Islamic finances face massive demand boom in Africa

04 January 2016 Consultancy.uk

Africa is expected to see a massive population boom, many of whom will grow up Islamic. As such, demand for Islamic products and services on the continent are expected to rise in the coming years. Financing projects through Islamic financial instruments has massive potential within the African region. One such instrument is sukuk, which is a form of bond between the issuer and issuee, whereby risks are shared, while no interest is charged on the issued amount. This is beneficial to projects that require long term financing.

The ‘Islamic economy’ refers to a wide range of commercial activities and geographies that span the world. Islamic derived Sharia-compliant bonds, halal food, travel and fashion all make up components of the wider global market that spans from Niger to the financial centres of Kuala Lumpur, which was valued at $3.6 trillion in 2013. The Islamic finance side of the equation was in 2014 valued at $1.8 trillion by BearingPoint, and is project to grow to $3 trillion by 2018.

Recent research by the Economist Intelligence Unit (EIU), a consultancy that provides business analysis for decision making, concerns itself with the value of Islamic financial propositions for both the Islamic and non-Islamic players in the Sub-Sahara African region. The EIU research report, titled ‘Mapping Africa’s Islamic economy’, was commissioned by the Dubai Chamber and used desk research and interviews with experts as its basis.

Islamic potential
The research considers the potential growth in demand for Islamic products and services within Africa. One reason to expect an increase in demand is that the region has the world’s fastest growing Islamic population. From the ancient cities of the Sahel to the modern mosques of coastal capitals, Sub-Saharan Africa is now home to over 250 million Muslims, a number that is projected to grow to more than 385 million by 2030. Most live in West Africa, now hosting 160 million Muslims, which is expected to house 257 million Muslims by 2030. By then, the region will account for 67% of Muslims in Sub-Saharan Africa.

The massive number of people practising Islam, and the cultural and religious obligations that follow from such practices, means that the ‘market’ of people requiring goods and services that meet certain criteria is expected to increase. That increase comes with corresponding opportunities.

These opportunities are not only for delivering Sharia-compliant goods and services to the Muslim population. “Even in countries with a low proportion of Muslims, the values and principles of Islamic financing—such as investment products that avoid alcohol or gambling, and no-interest lending—appeal to investors seeking ethical schemes or banking customers seeking alternative products.”

Islamic finance sophistication
Different countries have different levels of Islamic financial sophistication. South Africa, Kenya, Nigeria, Sudan, Gambia and Senegal are the most sophisticated. Most of these countries offer Islamic banks and Islamic regulation. Only Nigeria and South Africa offer Sharia-compliant funds, while Sudan has Islamic Microfinance available. For some countries with small Muslim population, Islamic economy activities are seen as part of a commercial strategy, South Africa, whose industries have now positioned the country as a halal goods export hub for the continent, functions as an example of this.

The rise of sukuk
One of the main financial instruments in Islamic banking is sukuk, which is roughly equivalent to bonds. Through entering into partnerships with small players, Islamic banks provide a different funding source than government finances, which accounts for 62% of some markets. Furthermore, unlike conventional bonds, sukuk grants the investor a share of an asset, along with cash and risk. Sukuk issuances adhere to Islamic laws sometimes referred to as Shari’ah principles, which prohibit the charging or payment of interest.

African countries require considerable infrastructure investments, to meet the growing demand for basic necessities as well as the population boom. In particular, social infrastructures, encompassing housing, healthcare, and utilities are required. The Islamic financial potential of the sukuk may play a considerable role in helping countries meet their infrastructure needs. The financial instrument, which does not bear prohibitive interest demands, has the benefit of providing a basis for projects with a long timelines to completion, large values, and a clear connection to the real economy in the form of the asset.

Between 2001 and 2014, global sukuk issuances were nearly $670 billion, and appealed to countries regardless of whether they are majority Muslim. The African region has seen demand for sukuk bonds increase steadily. In 2014, for instance, Senegal’s local-currency sukuk raised the equivalent of $200 million from local and international investors, while South Africa issued a $500 million sukuk. According to the report, this demonstrates the role that Sharia-compliant financing tools could play in a non-Muslim country.

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