Islamic Banking in Africa Taking Off - Not Just For the Rich

This week's Economist article is actually a bit late to the party: Islamic banks having been working at various levels across Africa for a number years. Nonetheless, it's striking just how fast the sector is growing.

Another point the Economist article made (quoting Anouar Hassoune of Moody's) also struck me as a little odd: that Shariah-compliant instruments and products are a "luxury product". What he means (I think) is that Islamic banking tends to better in markets that have an established financial market infrastructure and appropriate enforcement mechanisms than in markets that have weaker markets and rule of law.

On one hand, you could say that would be true of any banking system, Shariah or not. On the other hand, this gets to a deeper idea worth pursuing: How well can Islamic banking and related products compete with existing banks in underserved markets - especially in countries or regions that are predominantly Muslim?

It's instructive to watch what's happening in Pakistan right now. Investors have been employing sukuks (similar to bonds) to underwrite a wide assortment of economic development projects, recently naming Dubai Islamic Bank and Standard Chartered Bank Pakistan to manage its first local currency sukuk. This follows a series of sukuk deals over the last three years that have helped attract significant foreign investment into the country.

Searching for promising opportunities, Islamic banks are stepping up investments in key beachhead markets in Africa - especially in regions that have long been dominated by Western Banks. If they are smart, they will also recognize that they could also capture substantial market share in consumer services and products, working niche markets that current banks serve poorly, or not at all. Islamic banks can serve a wide population - not just those at the top of the food chain. Flush with cash and able to move quickly, with attractive early markets, these banks are in an enviable position. Whether they fully realize the opportunity in front of them and whether their competitors can protect their market share are open questions.