Religion and economics: the development of Islamic banking in sub-Saharan Africa

Mosque in Nairobi – © Photographer: Vladimir Kindrachov | Agency: Dreamstime.com.

The bank is called the First Community Bank Limited, is a joint venture between Kenyan and Kuwaiti nationals and has a paid-up share capital of Sh 1 billion. Furthermore, it plans to open new branches in Tanzania and Uganda, which might trigger major competition among other players in the local banking industry, as well as in the sub-Saharan one, who have already introduced selected products from Islamic banking in the global financial sector. [1]

The licensing of the bank by the Kenyan Treasury and the Central Bank of Kenya (CBK) is the result of recent amendments to the local Banking Act, allowing banks to widen their services. Kenya’s decision to legalize the service is a welcome move for Muslims, who have requested it for a long time. Yet, it should be noted that leading banks had already taken advantage of the amendments to introduce Islamic banking products. Thus, already last year, the Kenya Commercial Bank introduced an Islamic banking service to specifically address the needs of the Muslim community. Some of the specifications that come with this service include interest-free loans. Barclays Bank of Kenya also introduced the La Riba current account to serve the Muslim community and compete effectively with the Kenya Commercial Bank. Included in the catalogue of the Islamic banking products are interest-free banking services, mortgages and car financing, as well as health financing products. But, with large numbers of Muslims in Kenya still not using the services of those banks, the market niche of Islamic banking is still considered to be untapped and open for competition. [2]

Thus far, other banks in the country have also shown interest in operating Islamic banking. The Gulf African Bank was due to open in April 2007. A consortium of investors, including Bank Muscat Unit, the Dubai government investment agency Istithmar, Saudi investors and the Free Trade Area Bank were the main shareholders of this bank. Gulf African Bank was due to start with $25 million in capital so that it could expand to other African countries where Islamic banking is still underdeveloped. In addition, the Dubai Bank applied recently for permission to fully operate as an Islamic bank, even though the Treasury and the CBK are yet to give a verdict. Nevertheless, the bank has begun offering a wide range of Islamic products. [3]

In this sense, Kenya is seen by Gulf banks and financial institutions as the gateway to East and Central Africa. This might be true even in the case of neighboring Southern Sudan. On 19 April 2007 – only a month before the licensing of the first Islamic bank in Kenya – Samson Kwaje, spokesperson for the semi-autonomous Southern Sudan government, announced that banks operating in Southern Sudan using Islamic banking systems have to either convert to conventional banking or leave this part of Sudan. Conversion means paying interest on deposits and charging interest on loans to customers. He based his position on Southern Sudan’s interpretation of the north-south peace agreement signed in January 2005. According to this agreement, the south will have its own conventional banking system, in parallel with the Islamic banking system operating in the mainly Muslim north. In spite of the ban on Islamic banking, which sparked an outcry from the Muslim community, there are nowadays three conventional commercial banks active in the south, as well as at least four Islamic banks – Umdurman National Bank, Faisal Islamic Bank, Bank of Khartoum and an agricultural bank. Those four banks were given time to decide whether they would convert to conventional banking or leave the south, and in the meantime continue to provide Islamic banking services to the local Muslim community. [4]

The growth of Islamic banking in present-day Kenya should be seen against the background of the stepping up of the ‘war on terror’ in Kenya, which is closely linked to the developments in the Somali crisis, and to the Kenyan government’s strong wish to avert a spillage of radical Islamism from Somalia into Kenya. Thus, Kenyan Muslims are regarding themselves as being much more discriminated against and harassed by the Kenyan government than previously. Furthermore, they seem to perceive the Kenyan government as a collaborator with the US against themselves, all of whom the US regards as potential terrorists. Since it is an election year in Kenya, and since the current Kenyan government has every reason to be afraid that the Muslims will try to topple it in the elections, it is trying to come to terms with them and to reconcile with them, as far as possible. In light of this delicate situation, the licensing of the first Islamic bank is an act destined mainly to show the Muslims that the Kenyan government does not only neglect or discriminate against them, as they perceive it does, but also tries to respond to their needs. [5]

