Sharia banking in Africa
The latest statistics about banking penetration in Africa that I got recently show that Sharia banking is gaining popularity in many parts of the continent. The key driver of the growth has been the increasing wealth in the mineral rich Sub Saharan Africa countries and also in the North Africa region. But what exactly is meant by sharia banking? And what are its prospects in Africa? I sought an expert’s views few days ago and in a nutshell, sharia banking simply adopts the principals of sharia law. Payments and receipts of interest are not permitted. Instead, returns on funds that are lent out must be based on the actual profits generated and not on pre-set interest rates.The provider of capital and the user of capital will equally share the risk of business ventures. In short, the depositor, the bank and the borrower should all share the risks and the rewards of financing business.Another key point is that investments should only support practices or products that are not forbidden or even discouraged by Islam. Financing cannot be provided to businesses engaged in alcoholic beverages, for example.The major difference between a conventional bank and a sharia bank is on the liabilities side i.e. the deposits taken by the bank. This is because of the presence of unrestrictive accounts, including mudharabah savings and time deposit accounts, since under the mudharabah contract, funds placed in these accounts are deemed to be investments and therefore there are no guarantees on either the principal or the return.As such, returns are dependent on the profits of the banks’ debtors under a profit-sharing scheme.
On the assets side, for example,the financing provided by the bank, there are basically two types of financing including trade like accounts and profit sharing accounts. The key contracts are murabahah, mudharabah, and musyarakah.Murabahah basically uses what financial experts call ”mark up” sale mechanism. Based on the “interest free” principle, the bank changes the transaction from a purely monetary transaction into a trade like one.The sharing principle applies to mudharabah and musyarakah contracts. The significant difference between these two contracts is that under musyarakah, the borrower also agrees to put some of its capital at risk. Admittedly, sharia banking is still small relative to the size of the African banking sector as a whole. Yet growth in recent years has been strong and the industry’s assets have grown a brisk 20 percent per annum over the last five years, with sharia banking proving to have been much more resilient to the financial crisis that erupted in 2008/09 than commercial banking was.Indeed, one of the attractions of sharia banking is that it is based on risk-sharing rather than on pre-determined interest rates. It is then naturally more resilient during hard times.Against this backdrop, the banking regulators in the continent appears keen to promote further expansion of sharia banking in Africa. The expert I spoke to estimated that the sharia banking business shall account for as much as 10 percent of Africa’s banking industry’s assets by the end of 2020. And scrutinizing the data in my possession, the expert has genuine reasons.First of all, despite Muslim being the most widely practiced religion in the continent, Africa’s sharia banking sector is still far behind compared to other parts of the world.Also, more and more companies from the Middle East are now keen to invest in Africa.And encouragingly, regulations are supportive.
The presence of many sharia banks in Africa is testament to the commitment of various governments including those that have just issued a regulation on sharia government bonds well known as sukuk.However, there are some issues that still need to be addressed.First is the need for greater public awareness of sharia banking.Sharia banks are relatively small in size, and therefore have limited capability to launch marketing campaigns. African countries government and banking regulators will therefore need to take a role in the campaigns.It’s also clear that industry is relatively new in Africa. This means that policies and procedures are still evolving. There may also be a lack of talented staff and expertise in the business.Moreover, since most of the shariah banks’ assets are dominated by murabahah contracts especially in Kenya which are similar to a sale and lease back transaction, the issue of double taxation surfaces. However, this should be resolved when a regulation on sharia banking is eventually issued.Still, many conventional banks are keen to enter the sharia banking industry given its strong growth potential. Some banks have opted to acquire a small bank and then convert it into a sharia business unit. This is the strategy adopted by several banks in Kenya. Some Kenyan banks are particularly well placed to enjoy the rapid growth within the sharia banking industry.Their sharia businesses have significant market share. Whether they will remain the dominant players remains to be seen. But one thing seems clear in whole of Africa is that the prospects for sharia banking are bright indeed.