The African market for Islamic banking and finance is unique for several reasons. Among other things, the continent is witnessing an unprecedented economic growth in in last decade combined with huge market potential. Indeed, almost half of the continent’s population is Muslim Attractiveness and popularity of the industry among non-Muslims is also increasing.
It is also a fact that just 20% of African families have a bank account, while many remained unbanked sometimes for religious reasons The African market is also unique given the advantage that return on investment in Africa is higher than in any other developing region. Moreover, Islamic banking and finance in Africa is supported by a growing openness and acceptability of the system by many regulators and politicians across the continent and the industry is seen as a catalyst in reinforcing and consolidating the growing trade relation between Africa and other Muslim countries.
Moreover, the Islamic banking and finance industry in Africa will be sustained by an abundance of natural resources in the continent, a remarkable increase in foreign direct investment, a rise of urbanism, rocketing consumer spending and an expanding young labour force. All these factors and others require a robust financial system that is currently attracting financial conglomerates and a rapid expansion of local players. Yet it is widely acknowledged by development theories that the lack of access to finance is a critical mechanism for generating persistent income inequality as well as slower growth.
The ṣukūk, or Islamic bond market, is another area that holds enormous potential. Although the African debt market is generally still in its infancy, there is growing interest from sovereign states in issuing sukuk and countries such as South Africa, Senegal Ivory Coast and Togo have already tested the international market while many others are preparing themselves to enter the market.
In order to sustain the growth and development of Islamic finance in Africa, there is a need to be aware of the challenges facing the industry and how the associated risks can be mitigated. One of the challenges that needs to be given particular attention is the issue of the perception of Africa as an investment destination or as a viable industry base for Islamic finance.
It is also paramount for the success of the industry, and in order to attract foreign investors, to deal with issues such as corruption, infrastructure gaps and the issue of reducing inefficiencies related to poor transport, electricity and railways. It is also important to design new methods for alternative FDI, managing political risk and the lack of security through conflict resolution. Moreover, Africa needs to work toward reducing barriers to trade and to make education a priority.
Regulators need to ensure that the new financial system is fully integrated with the existing financial system and that an appropriate legal, institutional and regulatory framework that allows the two systems to efficiently interface is in place. The lack of Shariah scholars knowledgeable in conventional economics, law, accounting, banking and finance is yet another challenge that could limit the growth of the industry in Africa as well as globally. Islamic finance in Africa also faces the challenge of taxation, the lack of Shariah-compliant liquidity management instruments, the issue of standardisation and harmonisation and other concerns facing the Islamic finance industry globally.
To overcome many of the above challenges, African regulators and policy makers need to adopt the right policies and increase the level of cooperation between themselves and the outside world. They should work closely with some of the multinational financial institutions already active in Africa and working in different development projects such as the Islamic Development Bank, the African Development Bank and the World Bank.
The prospect of development and growth of African markets in the years to come is very bright given the right policies and reforms that have been undertaken by many African countries over the last decade. These policies and reforms have helped in minimizing the negative effects of the recent global financial crisis and have limited the adverse effects of the fall in commodities market upon which many African economies are based.
Muhammad Al-Bashir Muhammad Al-Amine, author of the book Islamic Finance and Africa’s Economic Resurgence and Shariah advisor at the Islamic Corporation for the Development of the Private Sector, tells us about the development of Africa’s Islamic banking market.