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Islamic Finance
- according to Islamic law...no charging interest.
- lending needs to be backed by physical assets (good for project finance, and bonds....investing in infrastructure)
- Islamic bonds are called "sukuk"
- customers are drawn to the Islamic banks for cultural heritage reasons
- read more from wikipedia:
Where it might work in Africa:
Nigeria: with 70million Muslims and a booming banking sector
Trends in Islamic Finance:
Moody's credit agency estimates that although the total in 2007 was just $18 billion, there is potential for that number to grow to an amazing $230 billion, with almost 50% of that coming from the Muslim population in Africa.
Flows from the Gulf States (who are getting rich from high oil prices) to North Africa, where there are massive Muslim populations (100's of millions), and just a stones throw away. Also, the economies of Africa are growing fast due to the commodites bubble.
Sudan: only "sharia-compliant" banking is allowed in the North - and they have over 50% of all African Islamic banking today. It is interesting then, that in addition to the influx of Chinese capital (who doesn't care about human-rights abuses, nor about the US sanctions), we are also seeing an influx of money from the Arab states of the Middle East (who also care less about US-based sanctions). The combination of these two forces is making US efforts in the region less-than-effective. On the other hand, it is also spreading the responsibility around, and bringing money into an area deeply in need of investment.
Criticism of Islamic Banking
since the bankers can not charge interest, it is difficult to see how the banks can be as profitable as western banks. But without profits, it is more difficult to innovate (in light of the credit crisis of 2007, some people say thats a good thing).
Islamic banking is a "Luxury product" says Anouar Hassoune of Moody's "it tends to better in places with established banking systems" such as South Africa and Kenya.
In Africa as a whole, the countries laws may not be suitable to support Islamic Banking.
Islamic Banking and SWF's
In the Gulf States (GCC) (wikipedia) have been very active recently in setting up sovereign wealth funds (SWF's). One interesting thing to note is that in many of these countries, there is also a tradition of Islamic banking, where there are religious rules limiting banks ability to charge or earn interest. But, with this heritage of Islamic banking, I find strange is that amid the recent credit crisis of 2007-08, we saw many of these SWFs come to the US and purchase large equity positions in Western Banking institutions such as CITI Bank. Is this a conflict of interest with their Islamic banking cultural heritage? If the banks are doing it just for the additional potential return on investment, then you might argue "yes". I'm not an expert on Islamic banking by any stretch of the imagination, but, to me these investments seem to be more "strategic" in their nature (i.e. interest is not the primary goal). Perhaps in light of this realization, the western regulators may be right in worry about the intentions of these (less-than-transparent) massive funds in control of the Gulf States.
On the other hand;
For Africa: project finance and bonds financed by Islamic finance from the Gulf States may be just what the doctor ordered. This matches up Africas desperate need for infrastructure investment, and their desperate lack of funds. Mix this with the fact that Islamic finance has rules about the requirement to back up loans with physical assets, this might be a perfect match (and a good outlet for excess Gulf investments and sovereign wealth funds). Examples: invest in tourism, hotels, roads, airports, etc. See more in our discussion on Islamic finance
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