The African economy witnessed a contraction of 1.6% during the COVID-19 pandemic, albeit followed by an increase of 6.9% in GDP in 2021.
As Africa gradually tries to recover from the global pandemic, its average growth rate is projected to decelerate to 4.1% in 2022–23. Several key factors influence this decline; among them is the spillover effect of the Russia–Ukraine war impacting the cost of living as well as post-COVID-19 uncertainties and the increasing impact of climate change on the African economies.
According to the African Development Bank, during the COVID-19 pandemic, nearly 29 million Africans ended up being in extreme poverty in 2021, compared with the pre-pandemic projections, with an additional 30 million people expected to fall into extreme poverty in 2022 and 2023.
If the Russia–Ukraine war continues, an additional 1.8 million Africans could fall into extreme poverty in 2022, with an additional 2.1 million expected in 2023. These numbers alone raise huge concerns on the actions taken so far, and the challenges respective governments face on poverty alleviation and employment.
Here again, stakeholders expect development finance institutions such as the IsDB, African Development Bank and others to play a more active role on poverty alleviation and economic empowerment.
Review of 2022
Almost one-third of the world’s Muslim population resides in Africa, yet the total Islamic finance assets on the continent represent roughly 1% of the global Islamic finance industry’s total assets valued at US$2.2 trillion.
According to a recent study by Reuters, South Africa holds the lion’s share of Islamic finance assets, US$2.6 billion as of 2016, and also issued Africa’s largest Sukuk worth US$500 million in 2014.
The Ivory Coast, the second-fastest growing economy in Africa according to the IMF, had the second-largest Sukuk issuance worth US$244 million after South Africa’s US$500 million Sukuk issuance.
Morocco, the leading financial center in Africa, currently has five fully-fledged participative banks and three windows in operation since 2017.
Africa is an undoubtedly most untouched market with huge potential for Islamic finance to develop. The issuance of Sukuk for infrastructure development is gaining popularity in African markets; successful cases would be Nigeria’s sovereign Sukuk issuance or offset budget deficits. If this trend continues, it will not only attract foreign investors but will make a positive impact on the economy of the issuing country and the African continent as a whole.
Islamic finance is also expected to play a significant role in cultivating financial inclusion and facilitating banking penetration rates in countries with a high rate of unbanked population in Africa.
Islamic asset management in Africa is also barely tapped; it is simply absent in most African financial hubs, except South Africa which holds 98 Islamic funds under management, with pioneers such as OASIS Crescent Group which has been successfully operating for over 25 years. Other African countries can take a leaf out of its book and create a diverse portfolio of Islamic capital market products.
Sukuk seem to be the first step in most jurisdictions when it comes to Islamic finance. Thus, countries like Nigeria and the Ivory Coast, post-successful issuance of sovereign Sukuk, need to start developing their Islamic asset management sector and introduce Islamic pension funds to help grow their Islamic asset base.
A good example is Kenya’s retirement fund, which is creating a Shariah compliant pension fund to cater to its four million-strong Muslim population.
Preview of 2023
According to data provided by Moody’s Investor Services, Islamic banking assets in Africa are expected to increase noticeably over the next 10 years, given the continent’s large Muslim population.
A large number of Africa’s unbanked population, particularly those opting out of the conventional system due to their religious beliefs, present an untouched client base of potential deposits and investments.Nevertheless, continual challenges will constrain Islamic banking’s growth over the next 12 to 18 months.
Another challenge for the development of the Islamic banking industry is increasing competition among conventional banks in Africa; that is together with the fact that across the continent, legal, regulatory and tax regimes are still in the early stages of maturity for the Islamic financial services industry.
2023 could be a year where we focus on fiscal and monetary policy coordination among African countries to contain inflation while safeguarding the economic recovery and protecting the vulnerable population. Enabling a level playing field for Islamic financial institutions could facilitate this process and supplement poverty alleviation projects.
Fintech, combined with Islamic financial instruments, could bridge the significant gap of the unbanked population and add more Africans into the mainstream financial system and reap economic benefits, and help in stimulating economic activity and the movement of money.
Another area where African stakeholders need to focus on is to develop human capital. Relevant knowledge, skills and expertise will enable the African people to realize their potential as productive members of society and contribute toward the eradication of extreme poverty and create more inclusive societies.
Conclusion
A recipe for a more inclusive and accessible financial sector in Africa would be a combination of fintech and Islamic finance, from small and medium business owners to big investors; this could be the next rescue mechanism for the region.
Policymakers and regulators should develop financial stability mechanisms to protect economies by widening and deepening the utilization of innovative financing instruments such as green bonds and loans, sustainability or sustainability-linked bonds and financing, debt-for-climate swaps and Islamic and ethical finance instruments and products, among others.
The challenges are multi-fold as much as risks are material, but experience from the recent global pandemic response demonstrates that the world has the capital and policy tools to rapidly deploy them to meet global headwinds when the political will is there to do so.
Dr Aziza Yarlaeva Ebrahim is the strategy and Islamic finance advisor at the Islamic Finance Think Tank. She can be contacted at [email protected].