Islamic finance in Africa in its infancy but underway
Islamic finance has historically been dominant in Malaysia and the Gulf Cooperation Council (GCC). However, over the last year, Islamic finance has expanded its footprint throughout the Middle East, Indonesia, the United Kingdom, Luxembourg and Hong Kong. In recent months, several countries in North Africa and some Sub-Saharan African countries are already planning Sukuk debuts, including Cote d’Ivoire, Tunisia, Egypt, Nigeria and Kenya. This follows first-time issues by Senegal and South Africa. Islamic finance activities include Islamic banking, Sukuk issuance, Takaful (insurance) and microfinance. Despite this growth, Africa still has milestones to reach before it can establish itself as a major player in Islamic Finance. Why? Significant challenges revolve around the lack of a concrete regulatory framework.
African countries are working to develop their legislative and regulatory frameworks to encourage the growth of Islamic institutions and activities to accommodate Islamic finance further. Earlier this year, the G20 group of nations' decision to examine the use of Sukuk to finance infrastructure investment could, in time, bolster the size of the Sukuk market, including Africa.
Significant challenges lie ahead, notably, in establishing a legal structure and legislation that are acceptable to governments, investors and the Sukuk's Shari’ah boards. In Africa, there are no comprehensive Islamic banking laws, save for finite initiatives in a small number of countries.
These challenges will likely lead to a longer time frame of Islamic finance implementation and higher costs as opposed to more conventional forms of funding, at least until a standardised framework is established. However, several important trends will provide the necessary impetus for the development of Islamic finance in Africa. This includes growing government support for Islamic finance, increasing acceptance of Sukuk and Islamic finance more broadly and large investment and financing requirements in Africa.
Other bodies are also taking steps that could help, namely the Islamic Development Bank (IDB) and the Islamic Corporation for the Development of the Private Sector (ICD) that provide technical assistance and credit guarantees to member countries that want to fund infrastructure projects. In addition, the International Monetary Fund has created a working group to build and develop expertise in Sukuk.
Furthermore, Islamic finance could enable African sovereigns to broaden their investor base, providing some diversification away from traditional Eurobond investors and local market participants. As African governments tap the Islamic finance market, it is anticipated that other issuers such as state-owned companies and African banks could, in time, benefit from this additional source of funding.
In Senegal, the Republic has successfully launched a XOF 100 billion Sukuk (approximately $170 million. Source: Zawya). This Sukuk represents a new era in the use of Islamic financing instruments in public policies. Dakar is aiming to position itself as the continent’s hub for Islamic finance. Various activities are being held including training and seminars for senior executives in the finance, investment and pilot projects in the Islamic finance industry.
Over the last few years, South Africa has introduced Islamic compliant financial structures. After the issuance of the inaugural South African sovereign Sukuk during 2014, the country’s National Treasury instituted further amendments to the National Taxation Act that saw them widen the definition of Sukuk. Moreover, the Amendment Act of 2010 recognised arrangements such as diminishing Musharakah, Murabahah and Mudarabah as credible alternatives to their conventional financing agreements, which enable banks to offer Shari’ah compliant products.
West Africa’s Cote d’Ivoire has set in motion its plans to conduct a roadshow for the first tranche of its debut Sukuk program in the fourth quarter of this year. Bruno Kone, Minister of Post, Information and Communication Technologies of Cote d’Ivoire since June 2011, reported that the government intends to issue Sukuk before the end of the year. In April 2015, the Republic mandated the ICD as lead manager for its inaugural Sukuk program worth XOF 300 billion (approximately $510 million), which will be issued over the 2015-20 period in two equal (Source: Reuters). In East Africa, the government of Uganda has approved the Financial Institutions (Amendment) Bill 2015, paving the way for Islamic banking and finance in the country. The country is said to be seeing interest from both foreign and local financial institutions to offer Shari’ah compliant services to the nation.
The Kenyan government has an ongoing partnership with the Qatari government to try and develop capacity and also develop appropriate legal and regulatory framework to make it possible for the rollout of a Sukuk for the Kenyan Government, which is expected to be in the near future.
Islamic finance is very much in its infancy in Africa. While the potential is important due in part to demographic factors and the need to broaden the source of funds required to support Africa’s large infrastructure deficit, Islamic finance is constrained by the absence of a suitable legal and regulatory framework in many countries. However, important Initiatives are underway to generate momentum for Islamic financial products.