Growth of Islamic Banking in Africa Najmul Hassan Chief Executive Officer 28 th March, 2011.

Growth of Islamic Banking in Africa

Najmul Hassan

Chief Executive Officer

28th March, 2011

Outline

• Basic Terms and Concepts

• Key difference between Islamic and

Conventional Banking

• Islamic Banking; Success Story

• African Experience

• Conclusion

‘When the student is ready, the master appears’, so goes the proverb. If this is true for Islamic finance, then it is no wonder some quarters are tackling issues and concerns with much

zeal and enthusiasm.

Present Day World Situation

Can Islamic Finance Help?

Way Out: Islamic Banking

• The solution lies in a shift to equity-based financing, which is the primary characteristic of Islamic Finance.

• The global credit crisis presents the $1 trillion Islamic finance industry with an opportunity to expand its appeal beyond Muslim investors.

Basic Terms and Concepts in Islamic Finance

Basic Concepts1. Riba; Commonly equated with interest 2. Gharar; Impermissible contractual

uncertainties Basic Contracts3. Murabaha; One party buys an asset and

sells it to another party for cost plus profit

Basic Terms and Concepts in Islamic Finance

Basic Contracts2. Ijarah; One party with ownership of

an asset leases it to the other party for a defined rent

3. Mudaraba; One party provides the finance to another party who is responsible for managing the business

Basic Terms and Concepts in Islamic Finance

Basic Contracts5. Wakala; One party with excess

funds hires an investment firm as agent to invest on its behalf

6. Sukuk; This is an instrument similar to a bond, generally, the structure is where the role of financer is taken by a SPV

Comparison of Islamic Banking and Conventional Banking

Comparison – Islamic and Conventional Banking

• Islamic financial institutions work on a philosophy of prohibiting transactions considered :

• Immoral

• Promoting greater social justice by sharing risk and reward

Comparison – Islamic with Conventional Banking

• Interest payments, short selling and contracts considered excessively risky are also prohibited.

• "Islamic finance does demonstrate good banking behavior that has been perhaps lost over the last 10 years or so”, Neil Miller, head of Islamic finance at Norton Rose and an adviser to the British government.

What Distinguishes Islamic Banking

• Transactions are asset-based.

• Transactions which are speculative in nature are disallowed.

• Only 5% of daily fx transactions globally are backed by real trade. The remainder is speculative.

Islamic FinanceInception & Today

Islamic Finance – A success story

Investment banks like The International Investor (TII) & First Islamic Investment Bank appear offering specialised investment advisory and structured finance products.

Institutions like Shamil & Al-Baraka. Plain vanilla commercial banking with concentration on Murabaha, Ijarah and Istisna’a transactions.

Dubai Islamic, Kuwait Finance House & Bahrain Islamic bank, Faisal Islamic bank of Sudan & Egypt. Focus on resource mobilisation through Mudaraba.

1970s Liability-driven

institutions

1980’s Asset Generation

Emphasis

1990sSpecialised market niche

Islamic Finance a Success Story

• 350 + Islamic financial institutions

• Finance that complies with Shariah, or Islamic law accounts for around US $1 trillion in 2010 of assets and is growing at 10 to 30 percent a year, according to Moody's Investors Service

• The Asian Development Bank estimates that Islamic assets globally have a combined value of about $1 trillion, with annual growth of 10 percent to 15 percent a year

• All this growth has come from a model of lending that rejects interest payments and shuns speculation and heavy borrowing.

Islamic Finance a Success Story

Islamic finance now accounts for about 1 percent of the global market, according to Majid Dawood, chief executive of Yasaar, a Dubai-based sharia financing consultancy said, "We had expected to be at 12 percent of the global market by 2025, but now with this financial crisis, we expect to get there much faster,"

Islamic Finance – A Success Story•Islamic finance can provide a viable financial system on a global scale, but there are challenges that have to be met. Islamic finance has to adopt the best standards of accountability, transparency and efficiency. •The Accounting and Auditing Organization for Islamic Financial Institutions•The International Islamic Rating Agency •The Islamic Financial Services Board •The International Islamic Financial Market, and •The Liquidity Management Center

