Access to finance and infrastructure funding can help Africa’s economic development journey. Islamic finance can increase access to finance and can help bridge the infrastructure gap in Africa. The G20’s German Presidency introduced a new initiative for sustainable economic development in Africa known as the G20 African Partnership. The partnership offers various tools and strategies for Africa’s development and the rapid growth of Islamic finance in Africa offers a great opportunity to support it.
The G20 Antalya Summit supported Islamic finance “to facilitate better intermediation for SMEs and infrastructure investment”, referring to it as asset-based finance. B20’s Infrastructure and Financing Growth Taskforce Policy Paper 2017 considers Islamic finance to be one of the key tools that can help boost sustainable economic development in Africa. It is already a $2 trillion industry and most global financial institutions are part of this niche market. With its unique asset-oriented structure, Islamic finance is quite relevant to the financing of large infrastructure projects in Africa.
Islamic finance transactions do not include interest but instead, use risk sharing to justify earning of profit. Other main considerations include avoiding businesses that could be deemed as harmful, such as tobacco, liquor, pornography, and those that deal with excessive uncertainty, such as gambling. Islamic finance investments also avoid highly leveraged businesses as payment of interest is one of the main financial activities for such businesses.
Christine Lagarde, Managing Director of the International Monetary Fund, has said that: “Islamic finance’s underpinning principles of promoting participation, equity, property rights and ethics are all universal values.” She said she regards inclusivity and stability as the main reasons behind the appeal of Islamic finance and noted its potential to support an underserved population, SMEs, start-ups and infrastructure investments. Lagarde has also highlighted the risk-sharing and asset-backed features of Islamic finance that help to reduce leverage and contribute to greater stability.
Access to finance and financial services leads to economic growth and the lack of it is one of the main challenges faced by Africa. For instance, 350 million Africans do not have a bank account. An IMF Working Paper notes that in Sub-Saharan Africa, only one in four adults have a formal bank account In comparison to other developing countries where twice as many people do. The paper further notes that in Sub-Saharan Africa household are micro-enterprises, and small and medium enterprises lack access to credit, which “is a major obstacle in promoting growth and employment”.
There are other factors that limit access to finance in Africa. The World Bank estimates that 30% in Sub-Saharan Africa do not use formal financial services owing to religious reasons. This proportion is 32% in the Middle East and North Africa.
Africa is home to more than 250 million Muslims and Islamic finance is present in more than 21 African countries. Kenya, Morocco, Niger, Nigeria, Senegal, South Africa, Sudan and Uganda have recently established legal frameworks for Islamic finance. There are more than 50 Islamic finance institutions across Africa.
Islamic finance has grown rapidly across Africa. Initially two Islamic banks commenced operations in South Africa in 1989. Barclays launched the first Islamic banking product in Kenya in 2005. By 2010 Kenya had updated its laws to accommodate Islamic investments. Islamic banking in Tanzania started in 2010.
More recently, capital markets transactions have been on the rise. In 2014, after Senegal raised $200 million, South Africa raised $500 million by issuing its first sovereign Sukuk (or Islamic bond). The global Sukuk Report of July 2017 by International Islamic Financial Market reports 246 issuances valuing more than $21 billion. These issuances have come from Gambia, Ivory Coast, Nigeria, Senegal, South Africa, Sudan and Togo.
The African Development Bank reports several infrastructure projects that have been funded through Islamic finance. Other policy materials suggest that Islamic finance could not only help with financing large infrastructure projects across Africa, but also help to strengthen the SME and microfinance sector. The fast-paced growth of Islamic finance across Africa already suggests that Islamic finance is helping to improve access to finance throughout the continent. The liquidity in the Islamic finance market is constantly looking for bankable project pipelines and the G20 Africa Partnership provides a perfect opportunity to connect this demand and supply.
With its growth in Africa and beyond, Islamic finance seems to fit well with several other initiatives for African development, such as the G20 Initiative on Supporting Industrialization in Africa.
The objectives of the G20 Africa Partnership and Islamic finance are aligned naturally, and an express strategy for integrating Islamic finance as one of the tools for developing Africa would seem to be the right next step.
