This article was first published in the February 2014 International edition of Accounting and Business magazine.
Islamic banks are big business in the Middle East and South-East Asia, but not thus far in sub-Saharan Africa. The World Bank’s International Finance Corporation (IFC), however, has taken a US$5m, 15% equity stake in Kenya’s Gulf African Bank (GAB) to support corporate finance and lending to small and medium businesses – its first in the sub-Saharan Islamic bank sector.
The move signals the potential of Islamic banking in sub-Saharan Africa, given the region’s large Muslim population and the appeal of interest-free banking that is compliant with Islamic ethics and principles (known as sharia or Islamic banking). The low rate of banking penetration in the region is a further incentive.
According to a 2012 Gallup poll, just 24% of adults in sub-Saharan Africa have bank accounts; in countries such as the Democratic Republic of the Congo, Guinea and Niger, the figure is 4% or less. Buoyant markets are also encouraging Islamic banks to set up in the region, with 4.9% growth forecast in 2013, according to the World Bank. Meanwhile, foreign direct investment is projected to reach record levels over the next three years, up from US$37.7bn in 2012 to US$54bn by 2015.
‘The whole idea of investing in GAB was to support the development of Islamic banking in Kenya,’ says Kariuki Thande, an IFC senior investment officer in Nairobi. ‘Islamic banking is still a very nascent sub-sector in the banking industry, so the IFC is saying, look, there’s something here, and it’s financially viable, and there are significant opportunities to grow it in Kenya and the region.’
Partly owned by Dubai equity company Istithmar World, GAB was Kenya’s first Islamic bank when it launched in 2007 and was soon followed by First Community Bank. Standard Chartered is launching its Saadiq Islamic banking brand in Kenya, and conventional banks are also set to expand into sharia banking.
‘We are hearing noises about these banks setting up subsidiaries,’ adds Thande. ‘I guess that is likely to happen, and there’s the option to go the whole hog and set up a fully fledged Islamic bank.’
To compete with the better-established commercial banks, GAB is focusing on women, small and medium-sized enterprises (SMEs) and the unbanked non-urban areas, as well as working to develop mobile-phone banking. Sharia mortgages, involving fees rather than interest, are also a key product, appealing to Muslims and non-Muslims alike.
Yet, while GAB has been successful – in 2012 its net profitability rose by 154% over the previous year – Islamic banking has been slow to penetrate sub-Saharan Africa, which has 284 million Muslims, around 30% of the region’s population, according to a US-based Pew Research Centre report released in December 2012.
Tanzania’s first Islamic bank, Amana Bank, opened in 2011, while in 2012 the Central Bank of Uganda proposed amendments to the country’s Financial Institutions Act to set up Islamic banking. Mauritania also has a flourishing Islamic banking sector.
However, Islamic banking in sub-Saharan Africa has not matched the overall growth of the market globally, which is worth US$1.3 trillion and grew on average by 19% a year over the past four years, according to EY’s World Islamic Banking Competitiveness Report 2012–13.
In Nigeria, Islamic banking has been fraught with problems, despite around half its population being Muslim. Early in 2012, the country’s first Islamic bank, Jaiz Bank, was launched, but later in the year the federal high court declared Islamic banks to be illegal. Commentators attributed the decision to attempts to calm sectarian tensions within Nigeria. Jaiz Bank’s licence has not been revoked and its operations expanded from three branches to 10 by the end of 2013.
Such different market conditions, populations and regulatory concerns are likely to result in mixed growth for Islamic banking. Salman Ahmed, head of Islamic finance Middle East and Africa at law firm Trowers & Hamlins in Bahrain, says: ‘Certain parts of Africa will take off faster than others, and Kenya will be one of them. Development of innovative Islamic financial products tailored to the various legal regimes in sub-Saharan Africa and proper marketing of safe foreign investment in the region is the key to the development of the Islamic finance market. If stability can be maintained in Nigeria, it can be extremely attractive, and has clear potential to be quite a decent jurisdiction for Islamic banking. But there’s a lot of uncertainty in Nigeria.’
A core issue that has slowed the uptake of Islamic banking is the need to change financial regulations to permit its operation. Thande says: ‘Islamic banking has to work with existing regulations and engage with the regulators, or get them to craft new regulations for Islamic banking, which is what tends to happen.’
The International Islamic Trade Finance Corporation (ITFC), a member of the Saudi Arabia-based Islamic Development Bank Group (IDB) established by the Organisation of Islamic Cooperation, agrees. Lamin JK Sanneh, assistant general manager and head of sub-Saharan Africa at ITFC’s corporate and structured finance department, says: ‘The lack of regulatory clarity has created some obstacles to the development of the Islamic banking market.’
IDB is working to address such regulatory shortcomings with the Central Bank of West African States, which runs the currency used by eight mainly francophone states, to facilitate the introduction of Islamic banking in west Africa. ‘With the success of these initiatives, it is expected that more countries will introduce Islamic banking as a viable option in their financial market,’ says Sanneh.
The jury is still out on what Islamic banking regulatory model the countries of sub-Saharan Africa should adopt – or indeed whether they should develop their own instead. Malaysia is one possible model, given its success in Islamic finance, as is London.
Mohammed Amin, an Islamic finance consultant and former head of Islamic finance at PwC UK, says: ‘Muslim-majority countries should take the Malaysian approach, and countries where religion is contentious or that have a Muslim minority may want to follow the UK model, as it doesn’t specifically take the sharia approach.’ The UK uses different terminology and does not provide specific tax clauses for Islamic finance as Malaysia does.
For Islamic banking really to take off in sub-Saharan Africa, suitable regulations are clearly required, and need to include Islamic financial products such as insurance (‘takaful’) and bond (‘sukuk’) issues, but also capital, which the Middle East is well poised to do, given the Islamic finance structures in place and liquidity.
Paul Cochrane, journalist based in Beirut