The Rise And Rise Of Islamic Finance

After a slow start, Islamic finance has now become a major player on the world stage and is spreading rapidly around Africa. Global Islamic banking assets under management are currently estimated at just over $1 trillion and are expected to reach $4 trillion by 2020. It is therefore hardly surprising that African governments and banks […]


After a slow start, Islamic finance has now become a major player on the world stage and is spreading rapidly around Africa. Global Islamic banking assets under management are currently estimated at just over $1 trillion and are expected to reach $4 trillion by 2020. It is therefore hardly surprising that African governments and banks are looking to tap into this rapidly growing form of finance.

With Islamic finance rapidly on the rise, some countries are introducing new banking legislation in order to guarantee the standards of Sharia compliance to potential customers. Elsewhere, individual banks must provide evidence of their own commitment to Islamic guidelines, often in order to attract investment from wealthy Gulf states.

Sharia-compliant financial services are even making headway in countries with small Muslim populations. At the end of August, South Africa’s First National Bank (FNB) announced that it would appoint a new Sharia board for its Islamic finance division by the end of this year, despite the fact that Muslims comprise just 2.3% of the South African population. The South African government and main state-owned parastatals are now making use of a wider range of debt finance than in the past.

Amman Muhammad, the new chief executive of FNB Islamic Finance, said: “It’s top priority for us. We are certainly aiming to have our final committee together towards the end of the year.”

The board will guarantee that financial products comply with Islamic principles. In this case, the move towards Islamic banking seems designed to support FNB’s international ambitions, in the rest of Africa and in India. Muhammad added: “Up until we get to a point where we start seeing a concerted regulatory change to the way Islamic banks operate in the country, and defined governance standards specifically around the functioning and the role of Sharia boards, we ourselves ensure that through the boards we have, Sharia compliance is always adhered to.”

The South African government also plans to launch its first Islamic bond. A spokesperson for the Treasury revealed that the standard five-year sukuk would be dollar denominated and marketed both in South Africa and the Middle East, which has the attractive combination of the most developed Islamic finance sectors in the world and buoyant state-owned investment funds.

He added: “On this deal we really have to go out and talk to them because we don’t know what their response will be and we don’t want to have a failed transaction the first time around.”

Nigeria, Kenya and other African countries with large Muslim populations are planning to issue Islamic sovereign bonds and so will watch South Africa’s imminent sukuk issue with great interest.

Nigeria’s Islamic index

In August, the Nigerian Stock Exchange (NSE) and wealth management firm Lotus Capital set up the NSE Lotus Islamic Index of Sharia-compliant companies. Apart from showcasing potential investment targets to foreign companies, it is hoped that the index could encourage the development of tracker funds.

The 15 companies initially included in the index include Dangote Flour, Nestlé Nigeria, Unilever Nigeria and Cadbury Nigeria, plus several cement producers. It excludes companies with high levels of debt.

Osahon Aire, the project manager for the launch, commented: “The NSE Lotus Islamic Index will further illuminate the massive investment opportunities available to ethically minded investors, both in Nigeria and overseas. All the companies that will appear on the index have been thoroughly screened by Lotus Capital Halal Investment in accordance with a methodology approved by an internationally recognised Sharia Advisory Board comprising of renowned Islamic scholars.”

Ethical and Islamic funds share many inclusion criteria, including with regard to pornography, but differ in some aspects, such as animal welfare. The composition of the index will be reassessed twice a year but no single equity will be allowed to comprise more than 30% of the entire index value and no single sector can comprise more than 40%.

Progress is also being made in Eastern Africa. The government of Sudan has asked for help from Malaysia in setting up Islamic banks in the country. Plans have also been drawn up for a Sharia-compliant Somali stock exchange based in neighbouring Kenya and supported by the Nairobi Securities Exchange (NSE).

Peter Mwangi, the chief executive of the NSE, said: “We are happy to assist them as we have assisted other countries like Rwanda. We hope we will be able to help them come up with Sharia compliant sukuk bonds and halal equities.”

The People’s Bank of Zanzibar (PBZ), which is owned by the government of Zanzibar, is now expanding its services into mainland Tanzania. PBZ managing director Juma Amour Mohamed said: “We have won more than 15,000 customers who are enjoying a variety of services including Islamic banking. Our target is to open branches in another three regions and keep on expanding.”

More and more Islamic banking products are expected to be marketed across East Africa over the next few years, whether by established Kenyan and Tanzanian banks or by specialist Islamic banks that are in the process of being set up.

Arab spring boost for Islamic banking

The political winds of change that brought moderate Islamist parties to power in Morocco, Tunisia and Egypt are also driving investment in Islamic finance in the region. Islamic banking had been notable by its virtual absence in North Africa but Sharia-compliant financial services moved quickly to promote its cause when the Arab Spring began. Indeed, the General Council for Islamic Banks and Financial Institutions decided to organise the Maghreb Forum for Islamic Finance in Tunis, as early as last July.

There is certainly plenty of room for growth in the sector. In 2010, Islamic banks held just 4% of the total financial services market in Egypt, 2.2% in Tunisia, 1% in Algeria and 0.1% in Morocco, well below the 46% recorded in the United Arab Emirates in the same year.

Although Sharia-compliant banks did not cause the global financial crisis, they shared in the immediate fallout from the slump. However, Islamic banks have benefited from the wave of support around the world for more cautious financial strategies that eschew derivatives and hedge funds. The value of the sukuk market alone grew by more than 50% last year to more than $15bn.

The new government of Egypt has decided to set up an index of Sharia-compliant financial institutions, while Algeria already has three banks that offer Islamic financial products: Al Baraka Bank, Gulf Bank Algeria and Al Salam Bank.

Three banks also offer Sharia-compliant products in Tunisia: Al Baraka Bank again, Noor Bank and Zitouna Bank; and the Tunisian government has already suggested that it will issue its first sovereign sukuk by the end of this year.

In Morocco, the Islamist Justice and Development Party (PJD), which came to power last November, has drafted new banking legislation that includes greater support for Islamic banking. The central bank has reported that applications for an Islamic banking licence and an Islamic insurance licence have recently been received from foreign companies, while Attijariwafa has already launched an Islamic banking subsidiary in Morocco.

As Sharia-compliant financial products become more common, they also become more attractive. Specialised, niche products often carry higher per unit costs but the growing international popularity of Islamic finance is creating a more even playing field.

Salah Jaidah, the head of Islamic finance at Deutsche Bank, said: “I don’t think there is an Islamic premium anymore. Sukuk will be attractive for longer maturities, and used for infrastructure spending for example. This is very encouraging. It will allow a lot of issuers on the conventional side to tap Islamic markets. Many nations are looking at issuing sovereign sukuk, even non-Middle Eastern nations. We think North Africa will also be very active when it comes to issuing sovereign sukuk.”

Subscribe for full access

You've reached the maximum number of free articles for this month.

Digital Monthly

£8.00 / month

Receive full unlimited access to our articles, opinions, podcasts and more.

Digital Yearly

£70.00 / year

Receive full unlimited access to our articles, opinions, podcasts and more.