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Saturday, 7 March 2015

Could Islamic banking help solve Africa’s finance problems?

A recent study conducted by the International Monetary Fund (IMF) has explored the possibility of using Islamic finance for increased financial inclusion; whilst the conclusion of the report was mixed, the potential impact of adopting sharia financial practices could be significant.
Their recently published paper entitled ‘Can Islamic banking increase financial inclusion?’ noted: “some evidence that Islamic banking presence and activity were associated with greater inclusion with regard to bank credit by households and by firms as a means to finance investment.”
The study eventually concluded that there was: “weak and tentative evidence of Islamic banking’s positive impact on some types of inclusion.”
Sharia compliant finance, in essence, is comprised of five ‘pillars’ which include profit and loss-sharing, risk avoidance, a ban on financing immoral activities, as well as the more well-known ban on interest payments.  

Governments in Kenya and South Africa have both recently issued a sukuk, with South Africa notable for attempting to raise $500 million from its maiden bond issuing and for Moody’s Baa1 rating (the same as the rand.)

The IMF paper notes that a holistic reform of how finance is managed in Africa would be required in order to increase financial inclusion, regardless of sharia banking coverage.  
The researchers said: “improving financial infrastructure, introducing more competition in the banking system, improving the quality of credit information, and enhancing the efficiency of the legal system” would be instrumental in improving financial inclusion across the continent.

(African Business Review / 06 March 2015)
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