Finance is a dynamic device in modern economies and an important catalyst and driver of economic growth and development in both developed and developing countries. Islamic finance has considerable potential to become an important catalyst in Africa’s economic growth and development. It also has the potential to facilitate innovation and competition in the wholesale and retail banking sectors and to support the commitment of the various African Governments’ towards credit market diversification. Africa has benefited from a decade of solid economic expansion – since 2005, GDP growth rates have averaged around 5% – which has led to increasing urbanisation and more foreign investment. The strong economic growth of Africa is supported by Africa’s increasing ties to the global economy, through both trade and financial channels. Africa is an important producer of many commodities such as oil, copper, coal, aluminium, timber and cocoa, and these have remained its important sources of economic activity and foreign investment. In 2013, total foreign capital flows into Africa amounted to USD56.6bln, up from USD51.7bln in 2012. Another key driving force for the African economy is the rise of the urban African consumer. Today, more than 40% of the African population live in urban areas, and this figure is set to increase to 54% by 2050. In the near future, a large consumer base is expected to attract more sustainable sources of investment, in addition to commodities-based investments.

This continued growth in major African economies will result in a need to develop resources-related services and infrastructure, which are ideal assets for some forms of Islamic financing, such as Sukuk, Mudaraba, Murabaha and Ijarah. Africa is well positioned to structure and offer such instruments as part of financing packages for resources-related development. Furthermore, the ethics embedded within Islamic finance fit well with a world looking for more consumer protection. With an active Muslim population representing about 53.04 per cent of Africa’s total population of 1billion, Islamic finance has huge growth potential in Africa, and it presents an important base to service this fast growing sector in the global financial services market.

The Rise of Islamic Finance in Africa

Islamic finance development has become a centerpiece in many countries in the African region. A number of market development and regulatory efforts have taken place in the region in recent years. Nigeria, Sudan, South Africa and Senegal, Kenya, Morocco and Niger among others have put in place necessary legal and regulatory frameworks to enable Islamic banking offerings in their respective jurisdictions. There are more than 50 Islamic financial institutions in Africa out of 600 institutions globally. Many conventional banks across the continent including National Bank of Egypt, Sterling Bank of Nigeria, Absa Bank of South Africa or First Community Bank of Kenya have also started to offer Shariah-compliant banking products through Islamic window set-up. In the sukuk segment, countries in the likes of Senegal, Nigeria, Mauritius, and Gambia have issued sukuk whilst Morocco is planning their sukuk debut this year. A recent milestone in this space is the maiden sukuk issuance by the Africa Finance Corporation, a leading pan-African multilateral development finance institution. The transaction was upsized to USD150 million from its initial target of USD100 million with final order book of around USD230 million.

Islamic finance global momentum

Islamic finance development in the Africa region is in tandem with the emerging interest of Islamic finance globally. Based on the current growth momentum of the global Islamic finance, the global Islamic financial services industry is estimated to reach USD6 trillion in assets by the year 2020 with a growing number of new market entrants. Islamic finance industry has been progressing rapidly since its inception nearly four decades ago.

The industry, particularly in advanced Islamic finance markets, witnessed rapid growth and sustainable market drives enabling the system to be commercially viable and competitive industry to operate in parallel with the conventional financial system. Malaysia as a case in point, the corporate sukuk has outpaced the corporate bond whereby corporate sukuk issuance was RM64.8 billion, 75.7% of the 2016 total corporate bonds and sukuk issuances in the country.

The global Islamic banking industry is projected to surpass USD3 trillion mark by 2020. Apart from the Asian and the GCC driving the industry, a number of new markets especially in the African region have established necessary framework to support growth of Islamic banking development in their countries. Based on MIFC insights article entitled ‘2016 Global Sukuk Market: A Record Year for Corporate Issuance’, global sukuk outstanding as at end-2016 increased to a record of USD349.1 billion and 8.7% increase from end-2015.

