The African region has benefited from increased investment flows on the conventional side which as a result have simultaneously boosted demand and created a surge in appetite for Shariah compliant investment products across the continent. With several dedicated Shariah compliant investment houses, Africa is expected to bear strong growth prospects over the long-term. NABILAH ANNUAR takes a look at the continent’s investment landscape and potential opportunities.
Gradually being recognized by global investors as an exciting destination, Africa has been suggested to show positive developments similar to the rise of the Asian tiger economies in the 1970s and 1980s. Nadir Thorkan, an investment analyst at 27four, a South African (SA) investment firm, revealed that excluding SA, Africa is increasingly being recognized by global investors as an exciting, long-term growth investment destination. “Over the last decade, most key African countries have enjoyed economic growth in excess of 6% per annum – more than twice the average growth rate of South Africa – and over the next five years, nine out of the top 20 fastest growing economies in the world are expected to be in Africa,” he said.
Shariah compliant assets available in the African investment space include: (1) Equities which are subjected to the regular Shariah compliant financial screens as set out by AAOIFI; (2) Sukuk — following issuances from Senegal and South Africa, Nigeria and Kenya are also expected to launch their Sukuk in the near future; (3) Commodity exchange traded funds (ETFs), in particular precious metal commodity ETFs listed on the Johannesburg Stock Exchange; (4) Murabahah contracts; (5) Selected private equity. According to Nadir, the most easily accessible asset class remains Shariah compliant equities as these have the largest universe eligible for selection and are also the most liquid asset class.
However, unfortunately Africa’s capital markets are predominantly underdeveloped and small compared to South Africa. “Stock market penetration ratios (as a percentage of GDP) range from 15% to 60%, whereas in South Africa, this ratio is in excess of 150%. This, together with low listed equity market liquidity ratios, limits the ability to employ large amounts of capital quickly and effectively within Africa’s listed equity markets. As a result, large investments are mostly private equity in nature, focusing on infrastructure and green/brownfield projects,” explained Nadir. Africa’s stock exchanges nevertheless remain an attractive proposition for smaller institutional investors.
Conveying a critical outlook, Nadir suggested two global factors that could challenge Africa’s economic and investment landscape over the next year. The slowdown China is experiencing will likely spill over into slower growth in Africa. This is due to significant trade ties between sub-Sahara Africa’s (SSA) and China. Exports to China are now equivalent to almost 7% of SSA’s GDP, a much larger ratio than in any other emerging region including Emerging Asia. This leaves SSA more vulnerable to China’s economy with commodity exporters, such as South Africa, Angola and Zambia projected to be hit hardest. The second factor would be the appreciation of the US dollar and the potential for an increase of interest rates in the US, which is expected to affect all emerging markets and frontier markets such as Africa. “Country capital accounts will experience pressure, which will ultimately manifest in higher interest rates due to a pick-up in supply side inflation. This will, in all likelihood negatively impact financial asset prices,” said Nadir.
The major driving factor of the African economy is the demographics of young and growing urbanised workforce that is more literate and healthier than previous generations as well as a broad economic reform which is the result of improving institutional and political governance. The demand for Islamic investment products will naturally follow given the large Muslim population, particularly in North and West Africa. However, educating potential investors on the merits of including an Africa allocation within their investment strategy, as well as depth in the Shariah compliant investment options both in terms of scope and liquidity, is imperative to develop traction for Islamic investments in the continent.