KFH Research prepares report about future of Islamic finance in Africa
- 38 financial institutions are currently operating in Africa Promising future for Islamic finance, and southern and eastern African countries will become pivotal service centers
- North African countries have great untapped potential
-Lack of competent employees and fragile infrastructure most prominent obstacles, while retail services and small projects most promising opportunities
KFH Research prepared a report about the future of Islamic finance in Africa that said that there are various promising opportunities for the growth and development of Islamic banking in Africa; especially North African countries, in addition to Kenya, Nigeria, Senegal and South Africa. It is worth noting that South Africa is a market with great potential for Islamic banking transactions.
In addition, the report mentioned that Africa hosts 38 Islamic finance institutions, and stressed that most African countries have amended their legislations to allow Islamic institutions to operate.
However, the report shed light on several major obstacles that hamper the ability of Islamic finance to blossom in Africa, such as lack of competent employees, fragile infrastructure, and the low returns on some projects.
Despite the aforementioned, Islamic banks have great potential in the fields of retail services, financing of small and medium scale projects, and real estate development projects.
Sudan is the only African country that has restructured its economy and financial system in accordance with the teachings of Islam. In recent years, however, the continent has witnessed encouraging growth of Islamic finance, underpinned by the following factors:
· Increasing awareness in Sub-Sahara Africa on the back of the growing trade interactions with the Middle Eastern countries.
· Growing demand for Shariah-compliant products and services by Muslims who wish to comply with their religious beliefs.
· Increasing demand for the ethical, risk-sharing approach offered by Islamic finance, in particular in the wake of the recent global financial crisis.
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· Measures undertaken by some of the governments to review and reform their respective banking laws to allow Islamic finance institutions to set up and prosper.
Growth and Development
Although Islamic banking commenced in Egypt since the 1960s, the industry is still in its infancy across the continent. Currently, there are approximately 38 Islamic financial institutions operating in Africa. Kenya is among the African countries that are taking up the lead in Shariah-compliant banking services. While the demand for Islamic banking services has continued to grow in leaps, banks have been slow in offering such services, mainly due to a lack of expertise in Islamic finance and its products.
North Africa represents a large and still untapped market of 190 million people or 91% Muslims, except in Sudan where Muslims represent 70% of the population. However, Islamic banking is still a niche market in North Africa, where consumers are used to conventional banking products and services. Nevertheless, we expect things to slowly change moving forward, given new regulations created by the governments. For example, the Moroccan Central Bank decided in 2007 to authorise certain types of Islamic financial products, called alternative financial products, in response to consumers' demand. Full-fledged Islamic banks are already established in Egypt, Algeria and Tunisia; Islamic windows in Egypt, Morocco and Algeria. In 2011, the Central Bank of Sudan has approved Abu Dhabi Islamic Bank's request to open a branch.
In West Africa, development of the Islamic banking industry can be witnessed in Nigeria. Provisions of the Banks and Other Financial Act (BOFIA) 1991, as amended, provided for the establishment of Islamic banking in Nigeria. Following this, Habib Bank was given approval in 1992 to operate an Islamic banking window which is still operational with Bank PHB. In June 2011, the Central Bank of Nigeria issued the latest new guideline for non-interest banking and approved a banking licence for Jaiz International Bank to launch the country's first Islamic bank. However, the central bank is not a promoter of Islamic banking but only issued guidelines concerning its introduction. The main reasons for introducing Islamic banking in the country are as follows:
· To attract foreign investment to develop infrastructure in Nigeria and to guarantee financial inclusion for more Nigerians.
· To be used as positive catalysts in the banking sector.
· To meet the demand for non-interest, profit-sharing form of banking and finance, irrespective of religious affiliation.
Elsewhere in Senegal in October 2009, Bank Asya, Turkey's leading participation bank, acquires a 40% stake in Senegal-based Tamweel Africa Holding SA, owned by the Islamic Corporation for the Development of the Private Sector (ICD), a subsidiary of Islamic Development Bank (IDB). Bank Asya, the IDB and the ICD will operate in the interest-free banking sector together throughout Africa, especially in the western part of the continent.
In East Africa, Islamic banking commenced in Kenya in 2008 when the government allowed Kenya Commercial Bank to operate its Amana Islamic suite, the country's first full-fledged Islamic bank. With the establishment of Gulf African Bank, Kenya now has two full-fledged Islamic banks, which contribute around 1% of the banking sector's net assets. Five other conventional banks have also introduced Islamic banking products in Kenya to provide Shariah-compliant products to an increasing customer base. In May 2010, the Central Bank of Kenya amended its Banking Act in May 2010 to allow Islamic finance institutions to set up and prosper. Elsewhere in Uganda, the central bank is amending its banking regulations to allow for the establishment of Islamic banks in the country.
