The Economist

Africa is Islamic banking’s new frontier

Several African countries are vying to become regional hubs for Islamic finance. Kenya has three Islamic banks, as well as an Islamic insurance company. A further five conventional banks offer sharia-compliant products through dedicated Islamic 'windows'. Kenya also hopes to issue a sovereign sukuk to raise funds for infrastructure and help foster an Islamic capital market. Nigeria, which has one Islamic bank, plans to do the same. South Africa, Senegal, Côte d’Ivoire and Togo have already issued sovereign sukuk. In north Africa Islamic finance has long been held back by a fear that it means introducing sharia law through the back door. South of the Sahara the problems are more structural. According to Thorsten Beck of City University in London, Islamic banks’ sources of funds are mainly short-term, making it hard for them to offer long-term financing. Khaled Al-Aboodi of the Islamic Development Bank says regulators don’t yet know how to deal with the sector. In Kenya Islamic transactions still face double taxation, which makes it hard to compete.

The government initiates a #coup at #Bangladesh’s biggest bank

On the 5th of January military intelligence operatives phoned the chairman, a vice-chairman and the managing director of Islami Bank Bangladesh and brought them to the agency’s headquarters in Dhaka. A few hours later the bank’s board selected their replacements. Islami Bank has been of interest to the government for its association with the Jamaat-e-Islami, Bangladesh’s biggest Islamist party. In recent months, companies with ties to S Alam Group have built stakes in the bank, although the group denies any role in this. The new chairman, Arastoo Khan, declined to comment on the changes at the bank. The shareholders from Saudi Arabia and Kuwait were kept in the dark about the boardroom coup and complained bitterly about it. The Islamic Development Bank (IDB) questioned the rationale behind the changes and pointed out that there was no proper recruitment process. The Bangladeshi government has assured foreign shareholders that it will not let politicians loot the bank.

Trending: blending

Meeting the United Nations’ Sustainable Development Goals will require additional investments of $2.5 trillion a year in things like health care and education for the world’s poorest people, according to UNCTAD, a UN agency. The term blended finance appeared referring to a strong mixture of public, private and charitable money, a way to make the limited pool of money available for worthy causes go further. The idea of using public funds to attract private money is a venerable one. For it to change development finance fundamentally it will have to become easier to scale up.

Big interest, no interest

Despite strong recent growth for Islamic financial products, there still is room for further expansion, both in relatively unbanked Muslim countries in the developing world and in the West. As the orders for Britain’s issue showed, demand for sovereign sukuk is strong. Hong Kong and South Africa are scheduled to issue dollar-denominated sukuk later this month. Luxembourg, Russia, Australia, the Philippines and South Korea have also shown interest. However, there are potential pitfalls. There are calls for greater international standardisation. But since Islam has no overarching authority that can approve its rulings, there will always be disputes.

A mecca for sukuk

David Cameron, the British prime minister, announced plans to issue sovereign sukuk as early as next year at the ninth annual World Islamic Economic Forum in London on October 29th. The convention marks the first time the event has been held outside the Muslim world. That is a testament to the rising global clout of Islamic finance. The Gulf states have been at the forefront of the boom, other countries like Turkey are emulating the Gulf model. However, the prospects in the wider Middle East, e.g. Egypt and Lybia, are less clear. Despite Islamic finance’s being the toast of the town in the City of London this week, the struggle to make it work in the heart of the Muslim world continues.

Banking on the ummah

Over the years, Malaysia has become a leader in Islamic finance and the world’s most important Islamic-finance centre. A little more than a fifth of the country’s banking system in terms of assets is compliant to the principles of Sharia. Compared to that, in Muslim countries the average percentage is about 12% or even a lot less. On the global sukuk market, Malaysia occupies a dominating position. In the first three quarters of last year, the country was responsible for almost three-quarters of total global issuance. In addition, an international standard-setting body - the Islamic Financial Services Board - is situated in Malaysia.

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