Islamic finance industry in West Africa. With strong backing from the Islamic Corporation for the development of the private sector, Ivory Coast has been able to reinvent its Islamic banking operations.
Albeit East African markets have been ripe for a sukuk bond for a while, there has been no sovereign issuance, due to the lack of a viable governance structure as well as political will. The biggest investors of sukuk bonds are projected to be Islamic banks and sharia-compliant pension funds, coupled with several potential retail investors who are underserved by the conventional financial instruments.
A popular instrument in Kenya is ‘Halal Pesa’ by the giant telco Safaricom, in partnership with Gulf African Bank, launched in March 2022.This became the first Shariah compliant mobile and digital financial solution in the country. Its a financial saving tool that helps Muslim and non-Muslim customers alike, to access micro-savings and investment solutions which adhere to Islamic laws on earning permissible profits.
In neighbouring Tanzania, sovereign bonds are yet to be issued. However, private entities have issued at least two sharia-compliant bonds in the last two years; with KCB Bank Tanzania issuing a sukuk bond to raise $4 million to finance its Sharia-compliant bank’s subsidiary’s asset portfolio last year.
Also Read: Becoming Africa’s Singapore: Rwanda banks on technology to rebuild its economy
Shariah banking rising in Ethiopia
For Sudan, the banking system is fully Shariah compliant and in neighbouring Djibouti, Islamic banking assets make up around 25 per cent of banking sector assets. Shariah banking has also continued to enjoy moderate growth in Ethiopia since 2008 when its conservative central bank authorized interest-free banking. However official lending and the disbursement of Shariah compliant products and services thereof, commenced in 2020.
In South Africa, Islamic banking is growing with the first Sukuk Islamic bond of $500 million having been issued in 2014 by the country’s treasury, with an aim to attract funding from Gulf Arab and Southeast Asian liquid capital markets to repair the country’s ports, roads, hospitals and schools.
According to the latest figures from the Banking Association of South Africa, deposits in the country’s halal banking top $2 billion and advances amount to $824 million.
Some African countries that have issued Sukuk bonds in recent years include Egypt, earlier this year which raised $1.5 billion via three-year Sukuk bonds which attracted bids worth $5.4 billion. In addition, in 2018, Nigeria issued $327 million of Sukuk securities whilst Morocco issued $105 million.
Also Read: Banning Second-Hand Clothes Key to Jump Starting Africa’s Textile Industries
