Reducing Poverty: The Prospects of Islamic Finance in Africa
Basheer Oshodi believes that the Islamic finance global growth of over 15% per annum may not make much impact in Africa if the continent is unable to solve its poverty challenges.
There has been much talk of the poor performance of Africa’s development and governance indicators when compared to other regions. Attention has also been focused on Africa’s poor performance in meeting the Millennium Development Goals and the inability of the region to meet its 2015 targets. Others have stressed the national economic empowerment and development strategy: designed to implement economic and institutional reforms, poverty alleviation, wealth creation, employment generation and value reorientation.
Redefining poverty in Africa
From a purely economic perspective, it is generally believed that Africa (unlike China or Japan) does not have any proficient indigenous model, so westernised neo-classical economic and political theories are pushed to the region with the assumption that they will be as effective as they were in Europe and North America.
Many also argue that the Islamic economic system is only a theory that existed hundreds of years ago and hence cannot fit into the ethno-linguistic diversified African states. How possible is it then that Islamic finance can reduce the impact of poverty in Africa within the context of the continent’s overall socio-economic position? Or should the question be changed to how best to use Islamic banking and finance to solve the poverty challenge?
Islamic finance ‘as is’
The Islamic economic system is an all-encompassing socio-economic model based on fiqh muamalat. Islamic finance is viewed as a subset of the overall Islamic economic system which constitutes a part of Islamic civilisation. Islamic finance ‘as is’ in Sudan is systemic, being a state-led program specifically designing products to alleviate poverty with the use of musharakah, mudarabah and murabahah structures as well as the development of tailored guidelines and products to address productive families. Compared to Sudan, Islamic finance is a relatively new phenomenon in Nigeria; although big conventional commercial banks are already seeking to offer Islamic banking in the country, seeing it as an opportunity to offer yet another financial product into the market.
Apex Bank in Kenya and Nigeria argues that it will help provide financial services for the huge unbanked Muslim population while increasing funds in the formal economy. However, there is evidence from Nigeria and Tanzania that some banks offering Shariah compliant products only offer liability products that do not give anything back to customers, on the basis that Shariah compliant deposits need to be generated before asset products can be considered. Generally, Islamic finance would benchmark profits to interest in order to remain competitive while mimicking conventional products, provided Shariah compliance can be established.
Islamic finance ‘as it will be’
The next phase for Islamic finance in Africa will be that of aggressive competition; with banks competing for market size and market leadership. In South Africa, a top bank has already shown a preference for other jurisdictions rather than its saturated home market in order to capture virgin territory. The Islamic finance industry in Africa will however witness great success in the area of sukuk.
South Africa, with barely one million Muslims, is about to launch the first sovereign sukuk outside the Muslim world; while Nigeria is making efforts to do the same. Nigeria presently enjoys relatively favourable regulation and may have more sukuk in terms of value than the rest of African countries over the next 10 years. While South Africa has sound infrastructure, Nigeria would need to use sukuk to solve its infrastructural poverty challenge.
Kenya is patiently waiting for Sukuk to cover the bonds and T-bill market while giving some priority to Takaful. In Tunisia, the African Development Bank (AFDB) is committed to using Istisnah contracts to improve the country’s real estate, infrastructure and energy sectors while creating thousands of jobs and other benefits. The IDB is also making its presence felt more in the continent and is currently paying attention to large-scale agriculture projects which will create employment and have a positive impact on most categories of poverty.
A bank in Nigeria is considering using agro-commodities murabahah for liquidity management instruments, which will also touch the lives of the rural poor in many ways, while considerations for agro-Sukuk will benefit Africa as a whole. There will generally be a shift from retail banking and microfinance banking to investment banking. However Sudan’s integral Islamic finance microcredit style should also be encouraged across Africa to support the poor entrepreneurs.
Islamic finance ‘as it should be’ in Africa
The primary purpose of the Islamic economic system via Islamic finance is to achieve a moral economic system which should have an increasing effect on wealth creation while poverty, income inequality and unemployment is reduced. In reality, Islamic finance on its own in today’s neo-liberal world cannot reduce poverty but will need to operate within the context of the overall socioeconomic and political framework in order to have any real impact.
While Nigeria takes advantage of its oil wealth to create investment opportunities, Mali may not have as much endowment in wealth creation, regardless of the size of its Muslim population. The rebirth of Egypt and Libya should witness new investment in Islamic banks offering Shariah compliant products and services primarily aligned towards customer value architecture or people-biased propositions.
Islamic banks in Sudan and South Africa should invest in Mali, Niger and Chad, based on overall socio-economic needs of customers, while the continent should also float sukuk funds for the region – a role that the IDB and AFDB can play jointly with other financial organisations. In the same light, Africa should have its own Islamic finance reserve institution primarily aimed at poverty reduction while fostering mutual corporation in a moral economic environment.
Islamic finance global growth of over 15% per annum may not make any sense in Africa if it is unable to solve its poverty challenges. It will also have no meaning to the people if African countries achieve economic growth as a result of foreign trade, investments and aid but achieve no real development because the needs of the lower segments of the population are ignored.
People will start to question the primary purpose of Islamic finance if it only meets aspects of Shariah compliance without addressing poverty needs. It is thus necessary for governments, international organisations and business organisations to engage in a more holistic vision rather than just focusing on the financial benefits.
This article first appeared in the Islamic Finance News (21 December 2011, Volume 8, Issue 50, Page 25 – 26). For more information, please visit www.islamicfinancenews.com.