African Experience

Africa

Worlds Second Largest Continent• Area 11.5 Million Sq. Miles• 54 Countries• Population of 1.2 Billion

• 15% Of World Population• Majority of the Population

• Young • Poor • & Rural

Africa

Economics• GDP Expected to Reach 4.5% for 2010• Best Growth in the Last Decade• Rich In Natural Resources• Rich In Raw Materials• Number Of Mobile Phone Users 300

Million according to Wireless Intelligence

Africa

Banking• Over 65% Unbanked• Banking Penetration Relatively Low

• Urban Areas 60%• Rural Less than 20%

• Only One Fifth Own A Bank Account• Recent UN Report Findings

• Malawi 5% Banked• Senegal 7% Banked

• Report By World Bank Suggests • Ethiopia, Tanzania, Madagascar,

Namibia* & Botswana* lowest Bank Penetration in Countries Surveyed

AfricaMuslim Population

• Over 50% Muslim• 2nd Largest Muslim Population in

the World• Most of the Northern Countries All

Muslim• According to Mood’s Investors

services the Islamic Financial market is worth close to US $ 235 billion

• The actual depth of Shari’ah compliant financial intermediation was only US $ 18 billion as of year end 2007. Half of the assets being in Sudan and Egypt

AfricaCountries Offering Islamic Finance

South Africa Botswana KenyaAlgeriaNigeriaEgyptSudanTunisiaMauritiusSome Countries ContemplatingTanzaniaMalawiZambiaUganda

AfricaIslamic Finance

• 1st To Offer • Egypt • Sudan

• 37 Islamic Financial Institutions Operating in Africa

AfricaRecent developments in Africa• Senegal is planning to tap the

growing Islamic Finance market by issuing its first sovereign Islamic Bond in 2011

• Senegal has a population of 13 million of which 94% are Muslims

• Only 6% of the population have bank accounts

AfricaRecent developments in Africa• South Africa; population of 49 million with 2%

Muslims • GDP growth 8% per annum over the and past 10

years and per capita $8000• South Africa is in the process of introducing tax

neutrality laws for Mudaraba, Murabaha and Diminishing Musharaka

• Success of Oasis equity fund and Albarka bank• “The development of Islamic Finance in South

Africa is critical to the expansion of National Treasury’s strategy to position South Africa as a gateway into Africa. The treasury envisages South Africa being a central hub for Islamic product development and ensuring the rollout of such products into African markets” South African National Treasury

AfricaRecent developments in Africa• Ethiopia; Population 88 million

with 35% Muslims• ‘Zemzem Bank which is planning

to be the countries first Islamic bank in Ethiopia’*

• ‘Three Islamic banks have applied for License to Central bank in Uganda’*

• ‘The Central Bank of Uganda is amending its banking regulations to allow for establishment of Islamic Banks’*

*Islamic financial new 16 Feb 2011

AfricaRecent developments in Africa• Mauritius; Population 1.2 million with

17% Muslims• In Mauritius amendments were brought

to the Finance Act 2008 which obviate the levy of multiple payment of duties which would become payable under Islamic mode of financing land and property

• In June 2008, specific guidelines issued for banks who wish to conduct window or full fledged Islamic banks

• Mauritius is already home to a number of global investments and Shari’ah compliant funds with net asset value of US$ 75 billion

*Islamic financial new 14 Feb 2011

Africa

North Africa• Full-fledged Islamic Banks are

already established in Egypt, Algeria and Tunisia and Islamic windows in Egypt, Morocco and Algeria

*Islamic financial new 16 Feb 2011

AfricaKenyan experience• Two full fledged banks with

several conventional banks offering Islamic Products

• Gulf African bank set up in 2008, achieved profitability in 18 months and closed 2010 with profit of Khs 74 million

• With 14 branches spread in 5 cities the bank is offering products for Corporate, Retail and SME customers

Key success factors

• Enabling environment; including availability of liquidity instrument

• Knowledge based business; Educating relevant stack holders

• Focus on “ethical banking” targeting the entire population

• Human resource development • Share resources

Thank you