Islamic finance sets sights on Africa for growth

Shari’ah-compliant banking is a recent phenomenon in
Africa, discovered by most Muslim Africans only over the past decade.
Conservatively assuming that banking entrenchment in Africa represents an average 50% of the total GDP produced by African Muslims, the Islamic finance market on the continent is potentially worth close to USD 235 bln, Moody’s Investors Service said in its special comment entitled “Islamic Finance Explores New Horizons in
Modern Islamic finance originated in the mid-1970s, and for three decades remained focused on two core markets — the Middle East (and especially the wealthy oil-exporting Gulf countries) and Southeast Asia (with Malaysia being by far the unchallenged leader in this industry). Moody’s noted that the expansion of Islamic banking and finance has accelerated in recent years, with the industry diversifying out of pure lending into new business lines and new territories beyond the natural borders of the Muslim world. Initiatives on Shari’ah-compliant investment and financing are mushrooming across the board, with countries as economically significant as Japan, the UK and
China seriously considering some form of Shari’ah-compliant finance for their domestic market, thereby providing even more credibility to the phenomenon. Moody’s notes that
Africa is no exception to this trend. Although a country such as
Egypt has been familiar with Islamic finance since the 1960s, overall Shari’ah-compliant banking is in its infancy across the continent. Today, 37 Islamic financial institutions operate in
Africa, serving a Muslim population of 412 mln inhabitants.
“Average per capita GDP on the continent was a low USD1,137 in 2007, but given the fact that Africa is host to the second-largest Muslim population in the world, the absolute size of its economic production reached USD 469 bln last year,” said Anouar Hassoune, a Moody’s analyst and author of the report. “This is not insignificant, as it is on par with the combined GDP of Saudi Arabia and the
United Arab Emirates, two of the dominant economies of the Muslim world,” he continued.
In Moody’s view, the potential value of the Islamic banking and finance market in
Africa is huge. The actual depth of Shari’ah-compliant financial intermediation was only USD18 billion as of year-end 2007, equating to a market share of less than 8% of its potential size. In addition, the industry is very much concentrated at this stage of its development in Africa: more than half its assets are located in Sudan, with
Egypt — unsurprisingly — ranking second, but with a much lower share of around one-fifth.
“Provided that the continent continues to grow at its current pace, which is the fastest in decades, incremental wealth creation will make it easier for the Islamic financial services sector, including Islamic commercial banking but also Shari’ah-compliant insurance, investment and microfinance, to develop,” said Hassoune. In the report, Moody’s summarises the key trends driving the increasing emergence of Islamic finance in each of the three sub-regions of the continent — namely North Africa, sub-Saharan Africa and
Southern Africa.
In addition, given its very special status within the African Islamic finance landscape, a specific focus is made on
Sudan, out of which the first-ever African Sukuk (Islamic bond) was issued in 2007. Finally, the rating agency also tries to identify the fields where Islamic finance can positively contribute to the development of maturing financial markets, in view of the continent’s stronger integration into the global economy.
In particular, Sukuk may be viewed as a powerful tool for African sovereigns — but also corporates at a later stage — to tap current Islamic liquidity, which has reached historical highs.

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