Contribution of Islamic finance to African development still limited, says S&P

The lack of conducive Economic and regulatory environment for Islamic finance in most African countries will for the next few years limit contribution to the development of the continent, says credit analysts at Standards and Poor (S&P).

According to the analysts, conducive economic and regulatory environment are the first steps towards the development of Islamic finance in any jurisdiction.

S&P global ratings believes that African countries need stronger reforms to help the development of a local Islamic finance industry.

The latter could contribute, at least modestly, in helping the continent achieve many challenges from making banking services more accessible to the financing of infrastructure needs,” the analysts said in their latest report on the matter.

They are of the opinion that Islamic finance also has to show African countries a benefit beyond compliance with Sharia.

Expressing the state of affairs, the analysts said: “We estimate the assets of the global Islamic finance industry at about $2.1 trillion at year-end 2017, of which $1.7 trillion is banking assets. Africa’s contribution remains meagre with less than 2 percent of global consolidated assets and 1 percent of the Sukuk issuance. Only a handful of Islamic banks have licenses to operate in the continent and very few countries have issued Sukuk over the last decade.”

This prompted the credit analyst’s expectation that Islamic banks will continue playing a modest role in the continent in the next few years.

“While some African customers might naturally lean toward Islamic financial solutions if they were available, we are of the view that most clients will be more sensitive to the economic benefits. Multilaterals could help pave the way to that end by helping Sub-Saharan countries design the appropriate strategies and reforms.”

An observation by the credit agency of African countries over the past five years shows a few African countries such as South Africa, Cote d’Ivoire, Senegal, etc. are tapping the Sukuk market.

They have also observed a small number of regulators granting few new banking licenses for Islamic banks in Africa, but noted the overall market share of Islamic finance in African nations (excluding Sudan) remained at best very small.

Nigeria’s share of Islamic banking assets in selected African countries ranked near the bottom, only better than Mauritius.

Noting what it would take for Islamic finance to prosper in Africa, S&P analysts said regulatory changes could create an enabling environment for the development of Islamic finance in Africa. However, the industry’s success will depend on its ability to demonstrate its economic added value in this part of the world.

They advised African countries on investor base diversification or offering banking services at a competitive cost which could attract the attention of African regulators and policymakers while freeing up financing capacity on the balance sheets of multi-laterals active in the continent. Adding that it could also be an alternative route especially at a time when some of them face significant capital constraints.

“In our view, Islamic finance in Africa needs a specific regulatory, disclosure, accounting, and Sharia governance framework to start contributing meaningfully.

To date, Morocco seems the only country on the continent that decided to go this route. Although significant challenges for the development of Islamic finance in Morocco remain, the country has made strong advancements through the implementation of specific regulation in 2017.”

They see the prosperity being achieved either through creating access to a new class of investors or by offering Islamic products at costs comparable with conventional counterparts.

“The positive impact of the introduction of Islamic finance on banking penetration is yet to be demonstrated. Although a considerable portion of retail and corporate customers may have a natural bias toward Islamic financial products (specifically for countries with majority Muslim populations), ultimately in our view, the price difference and the quality of service will be a chief determinant.

Therefore, we neither foresee a radical change in corporate or consumer behaviour if regulators introduce Islamic banking nor do we expect major strides in banking penetration,” they said.

Africa reportedly needs more than $100 billion every year to close its infrastructure deficit, which requires recourse to all available financing solutions.

Access to electricity and communication, industrialization, and regional integration could unlock growth opportunities in the continent and Islamic finance could help finance some of these opportunities, assuming the implementation of a specific regulatory framework to organize the activities of Islamic banks, they noted.

“The continent could benefit from the experience of Islamic finance advanced countries (such as Malaysia or some countries of the Gulf Cooperation Council).

Malaysia implemented a specific regulatory environment that helped its Islamic finance industry to prosper.

They however suggested that strengthening the credit quality of African nations through economic and financial reforms could help place them on investors’ radar.