A newly released report “Islamic Finance in Africa: Unlocking Opportunities for Growth”, a joint publication by Kuwait Finance House Research Limited (KFHR) and Malaysia International Islamic Financial Centre (MIFC), studies the evolution of the Islamic finance industry in Africa and highlights the exciting growth prospects for the various Islamic finance segments on the continent. The nascent growth of the Islamic financial industry in Africa is dominated by Islamic banking and sukuk segments. The Islamic asset management and takaful segments currently account for a small share, but offer considerable potential for growth in the near future. In some countries, whilst Islamic finance is still in its infancy, governments are taking the initiative to make necessary legislative and regulatory changes to accommodate the growth of the Islamic finance industry.
Africa’s presence in the global Islamic finance landscape is growing, albeit from a small base. Currently, Africa accounts for 2.4% of global Islamic banking assets (1H2013), 0.6% of sukuk outstanding (1Q14) and 2.8% of Islamic fund management assets (end-2013). African countries that have issued sukuk include Sudan, Nigeria, Gambia and Senegal. Going forward, several countries such as Tunisia have expressed keen interest in tapping the sukuk market for infrastructure financing. This will be an exciting area to watch as the continent’s infrastructure financing needs will make sukuk increasingly viable, especially if countries are keen to attract funds from investors who favour Shari’a compliant instruments. Given the continued weakness in advanced economies, Africa’s funding needs may be supported by attracting investors from the Middle East and Asia Pacific, including Islamic countries.
The sukuk market in Africa holds great potential over the medium-run, amid unprecedented funding needs for infrastructure building across the continent. Sukuk provides a Shari’a compliant alternative to the conventional capital market, which makes it attractive to potential issuers in Africa and investors alike. In the next few years, Africa is likely to tap the sukuk market to support projects in the power, transportation and other projects.
Aside from the sukuk market, Africa’s Islamic funds markets holds potential in the medium-run. As incomes rise, African consumers will demand more sophisticated financial products. Given the large Muslim population across most parts of the continent and the rising awareness of Islamic and ethical finance, there is room for growth for Shari’a compliant investment funds. The number of high net worth individuals’ investable funds in Africa was one of the fastest growing in the world.
The Islamic banking sector has recorded solid growth, supported by Africa’s large and underserved Muslim population and increasing awareness of Shari’a compliant products. As incomes rise, the demand for cars and houses may increase significantly. The continued rise in demand for these products creates an opportunity for these banks, as well as a challenge to offer more sophisticated products at more competitive financing rates.
Finally, demand for takaful products in Africa are likely to increase as income increase amid more awareness of risk management. Private healthcare is likely to become more popular as public health facilities become more crowded. Similarly, the demand for private education may increase, at least for the upper middle-class populations. This creates an opportunity for takaful providers to increase offerings of medical cards and education savings takaful plans. On the commercial side, increased business activity will support the growth of products which protect against losses from fire and theft incidents, as well as group life and medical packages.
Africa offers exciting growth prospects. In the next few years, 7 out of the 10 fastest growing economies in the world will be in Africa. Growth drivers are becoming increasingly diverse, with the resource-based, construction and services sectors taking the lead. This augurs well for Africa’s economic resilience in the face of an increasingly volatile global economy. Of importance, expected favourable demographics and closer regional ties will drive growth. The continent is currently home to more than 1 billion people, and the population of young, middle-class Africans is rising.
From a socioeconomic perspective, African economies which are resource-based face greater risks of income inequality and Dutch disease, where a rise in resource-based income reduces investment in other sectors. Hence, a healthy Islamic finance sector may be the answer for policymakers to assist the more vulnerable groups in the population and thus, support a more equitable distribution of wealth.
Global development agencies such as the African Development Bank (AfDB), the World Bank and The United Nations are have regularly highlighted the need for Africa to improve its infrastructure to facilitate goods and labour mobility, increase competitiveness and attract foreign direct investment. At present, infrastructure funding needs amount to more than USD31bln, mainly in the power and transportation sectors. In recent years, an increasing amount of large infrastructure projects in Africa have been financed by investors from the US, Europe and China. In addition, several projects have been financed via Islamic term loans by the IDB and AfDB.
Another key driving factor that will drive the growth Islamic finance development in the region is the growing significance of trade and investment relationships between Africa and key Islamic finance jurisdictions. The Gulf Cooperation Council (GCC), a liquidity-abundant Islamic finance hub, and its trade volume to Africa is expanding. Between 2000 and 2010, the GCC exports to Africa grew by an average of 14.7% a year and imports increased by an average of 27.5%. Annual trade between the GCC countries and Africa amounted to almost USD35bln. On the investment side, Malaysia, another key Islamic finance country, is a major investor in Africa. According to the UNCTAD, Malaysia was the third biggest investor in Africa in 2011, when FDI flows into Africa amounted to nearly USD3.5bln. Malaysia’s investments into Africa were channelled mainly into the energy sector, as well as telecommunications, banking and finance, infrastructure and property development, manufacturing, and power generation.
Islamic finance has tremendous potential to at least partly support the funding gaps in Africa while enhancing the financial inclusion rates in the region. The Islamic banking sector in Africa also has abundant opportunities supported by Africa’s large and underserved Muslim population and increasing awareness of Shari’a-compliant products. On the other hand, infrastructure projects also appeal to Islamic banks and investors due to its links with the real economy Islamic finance offers an alternative financing mechanism to support the large infrastructure investment needs in Africa. In addition, it provides government institutions an alternative financing mechanism to support the country’s capital expenditure needs. The measures undertaken, coupled with the natural advantages offered by Africa, are likely to lead to stronger growth of the Islamic finance industry in the region.