In the south, Muslims represent 2.3% or 1.3 million of the population in South Africa. However, only 10%-15% of the Muslim population uses Islamic banking. There are currently three Islamic banking institutions - one full-fledged Islamic bank and two Islamic banking windows. Al Baraka Bank, registered in South Africa in 1989, is the first Islamic bank in the country. Total Islamic banking assets currently account for 1%-2% of total banking assets in South Africa.
The outlook for the Islamic banking industry in South Africa is bright, given various measures undertaken by the regulators to develop the industry - (1) South Africa is currently in the process of introducing tax neutrality laws for Mudharabah, Murabahah and diminishing Musharakah, and (2) The National Treasury envisages South Africa being a central hub for Islamic product development and ensuring the rollout of such products into African markets. Nevertheless, challenges faced by Islamic banks in the South African market include increased competition, lack of customer education and awareness, and lack of good geographic spread.
Opportunities
Islamic banks and products are likely to be most popular in the parts of Africa with the highest concentration of Muslims such as North Africa, large parts of West Africa and down the eastern seaboard. Islamic banks are also expected to become attractive in countries with significant populations of Muslim businesspersons such as South Africa.
Opportunities for Islamic banks in Africa include retail products as well as SME financing. Although Islamic finance has been around for 50 years in Africa, more than half of the continent's Muslim population remains unbanked. Unlike major urban areas which have a penetration rate of approximately 60%, banks in rural Africa have a very low penetration rate of less than 20%, given the branch infrastructure which makes it inadequate to serve the population. Given the continent's growing middle class and large young population, this serves as an opportunity for banks to expand their network of banking services.
The opportunities for Islamic SMEs and microfinance are also vast, underpinned by steady economic growth, government ambition to reduce poverty levels and enrich the standard of living, the growing preference for Shariah-compliant products, and a large Muslim population. However, the risks are perceived to be higher, given agribusiness SMEs in Africa tend to be undercapitalised, lack collateral, and have poor expertise in management, commercial and financial skills. In this regard, Islamic banks can actually adapt from successful microfinance institutions such as Grameen Bank in Bangladesh and Bank Rakyat Indonesia who adopted dynamic incentives, regular repayment schedules and collateral substitutes to help maintain high repayment rates. One of the key success factors would be to develop products that not only meet the requirement of the target groups, but are also affordable for the masses.
Outlook
Moving forward, we expect the Islamic banking industry to continue to expand in Africa, supported by the following factors:
· The on-going shift by African countries from being aid-dependent to increasing trade and business interactions with the Middle East. Islamic finance can potentially play a part in facilitating more trade between Africa and the Middle East with the involvement of more global and Islamic banks from both regions.
· Policies and business reforms in some parts of the continent have made Africa the third fastest-growing region in the world, after the Middle East and Asia. This will result in huge infrastructure requirements which will in turn result in an increase in the demand for Islamic financing. Issuing sukuk will provide an opportunity to tap funds from the Middle East and Asia.
· According to African Development Bank (AfDB), the number of middle-class Africans has tripled over the last 30 years to contribute more than 34% of the continent's population. Strong economic growth over the years, enhanced human resource development, and promotion of private sector growth are some of the factors that have caused the number to increase. This is expected to boost consumer spending and support the demand for retail banking products such as vehicles and houses as well as insurance products.
· Besides amending the banking laws to accommodate Islamic banking, the African governments are expected to undertake similar review on the insurance industry and the capital markets which will bode well for the Islamic finance industry as a whole.
· Efforts by some African countries such as South Africa and Nigeria to promote and position themselves as Africa's Islamic finance hubs.
· Africa is host to the second largest Muslim population in the world, where 540 million or 52.4% of its population is Muslim.
Risks and Challenges
Risks and challenges that need to be overcome for Islamic banking to expand in Africa include the following:
· Lack of qualified and skilled personnel in Islamic finance. In addition, the banking and financial authorities need to become more familiar with the principles and practices specific to Islamic finance to enable them to make appropriate supervisory and regulatory judgments.
· Lack of awareness of Islamic finance. Greater marketing and product education and awareness are crucial to help overcome any resistance that may arise.
· Senegal and The Gambia already have operational regulations governing Islamic banks, while several other countries are at various stages of drafting their respective regulatory guidelines. However, more needs to be done in terms of establishing robust regulatory and legislative structures, strict risk management frameworks as well as governance and compliance structures for the Islamic finance industry to take off and prosper.
· Lack of infrastructure such as Islamic money market to help provide liquidity in the Islamic banking system, as well as takaful to protect investments of Islamic banks against unforeseen hazards.
· Most African countries do not have specific tax legislation related to Islamic banking and finance products. If they remain unsolved, this would delay the development of Islamic finance in the rest of the continent. Certain countries such as South Africa and Nigeria have recognised the need to place Islamic banking on an equal footing with conventional banks.
· In some African countries, political and economic instability has made financing home purchases difficult. The growth of SME loans and financing has also been hindered by not only political instability but strong dependence on a few raw materials.
© Press Release 2012
from Kuwait Finance House
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