The Gulf's Islamic banks are targeting Africa's opportunities

Islamic banking is expanding well beyond its traditional bases and Gulf players have recently set their sights on Africa's large Muslim population.

Large financial institutions are buying stakes in local banks and sukuk are being launched in a bid to expand this model of banking into this opportunity-rich region.

Saudi Arabia's Islamic Development Bank (IDB) is leading the way and its first port of call is Senegal, where the multilateral bank has established its main operation.

"Dakar is the natural choice to get a foothold into francophone sub-Saharan Africa and we plan to start with stakes in local banks there before considering other geographies," says Khaled Al Aboodi, IDB's CEO.

Regional links

The attraction of Senegal is its regional tie-up with the west African states currently operating under one central bank. The other countries involved are Benin, Burkina Faso, Cote d'Ivoire, Guinea Bissau, Mali, Niger and Togo.

"It makes business easier and straightforward as we get to enter several countries under one set of regulations," says Mr Al Aboodi.

The IDB is a multilateral development financing institution based in Jeddah, Saudi Arabia, with total assets worth $7bn. It was founded by the first conference of finance ministers of the Organisation of the Islamic Conference in 1973 and has been operational since 1975. There are 54 shareholding member states including Saudi Arabia, Libya, Egypt and Pakistan.

While other Islamic financial institutions have tentatively entered the African banking sector, few have devoted much time and energy to a region that previously offered little opportunity for return.

The IDB is aiming to set up vehicles aimed at developing the local private sector which holds rich promise, especially in the infrastructure sector.

Pull factors

Brandon Davies, the chairman of London-based Gatehouse Bank, explains that 80% of project finance and infrastructure can be conducted in accordance with sharia regulations, which is where the bulk of funds would be used in Africa. This makes Africa an ideal region in which to develop the industry.

Another bonus for Islamic financial houses looking to set up on the continent is the lack of competition as other more sophisticated financial products are still unavailable in many of Africa's banks. "In this context there is no need to steer current financial products towards sharia compliant ones, given the absence of more sophisticated financial tools in the first place," says Mr Davies.

Through its investment arm Tamweel Africa, which came into operation in 2010, the IDB is looking to set up banks in Mali and Benin. Mr Al Aboodi says that Benin "is our gateway to Nigeria". According to the CEO, Benin, which has strong ties to west Africa's most populous country, is the route through which the bank will eventually penetrate oil-rich Nigeria.

Tamweel makes a move

Tamweel Africa is a holding company with a capital of $50m and has bought the shares of three banks in west Africa owned by Dar Al-Maal Al-Islami (DMI). IDB holds 60% of the equity and Turkey's Asya Bank owns 40%, for which it paid $15m.

One of the benefits of Tamweel's partnership with Bank Asya is the access it now has to the Turkish bank's technical expertise. "We do not want to be involved in the day-to-day running of the banks, and Tamweel – with Bank Asya – will cover this area of the banking management," says Mr Al Aboodi. The CEO insists the Saudi stalwart is more efficient at managing the overall development of the industry across the continent while leaving the daily running of the banking process to Bank Asya.

"We plan to grow in other African countries too. We will provide technical and operational support to these African banks. In addition to this, we plan to help the growth of Turkish investment in the region," says Bank Asya CEO Cemil Özdemir.

As an Islamic bank, Bank Asya's chief aim is to grow in Muslim states. "It is much easier and more productive for us to grow in these countries," Mr Özdemir adds.

Plans in Africa for many Gulf banks, such as giant Gulf Finance House, include a foray into the Maghreb region. With Muslim populations in excess of 95%, Morocco, Algeria, Tunisia and Libya would appear to be obvious candidates from which an African Islamic finance banking hub would emerge. But bankers within the sector maintain it is a difficult task.

For Sameer Abdi, partner at Ernst & Young, the political implication associated to the tagging of the product has deterred banks for applying for licences. The word 'Islamic' in some places has become associated with political movements that governments want to dissociate themselves from. Things are changing, however, and in sub-Saharan Africa analysts note a growing trend among Muslim populations looking to reaffirm their religious identities through sharia-compliant trading.

IDB is also planning to launch a sukuk (Islamic bond) in one of the west African countries it is looking to enter in the first quarter of 2011 in a bid to accustom local investors to the principles of the product.

The market for sukuk is set to increase in size and investor base and one successful issue could spur on many more, according to local analysts. More than $800bn worth of infrastructure projects are expected to take place in the next five years alone in Africa and many could be funded by sukuk.

Traditionally Islamic banks have more deposits than they have assets given the number of sharia investors who want to put money into Islamic banks. In a conventional context that would be a problem because the industry is product poor and there would be insufficient business opportunities.

But with Africa in need of investments in mainstream sectors such as construction, the products already available can meet the demand of the growing number of African investors. The products already on offer, such as sukuk, are sufficiently attractive to borrowers and people making long-term investments in the energy and transport sectors.

Non-Muslim customers

Analysts looking at the future of sharia-compliant banking in Africa say it does not have to be confined to the Muslim community. In areas with smaller numbers of Muslims, such as southern Africa, investors can still benefit from this type of banking. Islamic banks could set up operations in those parts of Africa where the model of banking has proved to be attractive for ethical reasons as opposed to religious ones.

Some argue there is no ambition to go global with Islamic banking, while others say it does not have the capacity to do so anyway. But, with a half-billion strong market in its view, Islamic banking is already getting out of its comfort zone.

Talk of expanding in eastern Africa through banks in Uganda is next for Gulf players, which are looking at this niche market with renewed appetite and aim to benefit from the opportunities offered by the recently established East African Community's (EAC) common market.

The EAC protocol, signed up to by Burundi, Kenya, Rwanda, Tanzania and Uganda, will allow free movement of goods and services within the region and facilitate the entry of international players to the zone.

All this makes for fertile ground for one of the fastest-growing sectors in the banking world and, with all eyes focused on Africa, Islamic banking has set itself a new challenge early on in the race for the continent's new-found wealth: its middle class.