On the African prospects of Islamic finance

I attended an Islamic finance roundtable event in Lagos recently. It was organised by S&P Global Ratings, one of the three leading global credit rating agencies. There is increasing interest in Islamic finance in African countries, whether in the form of a sukuk (Islamic bond which makes returns from an underlying revenue-generating asset as opposed to scheduled and fixed interest payments in conventional bonds) or commercial banking products that avoid the payment of interest, which Muslims are barred from earning. African sukuk issuances have yet to impress, though; about US$2 billion(since 2014 mostly), according to S&P Global Ratings. (17 African sovereigns issued US$46 billion in conventional debt in 2015.)Over the past two years, annual global sukuk issuance was about US$65 billion on average and end-2016 Islamic finance industry assets are estimated at aboutUS$2.1 trillion. There has been a decline in the volume of global issuances lately, though; low crude oil prices are one reason why. Even so, there are significant prospects for more sukuk issuances by African sovereigns and sub-sovereigns. A sign that Islamic finance may eventually become mainstream is that corporate entities are beginning to seriously consider it as a source of financing. The Lagos-based Africa Finance Corporation (AFC) issued a 3-year US$150 million sukuk in early 2017, for instance.

Entrenched ways

Curiously, Muslims have not warmed up to Islamic banking as was probably envisaged, though. Most have gotten used to conventional banking, especially as they have over time devised personalized mechanisms for abiding by their religious principles while still availing themselves of conventional commercial banking services: For example, when paid interest on their savings account deposits, they would either ask that the interest portion be removed or alternatively, they maintain it as a permanent balance in their accounts. The motivation is rational. To forgo conventional banks for the few Islamic ones that have only recently begun to spring up in a few African countries could be costly. Conventional commercial banks have more heft to provide a more diversified bouquet of banking services than the still budding Islamic ones. To become more commonplace, Islamic banking professionals have to find ways to make their services appealing to non-Muslims. Patronage of an Islamic bank does not require that you believe in Islam. It is simply a type of banking that insists that if you must earn a return, it should be from actual assets and not just financial transactions. Call it ethical banking, if that is more palatable to your religious sensibilities. Such sentiments seem to have been overcome in the Islamic capital market sector, however. Non-Islamic entities and countries have issued sukuk, for instance. Still, Islamic law does underpin the industry.

Standardize now

A lack of standardization is becoming a problem, though. To be clear, Islam is clear on what the rules are or should be. Varied and unusually dynamic interpretations of sharia (Islamic law) on what is compliant or not have been problematic, however. The controversial case of Dana Gas, an Abu Dhabi-listed gas company, may be the crisis the industry needs to finally put things in order. To avoid parting with more cash than it agreed to, Dana Gas is seeking to restructure two sukuk issues worth US$700 million into more supposedly Islamic-compliant ones. The reason is obviously not religious but financial. It is the classic case of trying to use religion to escape fulfilling an obligation. Still, Dana Gas is simply latching on to what seems like a “dynamic” Sharia interpretation culture in Islamic finance. To be fair, prominent Islamic finance sharia advisors have been forceful about what a dangerous precedent the Dana Gas case would set if it wins the case it filed with an English court, which may not be heard before December 2017 (according to The Economist, a British newspaper), two months after the sukuk issues would have matured. Put simply, the problem is human, not religious. It is a classic case of an attempt to breach a contract after agreeing to its terms. Bear in mind the sukuk issues in question were issued some 10 years ago. That is a long time for anyone or entity to suddenly develop a phony sense of religiosity. There could not be a greater need for standardization. A global authority on Islamic finance needs to be instituted without delay, a point made at the S&P Global Ratings Lagos event (and in recent features by The Economist and African Bankermagazine).The Malaysian model, which is more liberal and advanced than the Middle Eastern variants, is touted as befitting. The current artificial ambiguity is a needless constraint.

Rafiq Raji