The growth of Islamic banking in Kenya should also be seen against the background of the dramatic growth in acceptability that Islamic banking has evidenced globally. Its main distinction is that it offers fixed-profit lending, which shields borrowers in times of rising interest rates. In addition, in adverse circumstances, where conventional banks levy penalties and penal interest on default by borrowers, Islamic banks work in partnership with borrowers to realize repayment of loans. Depositors in Islamic banks also have a potential upside to returns on their deposits in case the underlying assets perform well, because the banks share profits with depositors. That is why, according to a report written by Kenyan financial experts entitled A Growth Model of Islamic Banking, as of 2006, there were “about 270 Islamic banks around the world, including subsidiaries of conventional banks, of which they together held assets worth more than $265 billion”. The potential growth of the Islamic banking concept, especially among the approximately 1.3 billion Muslims worldwide, has recently made major banks, such as HSBC and UBS, use Islamic banking systems in their branches. [6]

However, Kenya is not the only gateway to the African continent. On 19 May 2007, ABSA Islamic Bank of South Africa announced that it “would use the ABSA group’s expertise and its expansion into Africa to tap into Africa’s populous Islamic banking market”. ABSA Islamic Bank is the youngest of the Islamic banks operating in South Africa. It began offering Islamic banking services at five branches in September 2006. Although it controls a relatively small share of the market, it still hopes to wrestle more of the market from its rivals. So ABSA Islamic Bank, which is offering mainly retail products, is due to launch its corporate and business bank offering in South Africa this month (July 2007). So, if it ever finds that it cannot compete with its rivals, it seems to have found a new market among the ever-growing Muslim population in sub-Saharan Africa. [7]

To sum up, it seems that the growth of Islamic banking in sub-Saharan Africa reflects the dramatic growth in global acceptability of this system, and the wish of the various secular African regimes to come to terms with their considerable Muslim communities and to try to reconcile with them. However, much more importantly, it also reflects the ever-growing conversion of black Africans to Islam, and, thus, the need for a religious banking system that will respond to their needs, since many of them are still unbanked. Furthermore, the penetration of the concept of Islamic banking into the heart of Africa follows in the footsteps of the penetration of Islam into Africa in the nineteenth and twentieth centuries, whereby Kenya has served as a gateway into East and Central Africa, and South Africa has served as a gateway into south-eastern and south-western Africa.

Moshe Terdman

 Notes

[1] See online at http://allafrica.com/stories/200705310054.html; http://bdafrica.com/index.php?option=com_content&task=view&id=1259&Itemid=4342.

[2] See online at http://bdafrica.com/index.php?option=com_content&task=view&id=1259&Itemid=4342; http://allafrica.com/stories/200705310054.html.

[3] See online at http://bdafrica.com/index.php?option=com_content&task=view&id=1259&Itemid=4342; http://investhalal.blogspot.com/search/label/commercial%20bank; http://abdullahharon.blogspot.com/search/label/Kenya; http://www.dubaichronicle.com/2007/02/gulfarab-consortium-to-open-islamic.html.

[4] See online at http://bdafrica.com/index.php?option=com_content&task=view&id=1259&Itemid=4342; http://www.sudan.net/news/posted/14536.html; http://sudanforum.net/showthread.php?t=4364.

[5] See online at http://www.e-prism.org/images/islam_in_africa_newsletter-_no2_vol_2__april_2007.pdf.

[6] See online at http://allafrica.com/stories/200705310054.html; http://bdafrica.com/index.php?option=com_content&task=view&id=1259&Itemid=4342.

[7] See online at http://allafrica.com/stories/200705210828.html; http://investhalal.blogspot.com/2006/09/south-african-bank-begins-offering.html.