Opportunities for Islamic Finance in Africa

Enormous, diverse, rich in resources but historically underserved and overlooked by the financial services sector, Africa has a Muslim population of over 400 million. A nascent Islamic finance industry is gradually emerging across the continent, invigorated by the strengthening of economic links and increased trade between Africa and the rest of the world. – with the Middle East especially playing an important role in bringing vital investment into rapidly developing countries. Patrick Colegrave and Joanna Hossack look at the current climate for the industry, and how this can continue and increase in the coming years.

Regulatory improvements

Until recently, one of the main factors inhibiting the growth of Islamic finance in Africa was the fact that most countries had not yet implemented a suitable regulatory framework to permit Shariah compliant lending.

Post-Arab Spring, the status quo in North Africa is changing and generally, more governments are opening up to the prospect of attracting investors for whom compliance with Shariah is a priority. Egypt, Tunisia and Morocco have all implemented new Islamic banking laws since 2011. In Tunisia and Morocco, experts say the legal building blocks are being assembled to allow the issuing of Sukuk; this is also the case in Kenya.

Increased interest from Islamic investors

As the regulatory environment progresses, investor appetite is following suit. In June of this year, the IDB announced that it would be increasing its involvement on the continent, starting with the launch of a US$180 million investment program targeting renewable energy projects in six African countries (Mali, Senegal, Burkina Faso, Nigeria and Niger, with the sixth not yet determined). In the past two months, a further US$1 billion package has been announced for the development of IDB countries in the Horn of Africa and a memorandum of understanding has been signed between IDB and the African Union Commission, for the purpose of fostering development in their member countries.

Following the stimulus from IDB and similar institutions, the expectation is that investment will follow from the private sector. Indeed, recent indications from project finance teams at commercial banks in the Gulf suggest that Africa represents a significant investment opportunity, albeit one that is yet to be fully explored.

Infrastructure and Sukuk

An increased investor appetite is demonstrated by the readiness of a number of African countries to issue Sukuk (and the success of such issues when launched). As they tend to be backed by land, property and infrastructure, Sukuk are a very good fit for sub-Saharan Africa, a region that needs huge investment in infrastructure, from power stations and railways to ports and roads.

The first major Sukuk issuance by an African sovereign raised US$200 million and was made by the Republic of Senegal in June 2014; however, Gambia and Sudan regularly issue small, short-term Sukuk and have been doing so for years. Nigeria’s Osun State raised US$62 million with a Sukuk issuance in October 2014. Analysts predict that sovereign issuances may be imminent from Tunisia, Egypt, Mauritania, Morocco and Kenya. The commitment to Islamic finance is not limited to African countries in which there is a majority Muslim population. The Republic of South Africa this year issued an inaugural US$500 million Sukuk, which was four times oversubscribed.

The Cayman Islands has always been a popular jurisdiction for incorporating Sukuk issuers. There are currently over 100 Sukuk companies registered in Cayman and we expect this figure to grow as the Sukuk market continues to thrive and expand into the non-Islamic world and conventional institutions become more comfortable with these instruments.

Benefits of offshore SPVs in financing structures for developing countries

The use of off shore SPVs is not limited to the capital markets. Notwithstanding the progress that is being made to encourage Islamic investment in developing African countries, in the context of syndicated finance there may be concerns that business law is in its infancy relative to other jurisdictions and that courts are inexperienced in dealing with complicated corporate matters.  Local companies may be subject to restrictions on foreign share ownership and permitted business activities. Offshore entities are often therefore vital for cross-border financings involving developing jurisdictions and are commonly used as holding vehicles and/or joint venture vehicles in these structures.

In the construction of a large infrastructure project, for example, the project company will often be incorporated in an international finance center (IFC) such as the Cayman Islands or the British Virgin Islands. This is because an IFC offers the benefit of a developed legal system. Access to a tax neutral jurisdiction that has certainty of legal interpretation, an up-to-date statutory and regulatory framework and sophisticated courts provides comfort for establishments seeking to invest in developing countries.

The foregoing discussion and analysis is for general information purposes only and not intended to be relied upon for legal advice in any specific or individual situation.


Patrick Colegrave is a partner (Investment Funds and Corporate) and Joanna Hossack is an associate (Banking and Finance) at Harneys. This article first appeared in Islamic Finance News (7 January 2015, Volume 12, Issue 1, Page 33). For more information, please visit