Africa and Nigeria have lost an Islamic finance champion. Who will lead now in Sub-Saharan Africa?

"By using-or abusing- the term 'failed bank' we are able to mask what is almost always a monumental fraud. But it is a deliberate act of prestidigitation." - Sanusi Lamido Sanusi

Sanusi Lamido Sanusi is outspoken by central banker standards; the quote above comes from a university convocation lecture in Nigeria in 2010 (PDF). The consensus opinion is that his ousting last month was a politically motivated result of his anti-corruption drive in Nigeria. His time at the Nigerian central bank--he was appointed in 2009 as the Nigerian banking system was on the verge of collapse--not only coincided with the stabilization of the banking system, but also the first tenuous steps towards allowing Islamic banking in Nigeria.

In the same speech where he lamented the use of 'failed bank', he said that "it should be possible to have international, national, regional, mono-line and specialised banks such as Islamic banks in the country" (emphasis added).

The first Islamic bank, Jaiz Bank, opened in 2012 and South Africa-based Standard Bank operates an Islamic window in Nigeria. On the capital markets side, the state of Osun issued the first Nigerian sukuk and other banks have expressed interest in Nigeria for expansion of their Islamic banking franchises.

Sanusi's Islamic finance ambitions for Nigeria and Africa

That international banks are interested in Islamic finance in Nigeria is not surprising because it is both one of the largest economies in Africa and home to one of the largest Muslim populations. The distribution of Muslims across Africa makes it challenging for an international bank to reach them because each country has different requirements for licensing an Islamic bank (if they even allow Islamic banks). Other markets with large Muslim populations like Sudan have smaller economies (its GDP is one-quarter of Nigeria's) and face greater challenges associated with conflict.

Nigeria has both a large Muslim population and a large economy, but because of the tension between the north and south of the country, which is divided largely along religious lines, the growth of Islamic banking in Nigeria has been controversial. In this process, Sanusi has played an active public role in supporting the growth of Islamic banking in the country. Last November, he advocated for Islamicfinance, saying: "Islamic finance has shown its potential in achieving financial inclusion in many economies by bringing in large under bank populations, especially Muslims into the urbanised financial sector," and went on to state that Islamic finance could contribute to transforming Nigeria into a major international financial centre. Before these pronouncements, in June last year he called out to Nigeria and other African countries to tap into Islamic finance to fund infrastructure on the continent.

In his absence the Islamic finance industry in Nigeria and Sub-Saharan Africa has lost a champion and while the sector will continue to develop, it will likely see an even slower rate of growth in Nigeria than it has since the market for Islamic finance opened, hence providing opportunities for other African nations. Two countries where there are recent developments are Kenya and South Africa.

Kenya and South Africa rising

In Kenya, the government is completing a 10-year strategy to develop its capital markets that includes significant plans for Islamic finance to be an integral part of this process even though Kenya's Muslim population accounts for only 15% of the population. The plan includes changes to existing regulations to facilitate Islamic banks, but in the long-term, Kenya's regulators will develop a separate system of regulating Islamic financial institutions, including through a centralized sharia board.

In South Africa, a country with a larger economy than Nigeria's but with a smaller Muslim population, there was an announcement at the end of February that its debut sukuk issuance was 'imminent'.

The developments in Kenya and South Africa are not happening in a vacuum and their moves to develop their Islamic finance sectors are in part due to finding ways to attract new sources of liquidity. In South Africa's case, the plans for a sukuk had been on the shelf for a long time, but were only revived recently as the storm of currency depreciation in the 'fragile five' economies (emerging markets with large current account deficits) made it more costly to refinance its existing government debt. The development in these markets will shift the center of Islamic finance in Africa towards the East and South, towards markets with lower potential for growth than Nigeria.

Other potential growth markets - Senegal, Niger, Guinea, Mauritania, Mali, Benin

The nexus of Islamic finance in Sub-Saharan Africa as it is viewed from the Islamic Corporation for the Development of the Private Sector (ICD, part of the Islamic Development Bank group) is farther West in the countries around Nigeria where the ICD owns Islamic banks in Senegal, Niger, Guinea and Mauritania and is planning to extend into Mali and Benin. Across these countries, there are 54 million Muslims, almost as many as Nigeria, but operating across six countries is more difficult than in one country.

Impact of slower Islamic finance growth in Nigeria on Africa

To unlock these other growth markets, there would be tremendous benefit to have a regional bank based in a large country like Nigeria to lead development into the other West African markets in a similar way to how Al Baraka Bank has led development in small markets for Islamic finance elsewhere in the world.

For this reason, Nigeria will remain a key market for Islamic finance in Sub-Saharan Africa and the early departure of Sanusi will likely slow the progress of Islamic banking in Nigeria and in West Africa as a whole. The repercussions of this slow development will have its own impact on developments in Kenya and South Africa because it will force them to become more reliant on domestic growth and capital from the GCC and Southeast Asia, rather than being able to develop more linkages of capital markets and flows of capital across the continent. The more distant external sources of capital are in demand in their own regions and in North Africa and there will be a much more limited supply of capital available for external investments in Africa.

It is not entirely possible to attribute future slower growth of Islamic finance across Africa solely on the replacement of Nigeria's central bank governor. Mr. Sanusi was, in any event, scheduled to have his term end in June. But, his replacement which was likely politically driven will limit his future ability to serve as an advocate to future central bank governors for greater development of Islamic finance in Nigeria and that will have an impact Africa-wide because Nigeria has the largest Muslim population in Sub-Saharan Africa and the second largest economy on the continent which provides a significant opportunity to be the center for Islamic finance in the region.

Chart 1: % of Muslims in Africa 2010 – Egypt, Nigeria, Algeria, Morocco, Sudan, and others
% of Muslims in Africa

Source: Pew Forum, "The Future of the Global Muslim Population" (report from 2011, data from 2010)

© Islamic Finance Gateway 2014

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