Africa emerges as new frontier for Islamic finance

Dubai: Islamic finance is expanding rapidly in Africa, spreading across 18 African markets with great prospects for growth, according to rating agency Moody’s.

While Islamic bond (sukuk) issuance in Africa accounts for only 0.5 per cent of global issuance, the rating agency notes that since 2014 there has been $2.3 billion (Dh8.44 billion) worth of African sukuk issuance, providing new funding sources for both sovereigns and financial institutions.

In the banking sector too, there has been significant growth in the number of Islamic banks and banking assets on the continent in recent years.

“In the African banking sector, we have witnessed an increase in the number of licensed Islamic banks in recent years, though we estimate that Islamic banking assets still make up less than 5 per cent of total African banking assets,” said Akin Majekodunmi, a senior credit officer at Moody’s.

“We expect both sukuk issuance and Islamic banking assets to continue to grow quickly in Africa from a low base.”

Moody’s estimates that Muslims make up at least 40 per cent of Africa’s population and efforts by African governments to support Islamic banking in line with the cultural and religious affinity of their populations will support growth in this sector.

Islamic banks are fast gaining popularity and market share, according to Moody’s analysts.

“The number and size of Islamic banks in Africa will increase. Islamic banking assets represent less than 5 per cent of total African banking assets,” said Nitish Bhojnagarwala, a senior credit officer at Moody’s.

“Currently but we see this rising to above 10 per cent over the next five years. Based on currently available information, only Sudan (unrated) and Djibouti (unrated) so far exhibit meaningful levels of Islamic banking assets as a proportion of total banking assets.”

Moody’s expect Africa’s large Muslim population, which is predominantly unbanked or under-served, to provide a solid foundation through which Islamic banking assets can grow rapidly.

Analysts estimate that there are over 80 Islamic financial institutions in Africa, many of which have been licensed in the last five years.

The greatest number are in North Africa, with Sudan dominating in this field. Furthermore, countries such as Nigeria, Senegal and Kenya have recently implemented banking, legal and regulatory frameworks to spur growth in the Islamic banking sector.

In addition to the Islamic institutions, a number of well-established conventional banks across Africa have set up Islamic departments or windows in which they offer Sharia-compliant products.

Sukuk outlook

Sukuk issuance across Africa has picked up momentum over the last few years, thanks to an increased demand for Sharia-compliant financial assets, further supporting the domestic policy goals of African nations for Islamic finance.

According to Moody’s, there was $400 billion of corporate, financial institution and sovereign sukuk outstanding at the end of 2017.

Outstanding African sukuk issuance makes up only 2 per cent of the global total.

In 2017, both the federal government of Nigeria and the African Finance Corporation, a pan-African development lender, came to the market with inaugural sukuk issuances of $280 million and $150 million, respectively.

Mali this year issued sukuk worth $285 million. To date, the Ivorian and South African (Baa3, Stable) governments have issued the largest volumes of sukuk in Africa — at around $500 million each.

“Structural constraints, which historically prevented sukuk markets from developing even faster, remain. These constraints include the legislative complexity and time associated with sukuk issuance, especially for new issuers, and the need to identify physical collateral (for example, infrastructure projects) to support the sukuk structure. Nonetheless, we expect both the absolute level and the contribution to total global issuance of African sukuk to grow as more African sovereigns seek to diversify their funding base,” said Majekodunmi.