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Wednesday, 25 September 2019

Islamic finance is an opportunity for Africa – Moody’s

The Africa Report (25 September 2019)
The Islamic financial sector has great potential in Africa, where countries are looking to broaden their sources of financing.Moody’s published a report on 16 September that reveals Islamic finance is already progressing apace on the continent and has good prospects ahead of it, at least for the next 12 to 18 months. Most countries will need time to put the regulatory framework in place.
  • Islamic finance emerged on the continent in 2013.
  • All banking transactions and products are adapted to the principles of Sharia law (prohibition of interest, uncertainty, speculation, investment in sectors such as alcohol, tobacco, gambling, etc.).
  • It is based on the issuance and use of sukuks: debt securities that comply with the same Islamic principles.
  • Morocco’s issuance of $105m of sukuks between October and December 2018 was an initial success for the Cherifian kingdom, with the transaction 3.6 times oversubscribed by investors.
0.5% of the world’s sukuks

Sukuks continue to provide alternative funding sources for both African sovereigns and financial institutions, and issuance is supported by the increasing financing needs in Africa (especially for infrastructure projects) and global investors’ growing comfort with Islamic instruments,” the report says.
With $500m worth of sukuks issued in Africa over the past year, Moody’s points out that the continent accounts for only 0.5% of the world’s sukuks in circulation: Saudi Arabia and Malaysia are the main users, with $299bn and $134bn respectively.

Financial systems must adapt

“We expect that Africa’s large Muslim population, which is mainly unbanked or underserved, will continue to provide a solid foundation on which Islamic financial assets, and therefore profits, can grow rapidly,” say Moody’s analysts. They also cite the recent interest shown by Egypt, Algeria and Sudan in issuing sukuks in order to diversify their sources of financing.
Interested states still have to adapt their financial systems and legal constraints to the issuance of sukuks, and to identify projects that can serve as guarantees/support for these issuances.
The report highlights the “good resilience of Islamic banks despite a difficult operating environment in many African countries”, suggesting that sukuk issuances will continue to grow steadily and that these banks “will continue to perform well”.

South Africa and Nigeria benefit

The report cites three examples to illustrate this point: the South African Islamic bank Al Baraka, whose profits increased by 12.4% between January and June 2019 compared to the previous year; First National Bank (the third largest banking group in South Africa and the continent), where Islamic deposits have significantly contributed to its growth; and Sterling Bank (Nigeria), whose Islamic banking section has experienced a 24% growth in profits despite a 16% contraction in total assets in the Nigerian commercial banking segment.

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