LEVERAGING ISLAMIC FINANCE FOR SUSTAINABLE DEVELOPMENT IN AFRICA

Roughly one-third of those suffering from extreme poverty worldwide live in member states of the African Union. In 21 of those 55 countries, fewer than half of the population has access to food security, adequate quality healthcare and sanitation. Four percent of infants born in these countries die before they reach the age of five.

Simply put, despite great potential, many African countries have struggled to achieve broad-based development. For many countries, the infamous “resource curse” is at work; in others, weak leadership and failed institutions are to blame. It does not help that the vast majority (some 71%) of the 125 million people affected by conflicts and natural disasters reside in African countries. Instability places enormous strain on national budgets.

But these countries have options. In particular, the Islamic financial systems could play an important role in helping them to meet their development goals – especially if Islamic finance is used to its full potential.

Islamic finance has important advantages over conventional financial products. With strong adherence to ethical values that are in vogue to both customers and investors today, and a core demographic population segment that is growing rapidly, Islamic finance is an intriguing opportunity for African countries. Though, in some few African countries like Nigeria and Senegal, a number of regulatory efforts to spur Islamic finance have been put in place to complement existing private-led Islamic financial developments, there exits various areas of growth when one considers the fact that Africa is one of the world’s largest untapped growth markets for Islamic economy. Islamic finance offers various instruments that are poised to support African governments’ need for raising capital for large infrastructure and enhance individual and SMEs access to financial services. 

Its prohibition of interest and requirement that investments be linked to the real economy, together with its approach to profit-and-loss-sharing, add stability to the financial sector. Islamic finance also can enhance financial inclusion, as it incorporates people who, for cultural or religious reasons, are excluded from the traditional financial system. This is perhaps one reason why Islamic finance has been expanding at 10-12% per year over the last decade or so.

With over 50 Islamic institutions operating in Africa, the market presence is quite robust and broad. However, despite the Islamic finance sector’s strength in values and demographic viability, its adoption into the mainstream population of both Muslims and non-Muslims has been a struggle. This has been in some part due to a lack of understanding of the core values of the offering along with some misinformation; however, it can also be argued that the lack of adoption to digitized service offerings have also impeded the sector in reaching its potential.

The development of Islamic finance in Africa could be expedited to be part of the competitive global Islamic finance markets leveraging on global partnerships, capabilities and experience of the advanced Islamic finance markets. In serving the growing demand of the industry, Islamic finance and its offerings could act as catalysts to facilitate Africa’s sustainable economic development as well as being one of the impetus for its inclusive growth.