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Saturday, 4 July 2009

Islamic banking has established a firm foothold in Africa but the potential is still enormous

Islamic banking, once regarded as an exotic but not very practical system and consigned to the outer fringes of the global industry, is now moving steadily into conventional banking and attracting attention from its non-traditional base. The fact that it eschews charging interest on loans has made it appear the perfect antidote to the excessive greed that characterised conventional banking and led to the current financial crisis. In short, Islamic banking, with its emphasis on ethics and its employment of capital solely as a factor of production rather than as a means of gain, is now the politically correct banking system.

It has remained largely insulated from the global credit crisis. It is expanding not only in the Muslim world, but also in other countries where Muslims are a minority, such as Britain, France, the US and even Japan. The industry has grown at the prodigious rate of 15-20% annually over the past decade. This growth is likely to continue, albeit at reduced rates, as more corporates and companies look increasingly to Islamic banks for trade and project finance. Islamic banking has established a firm foothold in Africa but the potential is still enormous. This Special Report examines what Islamic banking is really all about and the role it now plays in Africa.

The ideal model for Africa?
The strong growth of the previous decade was replaced by a mood of uncertainty, worthless assets and tumbling profits but one sector has continued to perform surprisingly well – Islamic banking. Neil Ford reports.

It seems likely that the Islamic banking sector will gain business from customers who believe that an under- regulated global banking industry has helped to precipitate the current global financial crisis. Shariah-compliant investment does not allow speculative activities such as hedging and derivatives, and so could be seen as a safer bet. There is also evidence to suggest that Islamic banks have been less severely affected by the economic downturn than other financial institutions, partly because they invest only in assets and not debt, a fact which allowed them to escape the direct impact of the US housing crash. The global market for Islamic banking certainly enjoyed a good year in 2008. The managing director of UK consultancy Maris Strategies, Joseph DiVanna, says that Islamic banks are not as susceptible to changes in the credit markets as mainstream banks and so continued to be launched in late 2008 and into 2009.

Over the past two years, new banks have been formed in Botswana, South Africa, Sudan and Kenya, as well as across the Middle East and South Asia. Probably the most noteworthy recent development in African Islamic banking is Al Baraka Bank’s decision to seek a listing on the Johannesburg Stock Exchange (JSE). The company is the sole bank in South Africa to offer only Islamic financial products and is currently celebrating its 20th anniversary but has now taken the decision to go public. At present, the bank is owned by the UK’s DCD London & Mutual Plc, Saudi Arabia’s Dallah Al Baraka Group and South African investors – so although it forms the South African leg of the Saudi company’s operations, it is not a mere subsidiary.

Chairman Adnan Ahmed Yousif said: “Listing is on our agenda because it will give us a very good diversity of shareholders and prestige. We also feel that the Reserve Bank in South Africa is beginning to understand Islamic banking very well.” Yousif hopes that the listing, which is expected by the end of this year, will “increase the company’s visibility, attract new customers and grow capital for expansion programmes.” The company’s profits for 2008 increased 19.5% to R21.7m ($2.7m), deposits were 12% higher at R1.6bn ($198m) and advances 7% up at R1.4bn ($173m).
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