Economic slowdown will not halt growth of Islamic finance.
If you thought that low commodity prices, burgeoning budget deficits and sluggish economic recovery would dampen the growth of the $2.6 trillion global Islamic finance industry, think again.
The proliferation of the sukuk (Islamic bond) market "has more than compensated" for the slowdown in Islamic bank deposits and financing in key markets in the Middle East and Asia, says Khaled Al-Aboodi, CEO of the Islamic Corporation for the Development of the Private Sector (ICD), the private sector funding arm of the multilateral Islamic Development Bank (IDB) Group.
Al-Aboodi projects global Islamic banking assets will hit $3 trillion by 2020 and says ICD's activities in Africa "will continue to be a priority", focusing on supporting the private sector and small and medium-sized enterprises (SMEs) through the establishment of Islamic banking windows at conventional banks, extending lines of financing to local banks to finance private sector projects and helping local corporates in raising additional financing through the issuance of sukuk.
Between July and October, Saudi Arabia alone raised SR47bn ($12.53bn) through four monthly domestic sukuk issuances. This was in addition to the $9bn international sukuk the kingdom issued earlier this year. "The sukuk market," maintains Al-Aboodi, "is doing very well, with 2016 being an exceptional year. It will more than compensate for the slowdown in other market segments. We are seeing fewer new Islamic financial institutions being established but this is normal whenever there is an economic slowdown."
The ICD issued its debut $30om sukuk last year. In less than two years, says Al-Aboodi, ICD increased its balance sheet to over $2bn, and may go to the capital market again subject to the right conditions. He concedes that the impact of the global economy on member countries, especially in Asia and Africa, has not been good. This is why ICD has embarked on a three-year reorganisation to refine its support of its member countries.
The ICD recently extended two lines of financing each worth $50m to the West African Development Bank and another $100m line of financing to Afreximbank to support financing private sector projects and SMEs. At the time of writing it was also finalising a similar line of financing to PTA Bank, the financial arm of the Common Market for Eastern and Southern Africa (COMESA) and a $20m line of credit to a Mozambique development institution.
The idea is to introduce these institutions to the concept of sharia-compliant financing and in the process also provide technical expertise and market education. However, the facilities are subject to the financing being tied to real economy projects, and the hope is to create a platform for African corporates to start issuing sukuk.
According to Al-Aboodi, ICD is in negotiations with investors in Uganda to establish a regional Islamic bank headquartered in Kampala, which will have both local and overseas shareholders including the ICD and IDB, to finance activities such as lines of credit, leasing and SME financing in Uganda and in other East African countries such as Kenya and Ethiopia. At the same time, ICD plans to launch an Islamic bank in Nigeria in 2018. It is currently finalising negotiations with local investors, which when established would be the country's second Islamic bank after Jaiz Bank.
North Africa is no laggard
While the perception is that the development of Islamic finance in North Africa is lagging behind sub-Saharan Africa, the reality according to Al-Aboodi is that Morocco, Tunisia and Algeria are also strongly promoting "participatory" banking, the Maghreb euphemism for Islamic banking. Algeria has two Islamic banks in A1 Baraka Bank Algeria and Salam Bank Algeria, and Algerian prime minister Ahmed Ouyahia recently announced that licences for two state-owned banks to offer Islamic banking are to be approved before the end of 2017 and for another four other banks in 2018.
In Morocco, the Bank Al-Maghrib, the central bank, approved five new Islamic (participative) bank licences to various parties. One was to Credit Agricole du Maroc jointly with the ICD. The bank is due to start operations soon and is targeting trade finance and supporting business within Morocco and with the African market.
In Tunisia, ICD has teamed up with a local leasing firm, and following approval from the Central Bank of Tunisia, converted the firm into a universal Islamic bank, Wifak Bank, which started operations in June with nine branches. Wifak's strategy will be to target "individuals, businesses and professionals with a diversified range of modern and innovative banking services and products, covering a wide range of consumption, operating and investment needs."
Al-Aboodi is encouraged by Kenyan treasury secretary Henry Rotich's recent confirmation that Nairobi is considering joining the OIC (Organisation of Islamic Cooperation) and IDB, and by Nairobi's stated ambition of issuing a sovereign sukuk in 2018. He has had several discussions with Kenyan officials including the governor of the Central Bank of Kenya, Dr Patrick Njoroge, and stresses that the "ICD is prepared to support Kenya big time because of its proactive policy and the market is more advanced than other countries in Africa."
Kenya has two Islamic banks in First Community Bank and Gulf African Bank, while Dubai Islamic Bank, the oldest commercial Islamic bank in the world, earlier this year established a wholly owned subsidiary in Kenya with the aim of using Nairobi to establish its African footprint.
Al-Aboodi welcomes Nigeria's recent issuance of its debut Nioobn ($27701) sovereign sukuk and remains confident that Abuja will issue a sovereign sukuk in the international market.
ICD has arranged pioneering sukuk issuances in West Africa by Senegal, Cote d'Ivoire and Togo. Senegal, according to Al-Aboodi is considering a third sukuk issuance in early 2018, and discussions with Mali are well in advance for a debut sukuk. He also sees good potential in Togo for further sukuk issuances and for Islamic banks because of its tax advantages.
Good money to be made
Going forward, additional priorities for ICD are to promote independent power projects (IPPs) and an Infrastructure Finance Facility for Africa. ICD is already involved in six IPPs, including ones in Egypt and Mali, and considering ones in Morocco and Tunisia.
"What I see more is conventional banks setting up Islamic banking windows. Banks are making good money out of windows and in some countries these are more profitable than their conventional banking services," he observes.
The ICD recently extended a $100m line of financing to Afreximbank to support private sector projects.
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|Title Annotation:||INTERVIEW: KHALED AL-ABOODI, CEO, ICD|
|Comment:||Economic slowdown will not halt growth of Islamic finance.(INTERVIEW: KHALED AL-ABOODI, CEO, ICD)|
|Date:||Dec 1, 2017|
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