Islamic Banking in Africa

 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

http://www.zawya.com

FNB shakes up sharia division

First National Bank's sharpie banking division is in a state of flux after it was hit by a corporate governance scandal in which its chief executive, Obi Patel, was put on "special leave" for almost a month while an internal probe was conducted. Patel has been reinstated, but is facing disciplinary action. 

There has also been a mass exodus of members of the sharpie board, which is meant to approve products. There were claims of misappropriation of funds, conflicts of interest, unfair labour practices, and mistreatment of staff, board illegitimacy and fraud.

The shenanigans have been kept under wraps, with the bank throwing cold water on allegations two weeks ago. An investigation was launched late last year after staff alerted Iris Dempsey, the FNB Wealth head to whom Patel reports, about potential internal operational breaches.

Dempsey told the Mail & Guardian in early January this year that the bank was "comfortable with the findings of the investigation" and Patel was back at his desk.

But following detailed queries this week, Dempsey said: "We have received the findings of that investigation, which identifies that not all the allegations were found to be true, but for those that were appropriate disciplinary action is underway. The findings hold no client or market impact, though."

The FNB investigation found internal breaches of operational procedure and corporate-governance failures. Documents and expense claims in possession of the M&G show a breakdown in internal risk and management controls. Special deals, sponsorships and work contracts were arranged for family members, friends and community leaders, the documents show. Although the amounts do not amount to millions, Patel's behaviour has raised serious governance concerns.

Patel is the owner of the debonair pizza franchise in Sandton, which he declared to FNB, but he is seen to have spent too much time running his own businesses rather than meeting his commitments at FNB.

Expense claims show Patel billed the company to take his family on holiday in Mulenga while he was on business and signed off food bills for "entertaining clients", although "kiddie" meals are reflected on 

The receipt.

FNB is the market leader in sharia banking, with Absa the only other of the big four offering it as a specialised division. Albaraka Bank and the Islamic Bank were the first Islamic banks to be granted a licence by the South African Reserve Bank in the 1980s, but the Islamic Bank was liquidated in the late 1990s owing to allegations of reckless trading. 

There are about 500-million Muslims in Africa, of which just more than one million are South African. Islamic finance forbids the payment and receipt of interest (riba), and investment in some industries. Sharia law states that interest-bearing transactions result in economic ills such as unemployment and high inflation. Trading in derivatives and speculative investment are also forbidden. Sharia law requires all transactions to be backed by tangible assets.

An email trail between executives in the Wealth segment and Patel and his lieutenants indicate clear concern about the way the Islamic Finance division is being run. 

The division is set for a shake-up and will undergo a clean-up and restructuring, including new reporting lines. Although sharia banking was located within FNB Wealth, it operated in a silo. That will change.

"Following the completion of this investigation, areas of improvement were identified," said Dempsey.

In an email dated December 29 2011 to Patel and two senior executives, Eric Enslin and Rajesh Jayrajh, the chief financial officer of FNB Wealth, Liam Brenock, raises the corporate-governance concerns and sets out how the division should operate within international sharia law. He calls for the creation and implementation of a "framework within which we wish the Islamic business to operate going forward", and says that he is reviewing and taking guidance from international standard-setters on financial reporting issues relating to Islamic Finance.

"I believe the collective leadership teams of Islamic Finance and Wealth need to reassess the current people, policies, practices and procedures in Islamic Finance and ascertain whether they are appropriate with regard to a business of this size …"

Brenock has demanded an urgent "status check" on the business. "We need to assess and document the risks and compliance requirements of the business. There is clearly a lot of work to be done to get the business to be a scalable model in which we are comfortable going into other African countries."

He suggests that Patel and his team get cracking on a corporate governance framework in which:

• Duties are segregated and the responsibilities of the roles clearly defined;


• There are more defined levels of authority and documented mandates;


• There is a register of external interests, which should be maintained by risk, reviewed and updated once a year;


• Employees "should not fly solo";


• Standardised processes and pricing exist, which have to be ratified by the executive committee;


• Documentary evidence is maintained of the key business decisions ratified at executive level; and


• Sound business practice is implemented. Expenses are signed off by reporting line managers ("mine gets signed off by Iris [Dempsey]").

Patel's bosses also took issue with the Islamic executive committee, saying its format and constituents needed to be reviewed. The qualifications, mandate and remuneration of the sharia board will also come under scrutiny.

"Membership should not be driven by function. There should be a mix of executive Islamic members and non-executive members from Wealth or other segments," said Brenock.

FNB Islamic Finance, operating since 2004, contributes a net profit of less than R20-million to FNB, equating to about 0.2% of overall group earnings, which were R10.1-billion in the year ending June 2011. 

Dempsey said that FNB strictly adhered to the FirstRand code of ethics and governance framework and, "should we receive any further allegations in relation to the Islamic Finance business, we will treat them with the urgency we place on all issues of this nature".

Patel was not available for comment, but Dempsey responded on his behalf.

http://mg.co.za/article/2012-01-20-fnb-shakes-up-sharia-division/

Islamic Banking in Africa

Islamic banking, once regarded as an exotic but not very practical system and consigned to the outer fringes of the global industry, is now moving steadily into conventional banking and attracting attention from its non-traditional base. The fact that it eschews charging interest on loans has made it appear the perfect antidote to the excessive greed that characterised conventional banking and led to the current financial crisis. In short, Islamic banking, with its emphasis on ethics and its employment of capital solely as a factor of production rather than as a means of gain, is now the politically correct banking system.

