Islamic finance to expand in Africa, as financing needs increase: Moody’s

Islamic banking assets are expected to account for above 10 percent of total African banking assets over the next five years, from a level of less than 5 percent currently, as the need for financing increases.

Similarly, African sukuk that make up just 0.5 percent of global sukuk issuance are likely to continue to grow quickly from a low base,Moody’s Investors Service said in a recent report.

Issuers in Africa have raised $2.3 billion from sukuk, or Islamic bonds, since the start of 2014, providing new funding sources for both sovereigns and financial institutions.

“Despite some structural constraints, we expect growth in sukuk issuance to be driven by increasing financing needs (especially for infrastructure projects); global investors’ growing comfort with the relatively complex legal structure of Islamic instruments; and the desire within Africa for stronger investment links with fast-growing economies in the Gulf and Asia that have large Muslim populations with large pools of available capital,” Moody’s said.

“We expect Africa's large Muslim population, which is predominantly unbanked or under-served, to provide a solid foundation in which Islamic banking assets can grow rapidly,” it added.

For Islamic lenders, 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.

The report identifies 18 African countries as having the greatest growth potential for sukuk issuance and/or Islamic banking. These countries are Egypt, Morocco, Algeria, Tunisia, Senegal, Nigeria, Niger, Mali, Gambia, Mauritania, Guinea, Togo, Ivory Coast, Sudan, Kenya, Djibouti, Somalia and South Africa.

Moody’s estimates there are over 80 Islamic financial institutions in Africa, many of which have been licensed in the last five years. The greatest number is in North Africa, especially Sudan. Countries such as Nigeria, Senegal and Kenya have however recently implemented banking, legal and regulatory frameworks to spur growth in the Islamic banking sector.

As an example, Nigeria's only Islamic bank, Jaiz Bank, has grown by 519 percent by assets over the last five years, expanding its branch network from just three branches in 2013 to 33 now, and serving 230,000 customers across the country, the report noted.