A recent report by Kuwait Finance House Research (KFHR) and the Malaysia International Islamic Financial Centre (MIFC) has highlighted the positive prospects for Shari’a-compliant finance in Africa in the wake of rising trade between the GCC countries and the continent.
Islamic finance currently represents a relatively small base in Africa, but according to the KHFR-MIFC study it 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.”
Indeed, the UN, World Bank and African Development Bank (AfDB) have all highlighted an immediate African need for more than $31bn in funding for infrastructure, primarily to facilitate resource mobility, increase competitiveness and attract foreign direct investment.
The GCC meanwhile represents a liquidity-abundant Islamic finance hub with an expanding African trade flow, with its exports to the continent growing by an average of 14.7% annually, between 2000 and 2010, and imports increasing by an average of 27.5%, while the total annual trade between the GCC countries and Africa now stands at $35bn.
Africa, in turn, accounted for 2.4% of global Islamic banking assets in H1 2013; 0.6% of sukuk in Q1 2014; and 2.8% of Islamic fund management assets at the end of 2013, and African countries such as Sudan, Nigeria, Gambia and Senegal have all proceeded to issue sukuk.
KFHR-MIFC note that “while Islamic finance is still in its infancy, governments are taking the initiative to make necessary legislative and regulatory changes to accommodate growth.”
In the sukuk market, Africa holds the greatest medium-term potential amid the demand for infrastructure funding, with governments and private entities likely to tap into the Shari’a-compliant finance mechanism to support projects in power, transportation and related areas.
Opportunities also exist in previously undeveloped segments, and “while the nascent growth of the Islamic financial industry in Africa is dominated by banking and sukuk, Islamic asset management and insurance (takaful) offer considerable potential for near-future growth.”
Income and outcome
As incomes on the continent rise, together with an awareness of Islamic and ethical finance, the continent’s many Muslim communities are also expected to play an important role in creating a demand and growing room for the development of Islamic investment funds.
The Islamic banking sector has already recorded solid growth, and as incomes rise yet further, “the demand for cars and houses 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 will likely increase, both for the purposes of privatised education and privatised healthcare, as public health facilities become more crowded, while businesses will support the growth of group insurance products that protect against losses.
The report concludes that, while the growth indicators in Africa are sound, resource-based African economies also “face greater risks of income inequality and Dutch disease, where a rise in resource-based income reduces investment in other sectors,” and, that as a final source of utility:
“A healthy Islamic finance sector may be the answer for policymakers to assist the more vulnerable groups in the population and support a more equitable distribution of wealth.”
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