Appetite for Islamic banking concepts ticks up in Africa

More Muslims in Africa are gaining access to credit and insurance as conventional lenders and underwriters are joined by their sharia-compliant counterparts offering Islamic banking products and services.

Sharia law prohibits the use of ribaa or ribit (interest).

This comes as figures from the Islamic Development Finance Corporation suggest that global Islamic finance assets could reach US$ 3.8 trillion by 2024, up from the current US$ 2.7 trillion.

A Proficient Market Insight report published last month shows that Africa is among the growth regions where non-Muslim majority states are developing strong Islamic finance markets. 

Interest-free banking services

A mix of high-interest rates and poor banking facilities is seen as contributing to non-Muslims entering the market for interest-free Islamic banking services.

Fintech is seen as the game changer that, coupled with rapid smartphone and internet penetration on the continent, will bring credit and insurance closer to the underserved Muslim demographics.

In March 2022, Kenya’s telecommunication behemoth Safaricom Plc. and Gulf African Bank (GAB) unveiled the market’s first Shariah-compliant mobile financing service amid a growing need for digital financial inclusion.

Sanctified Pesa Halal is a financial mode of saving that helps Muslims and non-Muslim customers alike access micro-savings and investment solutions which adhere to Islamic laws on earning halal (permissible) profits.

According to GAB’s Chief executive Abdalla Abdulkhalik, the service will see its users “receive the amount requested in full with a repayment period of 30 days at 5 per cent commodity Murabaha margin.”

“Our current strategy is focused on digitisation for financial inclusion. Our aim is to provide instantaneous access to interest-free credit through Halal Pesa,” noted Abdulkhalik.

The move comes several years after Kenya’s biggest bank by assets, the Kenya Commercial Bank (KCB) launched an Islamic banking unit dubbed “KCB Sahl banking.”

In South Africa, Islamic banking - which had a bumpy start in 1980 due to apartheid and general ignorance - is witnessing a steady rise in adoption thanks to investment from the Gulf.

In late 2014 the country’s treasury issued a record US$500 million Sukuk (Islamic bond) - a first - hoping to tap into funding from Gulf Arab and Southeast Asian liquid capital markets to revamp the country’s ports, roads, hospitals, and schools.

Banking Association of South Africa's (BASA) figures now show deposits in S.A’s halal banking top US$ 2 billion (R37 billion) and advances amounting to US$ 824 million (R14.6 billion). 

Solution

Depositors often do not bear any risk in conventional finance. Islamic finance, however, has another solution which is called PLS (profit-loss sharing).

Islamic finance is the form of finance which uses sharia principles of ethics and morality at its core in its financial dealing.

According to Fitch Ratings, the Islamic-finance industry in Nigeria is expected to continue its moderate growth trajectory in 2022-2023.

"Growth will be driven by top-down government support for the sector, Sukuk issuance by the federal government, asset growth by newly-established Islamic banks, and enabling regulations,” it said in its January rating.

Sharia banking has also continued to enjoy moderate growth in Ethiopia since 2008 when its conservative central bank authorised interest-free banking.

This was meant to bring financial inclusion to Muslims in the populous East African state. More growth is expected.

In 2020, ZamZam Bank obtained a license from Ethiopia’s banking regulator to carry out Islamic banking activities in the country, becoming the first official lender to specifically offer financial services and products that comply with Islamic law.

A year before, Abiy Ahmed, the Ethiopian Prime Minister, expressed his approval of the establishment of financial institutions entirely dedicated to Islamic finance.

That June, the Central Bank issued a directive authorising the creation of Islamic banks. Before that, most of Ethiopia’s big commercial banks offered a narrow range of Islamic financial products to very few customers.

Ivory Coast, which has a population of over 23 million people made up of almost 40 per cent Muslims, is growing to become an active player in the Islamic finance industry in West Africa.

With strong support from the Islamic Corporation for the Development of the Private Sector (ICD), the Ivory Coast has been able to kick-start its Islamic banking operations.

But as Islamic banking spreads in Africa, another sharia-complaint product, Takaful (insurance) is having a deeper penetration in Kenya with Tanzania following suit.

Tanzania Insurance Regulatory Authority (Tira) launched two sets of guidelines designed to boost insurance penetration and create more jobs.

The guidelines which became effective in May include the Islamic Insurance called Takaful, which is open to all.

In Northern Kenya, women seeking to start their own businesses are now obtaining interest-free loans for their start-ups following a program designed to stimulate financial inclusion in the region. 

Loans

It offers an innovative Microfinance model that is in complete compliance with Islamic guidelines for business and finance.

These include interest-free loans (qard hasan), savings (wadiah), and insurance (Takaful) as the CTS capitalises on the untapped potential of Islamic financial services in North Eastern.

The program was first wheeled through a partnership between Kenya’s pioneer sharia-compliant Sacco, Crescent Takaful Sacco (CTS) and Mercy Corps through its BRACED initiative.

Kenyan Muslims are about 5 million with a substantial chunk of the population remaining unbanked due to religious constraints, especially in the North.