It has remained largely insulated from the global credit crisis. It is expanding not only in the Muslim world, but also in other countries where Muslims are a minority, such as Britain, France, the US and even Japan. The industry has grown at the prodigious rate of 15-20% annually over the past decade. This growth is likely to continue, albeit at reduced rates, as more corporates and companies look increasingly to Islamic banks for trade and project finance. Islamic banking has established a firm foothold in Africa but the potential is still enormous. This Special Report examines what Islamic banking is really all about and the role it now plays in Africa.

The ideal model for Africa?

The strong growth of the previous decade was replaced by a mood of uncertainty, worthless assets and tumbling profits but one sector has continued to perform surprisingly well – Islamic banking. Neil Ford reports.

It seems likely that the Islamic banking sector will gain business from customers who believe that an under- regulated global banking industry has helped to precipitate the current global financial crisis. Shariah-compliant investment does not allow speculative activities such as hedging and derivatives, and so could be seen as a safer bet. There is also evidence to suggest that Islamic banks have been less severely affected by the economic downturn than other financial institutions, partly because they invest only in assets and not debt, a fact which allowed them to escape the direct impact of the US housing crash. The global market for Islamic banking certainly enjoyed a good year in 2008. The managing director of UK consultancy Maris Strategies, Joseph DiVanna, says that Islamic banks are not as susceptible to changes in the credit markets as mainstream banks and so continued to be launched in late 2008 and into 2009.

Over the past two years, new banks have been formed in Botswana, South Africa, Sudan and Kenya, as well as across the Middle East and South Asia. Probably the most noteworthy recent development in African Islamic banking is Al Baraka Bank’s decision to seek a listing on the Johannesburg Stock Exchange (JSE). The company is the sole bank in South Africa to offer only Islamic financial products and is currently celebrating its 20th anniversary but has now taken the decision to go public. At present, the bank is owned by the UK’s DCD London & Mutual Plc, Saudi Arabia’s Dallah Al Baraka Group and South African investors – so although it forms the South African leg of the Saudi company’s operations, it is not a mere subsidiary.

Chairman Adnan Ahmed Yousif said: “Listing is on our agenda because it will give us a very good diversity of shareholders and prestige. We also feel that the Reserve Bank in South Africa is beginning to understand Islamic banking very well.” Yousif hopes that the listing, which is expected by the end of this year, will “increase the company’s visibility, attract new customers and grow capital for expansion programmes.” The company’s profits for 2008 increased 19.5% to R21.7m ($2.7m), deposits were 12% higher at R1.6bn ($198m) and advances 7% up at R1.4bn ($173m).

Link: http://www.africasia.com/africanbanker/afbnk.php?ID=2356

Islamic Banking in Africa

Islamic banking, once regarded as an exotic but not very practical system and consigned to the outer fringes of the global industry, is now moving steadily into conventional banking and attracting attention from its non-traditional base. The fact that it eschews charging interest on loans has made it appear the perfect antidote to the excessive greed that characterised conventional banking and led to the current financial crisis. In short, Islamic banking, with its emphasis on ethics and its employment of capital solely as a factor of production rather than as a means of gain, is now the politically correct banking system.

It has remained largely insulated from the global credit crisis. It is expanding not only in the Muslim world, but also in other countries where Muslims are a minority, such as Britain, France, the US and even Japan. The industry has grown at the prodigious rate of 15-20% annually over the past decade. This growth is likely to continue, albeit at reduced rates, as more corporates and companies look increasingly to Islamic banks for trade and project finance. Islamic banking has established a firm foothold in Africa but the potential is still enormous. This Special Report examines what Islamic banking is really all about and the role it now plays in Africa.

The ideal model for Africa?

The strong growth of the previous decade was replaced by a mood of uncertainty, worthless assets and tumbling profits but one sector has continued to perform surprisingly well – Islamic banking. Neil Ford reports.

It seems likely that the Islamic banking sector will gain business from customers who believe that an under- regulated global banking industry has helped to precipitate the current global financial crisis. Shariah-compliant investment does not allow speculative activities such as hedging and derivatives, and so could be seen as a safer bet. There is also evidence to suggest that Islamic banks have been less severely affected by the economic downturn than other financial institutions, partly because they invest only in assets and not debt, a fact which allowed them to escape the direct impact of the US housing crash. The global market for Islamic banking certainly enjoyed a good year in 2008. The managing director of UK consultancy Maris Strategies, Joseph DiVanna, says that Islamic banks are not as susceptible to changes in the credit markets as mainstream banks and so continued to be launched in late 2008 and into 2009.

Over the past two years, new banks have been formed in Botswana, South Africa, Sudan and Kenya, as well as across the Middle East and South Asia. Probably the most noteworthy recent development in African Islamic banking is Al Baraka Bank’s decision to seek a listing on the Johannesburg Stock Exchange (JSE). The company is the sole bank in South Africa to offer only Islamic financial products and is currently celebrating its 20th anniversary but has now taken the decision to go public. At present, the bank is owned by the UK’s DCD London & Mutual Plc, Saudi Arabia’s Dallah Al Baraka Group and South African investors – so although it forms the South African leg of the Saudi company’s operations, it is not a mere subsidiary.

Chairman Adnan Ahmed Yousif said: “Listing is on our agenda because it will give us a very good diversity of shareholders and prestige. We also feel that the Reserve Bank in South Africa is beginning to understand Islamic banking very well.” Yousif hopes that the listing, which is expected by the end of this year, will “increase the company’s visibility, attract new customers and grow capital for expansion programmes.” The company’s profits for 2008 increased 19.5% to R21.7m ($2.7m), deposits were 12% higher at R1.6bn ($198m) and advances 7% up at R1.4bn ($173m).

Link: http://www.africasia.com/africanbanker/afbnk.php?ID=2356