Islamic banking has grown rapidly around the world but the industry remains in its infancy in Africa. However, that might be set to change. There was a noticeable buzz at an Islamic finance conference I attended recently in Nairobi. After years of slow development, there was a palpable sense among the delegates that Islamic banking is heading for its breakthrough in sub-Saharan Africa. This is great news, not just for the region's large Muslim populations, but for anyone keen to see a thriving African banking market based on choice for consumers.
While Islamic banking assets have grown rapidly around the world to stand at more than USD1.3 trillion at the end of 2012, the industry has remained in its infancy in Africa. However - going by recent developments - that could be about to change. By the end of this decade it's quite possible that banking complying with Shariah law - or non-interest banking - could grow to account for up to 10 per cent of banking assets in five or six sub-Saharan African countries, including Kenya and Nigeria.
With the first licenses granted in Kenya just 5-6 years ago, that would make Africa's leap into Islamic banking much faster than markets such as Pakistan and Indonesia, where Islamic financial services have been available for longer. Behind the buzz is real demand from African domestic consumers for the choice to bank in accordance with their faith - in common with Muslims in much of Asia and the Middle East. Governments and regulators in Africa no longer view Islamic banking as a niche industry, but actively seek to encourage its development.
There's also growing awareness of the significant liquidity pool now available in Islamic finance, particularly across the Middle East, as a source of funding for crucial infrastructure investment. Islamic bonds, or Sukuks, are seen by prominent advocates - such as Central Bankers - as a potential financing option for governments. Nigeria's Securities and Exchange Commission recently permitted the issuance of Sukuk, with the first issuance in the country now imminent.
Like Nigeria, other Africa countries are keen to follow the lead set by Kenya, which issued its first licenses to Islamic banks 5-6 years ago and in 2010 amended its Banking Act to open the industry further. In just a few years, Islamic banking - has grown to account for around 2 per cent of the market in Kenya where around one in ten citizens is Muslim.
Nigeria, with a Muslim population of around 80 million people, issued its first license to a non-interest bank, Jaiz Bank, last year and has also permitted conventional banks to open non-interest windows. Similar developments have occurred in countries such as Uganda and Tanzania. As I see it, by building on the experience of established Islamic banking markets, such as the Middle East and parts of Asia, sub-Saharan Africa has a great opportunity to leapfrog, developing a healthy Islamic banking eco-system much faster than other regions of the world.
One of the major lessons learnt elsewhere is that it's vital to get the regulatory balance right from the outset. To encourage the industry to flourish, it's important to keep it open for new participants with experience from more mature Islamic banking markets.
Middle Eastern Islamic banks, for example, have played an important role in developing the key Islamic banking markets of Asia, including Pakistan and Malaysia which has allowed such banks to operate alongside domestic banks. Another important lesson is that Islamic banking develops much faster when it appeals to both Muslims and non-Muslims, as a non-interest, profit-sharing alternative to conventional banking. In Malaysia, where the sector has grown to account for one quarter of banking assets with strong government promotion, Islamic banking has attracted a significant contingent of non-Muslim customers.
Encouraging Islamic banking as a choice not just for Muslims is particularly relevant to countries such as Kenya and Nigeria with their large mixed populations. Above all, African governments need to encourage the development of a local Islamic banking talent pool. That means making sure that a sufficient number of Africans have the opportunity to train and build up their Islamic banking expertise in markets where the sector is more advanced, such as the UAE or Malaysia. Doing so will be crucial for the Islamic banking industry's ability to prosper in Africa.
It's encouraging to note that the central banks of several African countries, including Nigeria, Tanzania and Uganda, have been sending representatives into more mature Islamic banking markets in order to learn from their experiences. This approach will help to ensure a more successful and sustainable development of the sector across the continent.
At Standard Chartered, we see Africa as the next frontier for the industry. That's why we'll be launching our Islamic banking brand, Saadiq, in Kenya shortly, with plans to expand into other countries in both East and West Africa in the future. It's still early days for Islamic banking in sub-Saharan Africa, but from where we're standing, the future's looking bright.
(The writer is Global Head of Islamic Banking, Consumer Banking, Standard Chartered Saadiq)
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