In the recent past, news about various Islamic finance initiatives in Africa made it on the business pages across the world, indicating that the continent is gearing up for a new form of banking. The Economist in a July article even called Africa “Islamic banking’s new frontier,” and the Malaysia International Islamic Finance Centre (MIFC) in June came up with a compact update on the state of Islamic finance in Africa and an outlook on the opportunities it could bring. Additionally, consulting firm Ernst & Young (EY), which operates an Islamic finance centre in Johannesburg, South Africa, and the international Monetary Fund (IMF) are putting the issue regularly on the cards.
It turns out that Islamic finance in Africa is driven by four components: Firstly, economic growth in many African nations supported by improving fundamentals, growing domestic demand and stronger regional integration. Secondly, it’s demographics. With a population of about 1.2bn people, Africa is currently developing a middle-class segment of its population expected to boost demand for Islamic retail banking, Takaful and Islamic funds.
Additionally, financial literacy is improving across the continent, including on Shariah-compliant financial products, which are seen as one driver for financial inclusion.
But, and this is the most important aspect, Islamic finance in Africa is also heavily backed by the continent’s urgent demand for new and alternative ways to fund the much-needed infrastructure, which has been a big challenge in the past for almost all African countries.
Experts state that, notably, sukuk could play a potential role in funding large infrastructure projects, mainly new airports, power plants, roads and railways. With sukuk, the IMF noted, African nations could tap into growing Islamic financial markets to meet infrastructure financing needs instead of using conventional financing from international finance institutions such as the World Bank or the African Development Bank; or relying on borrowed Chinese money. Instead, by opening doors to Islamic finance, Africa can seek to attract capital from Gulf Cooperation Council countries and other Muslim nations or institutional or private investors.
Another avenue for Islamic finance in Africa is funding of small and medium enterprises (SMEs), as well as microfinance, both instruments to increase financial inclusion on the continent.
The MIFC in its recent report points out that Islamic finance in Africa has started to gain attraction from 2013 onwards, when several countries began to successfully issue sukuk, followed by establishing a regulatory framework that allowed and supervised the operation of Islamic banks and financial institutions. It started with a $63mn-sukuk issued by the Nigerian state of Osun in 2013, saw other sukuk being issued in Senegal, South Africa, Cote d’Ivoire and Togo.
Kenya revamped its Islamic finance laws to allow for the first sovereign sukuk issuance in the budget year 2017/18, while Nigeria stands ready to issue its first government sukuk later this year. In addition, the Africa Finance Corporation, a pan-African multilateral lender based in Nigeria, in June 2017 issued a three-year $150mn sukuk – the first African government-backed entity to do so – which was oversubscribed by more than 50%. “The core values of Islamic finance and the need to invest ethically in assets that have a tangible positive social impact made a sukuk issuance a natural choice for us,” said Andrew Alli, Africa Finance Corporation’s CEO, adding that “we offer global investors the chance to be involved in high-impact infrastructure projects that not only promote social and economic development across Africa but also generate economic returns for our investors.”
As per mid-2017, Nigeria, Sudan, South Africa and Senegal, Kenya, Morocco and Niger, among others, have put in place necessary legal and regulatory frameworks to enable domestic Islamic banking, while countries such as Uganda, Ethiopia and Zambia are currently exploring and developing the system. According to the MIFC, there are now more than 50 fully-fledged Islamic financial institutions in Africa, while a considerable number of conventional banks have opened Islamic windows to address the new target group of Islamic banking clients.
Some countries are already in an advanced stage: For example, Kenya, the largest economy in East Africa and the continent’s ninth-largest, is working towards the goal to become a regional hub for Islamic finance products after the country’s treasury ministry presented a roadmap to fully integrate Islamic financing in the country’s financial system as an effort to stimulate economic growth and support infrastructure financing.
As for future potential, the MIFC report noted that Africa has almost 60% of the world’s uncultivated land and vast unexploited natural resources, particularly in Sub-Saharan Africa where large oil, gas and mineral deposits are waiting to be tapped. Africa is also currently the second most populous continent on earth, and the number of people is expected to double by 2050. This makes a case for Islamic finance to foray not just into infrastructure, but also in the commodity sector, as well as to provide access to financial services for the widely unbanked population. That way, it would additionally help alleviating poverty by creating opportunities through Islamic microfinance for the underprivileged, who would be enabled to set up and economically maintain micro, small and small and medium-sized enterprises, the pillar of a healthy domestic economy.