Islamic finance revolution gains steam in Africa

Published 15/01/2011

With assets reaching the US$ 1 trillion, the growth of Islamic finance can no longer be ignored. It has outperformed conventional finance, expanding fourfold over the past three years. Many experts have even wondered whether the global financial crisis could have been averted by a financial system based on Shari’a principles. This is an interesting scenario to consider: had the Islamic principles of full transparency and disclosure, fairness towards the customer and profit-sharing amongst investors been applied, there is a chance the financial crisis would not have had the same magnitude. The growth of Islamic finance as an alternative financial management model in the post-financial crisis era continues to flourish even in new regions. One such world opening up vigorously to Islamic finance is Africa. With a predominant Muslim population of about 495 million, the continent holds promising growth opportunities for Islamic finance. Even though a number of countries mainly in the northern part of the continent already have some Islamic banking activities, the appetite for financial products that comply with Sharia is rising in a number of other countries mostly in the sub-Saharan region as the continent awakens to the ideological and practical richness and relevance of this form of alternative banking. East Africa Kenya was the first country in East and Central Africa to allow the operation of Islamic Banking when the Central Bank of Kenya approved First Community Bank (FCB) on May 29, 2007, to operate as a full-fledged Sharia-compliant commercial bank. The Bank kicked off with an initial paid-up capital base of $15 million which, however, is expected to be increased as business grows and balance sheet expands. FCB has branches in six out of Kenya’s eight provinces. Gulf African Bank, which got CBK approval later in 2007, is the second full-fledged Sharia compliant bank in Kenya. In neighbouring Tanzania, private investors have received an in-principle approval from the Bank of Tanzania to establish their own Islamic bank to be called Islamic Bank of Tanzania. Perhaps more importantly, the Jeddah-based Islamic Corporation for the Development of the Private Sector (ICD), the private sector funding arm of the Islamic Development Bank (IDB) Group, is in the process of applying for an Islamic banking licence in Uganda, a member country of the IDB. The rationale, according to general manager and CEO of ICD Khaled Al-Aboodi, is to establish the bank in a member country, which could then enter into the other countries of the region and to finance or do business in these countries, irrespective of whether they are IDB member countries or not. Ethiopia In Ethiopia, the government of Prime Minister Meles Zernawi is treading cautiously by promoting the establishment of a home-grown Islamic banking industry. The idea is to authorise the first local Islamic bank on the basis of only Ethiopian shareholders. As such, no foreign investors or Islamic banks would be allowed to have shares. The Bank of Ethiopia published the 2008 banking business proclamation, effectively a draft consultation document outlining the introduction of interest-free banks in Ethiopia. The Bank of Ethiopia in June 2010 published guidelines for conducting interest-free banking, which once adopted would pave the way for the launch of the country’s first Islamic bank. In 2008, Ethiopian Muslim investors set up the ZamZam Bank Share Company and is set to become the first Islamic bank in Ethiopia. Nigeria Nigeria with a population of 140 million people is not only the most populous country in Africa, but it is also the largest economy in West Africa. Sixty percent of Nigerians are Muslims and in response to their demands to have a bank that meets their religious, moral and ethical aspirations, efforts are in progress by a number of corporate bodies, individuals and Islamic organisations to achieve this goal. And with the release of the regulatory frame work of Islamic banking by the Central Bank of Nigeria in February 2009, all is now set for JAIZ, the first Islamic bank in Nigeria to commence full commercial operation. Mauritius Mauritius has been amending its banking and tax laws to become a preferred destination for Islamic banking and finance operations. The country has largely done away with double taxation aspects of the law as a prelude to meeting the requirements of Islamic finance contracts. On August 7, 2007, amendments were made to the Banking Act that allowed Islamic banks. Conventional banks also showed interest in setting up Islamic windows. According to the Governor of the Bank of Mauritius Rundheersingh Bheenick, there are over 20 commercial banks in Mauritius that may opt to offer Islamic banking through a special window, or by launching a fully-fledged Islamic banks. HSBC Amanah was the first to launch an Islamic banking window in Mauritius in May 2009, offering a current account and long-term investment account. South Africa The Muslim population in South Africa is relatively small, but both affluent and influential. Islamic banking was introduced in South Africa in 1989 by Albaraka, a niche bank operating with a limited branch footprint. This was the only Islamic offering until 2002, when First National Bank (FNB), one of the four major national banks in the country, launched an Islamic vehicle finance product followed by an Islamic cheque account. Most recently FNB started offering its Sharia-compliant products through its branch in Botswana. In 2006 Absa, the largest retail banking group in South Africa, launched the first comprehensive Islamic offering. This included a cheque account, vehicle finance, transactional savings account, contractual savings account and Islamic wills. This offering was supported by the full range of access support from the largest ATM and branch network in the country, as well as cell phone and Internet banking. About Islamic banking A fact little known to many people is that it is Africa that paved the way for Islamic banking as an industry. The first modern experiment with Islamic banking was undertaken in Egypt under cover, without projecting an Islamic image, for fear of being seen as a manifestation of Islamic fundamentalism. The pioneering effort, led by Ahmad El Najjar, took the form of a savings bank based on profit-sharing in the Egyptian town of Mit Ghamr in 1963. This experiment lasted until 1967 by which time there were nine such banks in the country. These banks, which neither charged nor paid interest, invested mostly by engaging in trade and industry, directly or in partnership with others and shared the profits with their depositors. Thus, they functioned essentially as saving-investment institutions. Thus, even though Egypt has not maintained its lead as pioneer of Islamic banking, Africa has not been left behind and initiatives towards Islamic finance continue in many parts of the continent. Similarly, the principles that drive the system are expected to appeal to many in the continent irrespective of their religious background. The avoidance of unethical investments (“haram” products), discouraging of exorbitant interest rates and prohibition of speculative structures are all virtues that should hold appeal beyond the Muslim populations. The system should equally be a powerful tool for enhancing access to development finance and empowering the poor and vulnerable groups, particularly if Islamic banks extend to rural areas which are currently not effectively served by conventional banking. The prospects for Islamic banking in Africa overshadow the challenges, and the terrain seems conducive since there is high demand for Islamic financial services. The writer is the Managing Director of First Community Bank Ltd

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