Islamic banking or Islamic finance is banking or financing activity that complies with Sharia (Islamic law) and Hadith, the recorded sayings, and actions of the Prophet Muhammad.

 
islamic banking in africa

Faisal Islamic Bank in Sudan.

Quick Facts About Islamic Banking in Africa

  • Ivory Coast is largest issuer of Islamic bonds.
  • Sudan has the largest Islamic banking sector.
  • There are over 80 Islamic financial institutions in Africa.
  • The first modern-day Islamic bank, The Mit Ghamr Savings Bank, was founded in 1963 in Mit Ghamr, Cairo, Egypt.

Islamic Banking in Africa

According to the global financial agency, Moody’s, since 2014, $2.3 billion in Sharia-compliant bonds have been issued in Africa. The agency notes that there have been an increase in the number of licensed Islamic financial institutions, rising to over 80 in the last five years.

Some financial institutions in countries such as South Africa, Senegal and Nigeria offer “an Islamic window,” which means financial services provided by a conventional bank but based on Islamic principles.

Capitalising on the rise of mobile banking in Africa such as M-Pesa, Safaricom and Islamic bank Gulf African Bank announced plans to launch M-Sharia, a Sharia-compliant banking service through M-Pesa.

 

Principles of Islamic Banking

  • Sharia prohibits “riba” (charged interest) or usury, unjust, exploitative gains made in business.
  • Investment in businesses that provide goods or services considered contrary to Islamic teachings (e.g. pork, gambling or alcohol) is “haraam” (sinful and prohibited).

  • Islamic banking involves sharing of profit and loss. The banks make a profit through equity participation which requires a borrower to give the bank a share in their profits (as well as loss) rather than paying interest.

islamic banking africa

The town of Mit Ghamr in Egypt where Egyptian economist, Ahmad El Najjar, started the first modern-day Islamic bank.

Advantages of Islamic Banking

Reduction of risk. Islamic banks conduct comprehensive risk analyses. The banks do not finance risky companies. This leads to financial and investment stability.

Reduction of harmful products, services and practices. Islamic banking principles forbid any practices forbidden in Islam such as gambling, alcohol, prostitution, speculation, etc.

Shariah compliant instruments. Islamic banking allows devout Muslims to invest and bank with institutions that respect Islamic morality.

Financial justice. Islamic banking is based on the sharing of profit/loss and risk involved between the bank and the customer in a proportional manner.

Disadvantages of Islamic Banking

Higher costs. Islamic finance is complicated and expensive. Each Islamic transaction requires more than one contract, which c an be highly costly.

Diversification of hedging and growth. Futures, forwards, derivatives are banned. Therefore, the possibility of hedging against risks is very limited. Islamic banking forbids risky investments. Depositors are therefore prevented from investing in higher risk investment, which may have higher returns.

Risk for depositors. The profit and loss sharing model means there is increased risk for depositors. Depositors can’t fully monitor bank policies and decisions as they are not part of the bank’s management.

The principal-agent problem. The principal instruments are vested compliant to Shariah law by Islamic boards. The Shariah boards are appointed by the banks. There can be conflicts of interest when the board members try to keep the business of the banks that are paying their fees running. Moreover, they are costly.

Limited supply and inadequate financing. Islamic banking is not yet a mainstream banking option in many countries.

Banks Offering Sharia-Compliant Banking in Africa

Islamic banking in africa

Saba Islamic Bank in Djibouti.

Some of the financial institutions and conventional banks that one can use for Islamic banking in Africa include:

CountryBank
AlgeriaAl Baraka Bank of Algeria
ChadEcobank Chad
DjiboutiSaba Islamic Bank
EgyptNational Bank of Egypt, Al Baraka Bank, Faisal Islamic Bank of Egypt
EthiopiaHijra Bank, Somali Microfinance Institution (SMFI)
GhanaGhana Islamic Microfinance
GambiaArab Gambian Islamic Bank
GuineaBanque Islamique de Guinee, ICB Islamic Bank of Bangladesh
KenyaFirst Community Bank of Kenya, Dubai Islamic Bank, Gulf Bank, Sharjah Islamic Bank
MoroccoMa Banque islamique
NigeriaSterling Bank Plc, FinBank, Jaiz Islamic Bank, Stanbic IBTC Bank, Keystone Bank
NigerBanque Islamique Du Niger, Niamey
SenegalBanque Islamique Du Senegal
SomaliaSalaam Bank, Dahabshil Bank, Salaam Somali Bank
South AfricaAbsa Bank, Al Baraka Bank, Jordan Islamic Bank
SudanAl Shamal Islamic Bank, Faisal Islamic Bank, Al Salam Bank, Al Tadamon Islamic Bank, Al Baraka Bank Sudan
TanzaniaAmana Bank
TunisiaBanque Zitouna, Al Baraka Bank Tunisia
UgandaNational Islamic Bank of Uganda

Conclusion

The Islamic banking industry is expected to grow to over $3 trillion by 2020. The World Bank believes that Islamic banking has the potential to reduce poverty.

According to Pew Research, the share of the world’s Muslims who live in sub-Saharan Africa will increase from 15.5% in 2010 to 24.3% in 2050.