The financial market’s growing focus on sustainable and equitable financing further enhances the poise of the Islamic finance offerings as it presents enormous potential as an important catalyst to enhance the economy of a country and subsequently the world. Globally, there are now USD22.9 trillion of assets being professionally managed under responsible investment strategies, an increase of 25% since 2014 and the largest market for sustainable investing in Asia ex Japan is Malaysia (30%).

Another commendable development of the industry is the diverse spectrum of global partnerships aiming to solidify and advance the Islamic finance industry to the global Centre stage such as the International Islamic Liquidity Management Corporation (IILM), the Islamic Financial Services Board (IFSB). The IILM, established by central banks, monetary authorities and multilateral organizations actively issues sukuk to facilitate the development of cross-border Islamic liquidity management by institutions that offer Islamic financial services globally. In the effort to ensure sound and stable Islamic financial services industry, the IFSB has published more than 20 new or adapting existing international standards and guidance documents. IFSB also collaborated with the Islamic Development Bank (IDB) & Islamic Research and Training Institute to produce a ten-year framework and strategies document for the Islamic financial services industry development. The document provides framework to aid sustainable economic development and social progress through an efficient and resilient industry.

Islamic Finance: Unlocking Africa’s Untapped Potential

Finance development in Africa has an important role in unlocking the region’s untapped potential in various sectors in order to boost its prosperity. The growth of Islamic finance will provide the region access to enrich offerings of its financial instruments and also provide the opportunity to greater access of liquidity pools across the Middle East and Asia particularly from markets with ready pool of investors looking for Shariah-compliant investment opportunities.

Africa has almost 60% of the world’s uncultivated land and vast natural resources. Sub-Saharan Africa for example is endowed with large oil, gas and mineral deposits. Home to over 1.2 billion population, Africa is currently the second most populous continent on earth and the total population is expected to double by the year 2050. The growing population provides an excessive demand on local economies including a ready market for agricultural business and has the potential to expand its food exports. Natural and economic resources mobilization as well as economic diversification activities are among the drives to improve the economic growth the region.

There is a clear set of potentials for Islamic finance to play a role in especially in African countries which intend to diversify their sources of funding. The demographic of Africa provides potentially strong demand for Islamic financial services and products such as credit, savings and insurance.

Financial inclusion includes provision of appropriate and quality financing which is accessible and affordable to low-income and other vulnerable households to reduce poverty, reduce inequality in prosperity sharing and provide enough opportunity for vulnerable groups to improve their living standards10. Globally, 2 billion adults do not have a bank account including 5% in developing economies and 25% in countries with almost exclusively Muslim populations do not have a bank account due to religious reasons. Financial inclusion through Islamic finance could increase account ownership and facilitate financing needs in these areas.

Improve access to financial services

Providing individual access to financial services in developing countries, particularly to the underprivileged segments, helps alleviate poverty through participation in economic activities including small and medium-sized enterprises (SMEs).The demographic realities of Africa makes it a promising region for Islamic finance to tap into Africa including Islamic banking, insurance (takaful) and microfinance since the Muslims account for at least 40% of the total population in almost half of the African countries.

Based on a report by IMF, it is observed that there is a negative correlation between financial inclusion and the population size of Muslims of the total country’s population in Sub-Saharan Africa. For instance, Senegal and Niger consist of almost 95% Muslims of the country’s population but Senegal has only one Islamic bank and Islamic banking holds less than 3% of total assets in Niger.

Whereas with only 1.5% Muslim of the population in South Africa, the country currently has full-fledged Islamic bank, Islamic banking windows and Sharia-compliant fund managers. Only 24% of Muslims compared to 44% of non-Muslims own a formal bank account and especially in Sub-Saharan Africa, Muslims are more likely than non-Muslims to report religion as a barrier to have an account. Islamic finance is 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. Moreover, it is observed that large percentage of population in many African countries borrowed from family and friends rather than formal financial institutions.