28/02/2016 12:49 AST
On a recent trip to Johannesburg, I sat down with an Islamic finance executive for a major bank. There was a lot to talk about with the flurry of Islamic banking activity on the continent, not just through several Sukuk issuances but also a number of Islamic institutions and windows opening across countries.
But this executive said that growth in the sector had been tough. Though Muslims make up a large portion of the unbanked population in many of this bank’s (and others) target countries, they just weren’t coming into the fold—at least not at a significant rate.
This admission may come as a surprise to anyone reading the parade of headlines about ‘unlocking the potential’ for Islamic banking in Africa. There’s been quite a few—and I’ve written many of them. While this is still true, the reality on the ground—literally, because we’re talking about retail here—is more complicated than that.
On a larger scale, Shari’ah-compliant bonds, or Sukuk, have proven successful time and time again: South Africa’s four times oversubscribed $500 million Sukuk in October 2014; Senegal’s $208 million debut Sukuk a few months earlier, the biggest in West Africa until Cote d’Ivoire’s $244 million issuance this January; and Nigeria’s Osun State $62 millon 2013 Sukuk paving the way for a sovereign issuance. All set the bar high, and plans for more issuances are in the works in Niger, Nigeria and Kenya.
But from a retail perspective, is the demand there? In its recent 2016 Outlook, Moody’s Investor Services largely predicted challenging times in African banking due to sinking commodities prices, China’s slowdown and regulatory difficulties. Possibly the one bright spot in the report was the potential it saw in Islamic finance.
Noting the more than 230 million Muslims on the continent, Moody’s projected that 40-50 Islamic banks operate in the space, with huge potential for significant growth in the long term. However in the meantime, operations remain narrowly focused and small. With the notable exception of Sudan, where every bank is Shari’ah-complaint, Islamic banks in other African markets struggle for a share of the retail base. In Kenya—often highlighted as a promising market—the two standalone Islamic institutions are estimated to have just over 100,000 clients each. In 2013, the two ranked 25th and 33rd out of 43 Kenyan banks for asset size.
Moody’s recommends more capital and M&A activity to expand the sector—but as to who will provide that capital and engage in M&A, that’s a struggle every small bank, Shari’ah-compliant or not, is dealing with in Africa.
The banking sector in nearly every African country is saturated with institutions and immensely competitive. Much is made of the potential in the unbanked population—yet few banks have even begun to reach them. I don’t question the appeal of Islamic banking for a massive portion of the population, but simply being a Shari’ah-compliant bank will not be enough—not when so many have yet to bank in the first place.
Going back to Kenya, one of the best examples of aggressive and innovative retail growth is Equity Bank. By homing in on small deposits, mobile banking services and the specific retail needs of the average Kenyan (and later, East African) consumer, the bank has grown into a regional powerhouse with a customer base of 9.2 million and assets in excess of $3.2 billion.
The institutions that take advantage of innovative technology and agency banking will see their base grow in places that need it the most. The success of Islamic banking on a corporate and Government scale has already been proven, but it’s sustainability on a retail level is tenuous at best right now. Islamic banks, known for their ethics, now need to be known for their innovation.
CPI Financial
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