The Islamic finance industry slowed down significantly in 2020 after experiencing a very strong 13% growth rate in 2019. Islamic financial institutions spent most of the year coping with the dual shocks of adjusting to the COVID-19 pandemic. ASSANE WADE writes.

For many industry leaders, this period of stagnation was an opportunity to work on modernizing Islamic finance either through the long-awaited standardization of Shariah compliant offerings or by fast-tracking innovation.
Islamic finance has the potential to contribute to higher and more inclusive economic growth by increasing access of banking services to SMEs.

In Senegal, with an estimated bank penetration rate of 20% and a Muslim population of around 14 million people, ie 94% of the country’s population, Islamic finance appears to be one of the key growth drivers for the development of the Senegalese banking sector.

An appropriate marketing strategy for Islamic finance products could capture a previously inaccessible market with a large number of informal businesses, which in turn could increase financial inclusion.

 

 

SMEs in Senegal represent only 16% of the portfolio of banks in the country; Islamic microfinance represents for them an opportunity to access financing methods that are more in line with their economic structures, beyond ethical choices.

The use of variable income instruments with a profit-sharing system represents for them an incentive financing mode with very positive induced effects.

As we seek to overcome financial constraints, funding shortfalls and financing inequalities, Islamic social financing, itself built on the principles of fairness and justice, can open pathways to stimulate economic activity and promote social welfare, financial inclusion and shared prosperity.
Waqf has been used to develop and support communities through donations made to charitable, religious or educational work. The objective here would be to set up a cash Waqf to support SMEs to become sustainable and achieve a large-scale social or public benefit through the provision of Qard Hasan (interest-free loan) financing.

Deficits in social and employment protection, low capital and the invisibility associated with the lack of legal recognition of activities and jobs result in low resilience in the event of a crisis and a significant risk of aggravating pre-existing vulnerabilities.

The most represented sectors are also those directly affected by the prevention measures, and in particular by the restrictions on movement, or even confinement, which affect both demand and imports as well as access to the raw materials and intermediate goods necessary for production.

At the same time, the informal economy as a whole and informal sector enterprises and workers in particular are seen as an essential lever in the fight against precariousness, unemployment and underemployment.

However, in order to be able to be on this essential lever, it is still necessary to succeed in preserving the informal economy from this health, economic and social crisis associated with COVID-19 and in limiting its immediate-, medium- and long-term negative consequences.

Faced with the COVID-19 pandemic, Senegal has set up a response and solidarity fund against the affects of the pandemic called Force-COVID-19 which will be endowed with US$1.78 billion to mitigate the impact of the pandemic.

In addition, financial institutions such as the Banque Nationale pour le Développement Economique (BNDE)-Senegal and the Islamic Corporation for the Development of the Private Sector, the private sector branch of the IsDB Group, have signed a EUR12 million (US$14.17 million) Shariah compliant line of credit agreement to support SMEs in Senegal affected by the COVID-19 pandemic.

BNDE is a sufficiently capitalized credit institution, dedicated to the financing of the modern productive sector on the one hand, and the informal, popular and unstructured (but high value-added) sector on the other. The ambition of its shareholders is to make this bank a real leader in SME/SMI financing, both qualitatively and quantitatively, in order to make it a national tool capable of actively participating in the country’s development.

Senegal is today a leading player in the West African Economic and Monetary Union region in terms of the supply of Islamic financial products. However, it must be noted that this offer remains limited for a population of 16 million people, 95% of whom are Muslims.

As the first financial partner of the government of Senegal, the IsDB has financed many Islamic financing programs, including the National Programme for the Promotion of Islamic Microfinance in Senegal or PROMISE for an amount of US$80.27 million, in order to make the sector efficient and inclusive in the service of an emerging economy in a society of solidarity.

The COVID-19 crisis has highlighted the vulnerability of entrepreneurs and workers in the informal economy. The Senegalese government, like other countries in the world, has taken measures, including fiscal, monetary and social measures, to mitigate the impact of the crisis on businesses and households.

However, the challenge, both in the implementation of support measures and/or the recovery program, remains to find the right mechanisms to effectively reach out to the informal economy.

Assane Wade is a consultant analyst at Performance Group. He can be contacted at [email protected]