Africa's vast funding needs to drive Islamic finance industry's growth, Moody's says

Sovereigns are increasingly turning to Sharia-compliant capital market to raise debt

The Cairo skyline. Egypt and Morocco are expected to drive growth of the Islamic finance industry in North Africa. Reuters

Africa’s vast financing needs and growing interest of sovereigns in Sharia-compliant debt to bridge funding gaps will help drive the Islamic finance industry's growth on the continent, according to Moody’s Investors Service.

Sub-Saharan Africa accounts for about 16 per cent of the world's Muslim population yet Sharia-compliant bank assets in the region make up about 1 per cent of global Islamic banking assets, Moody’s said in a report released on Tuesday.

"We expect Africa's large Muslim population, low starting base and growing government interest in the sector to drive growth in Islamic banking assets in the continent," Mik Kabeya, assistant vice president, at Moody’s, said.

Governments in Africa – one of the last global frontiers of growth with a population of more than 1.2 billion – have increasingly looked to issue Sharia-compliant debt to shore up capital and meet their financing needs. Average annual sukuk issuance for Africa was negligible until 2012, but has averaged $433 million per year between 2013 to 2019, Moody’s said.

Expanding into Islamic finance would help African sovereigns diversify their funding sources and reduce funding gaps, as they face an exacerbated financial crisis because of the coronavirus pandemic, the rating agency said.

Sudan, South Africa, Nigeria and Senegal, all with major Muslim populations, are expected to lead Sub-Saharan Africa and boost their Sharia-compliant banking assets and raise funds through Islamic debt instruments. Existing and rapidly evolving regulatory and supervisory structures will underpin growth of the Islamic finance industry in these countries, Moody’s said.

Egypt and Morocco, the rating agency said, will lead growth in North Africa.

“Improved political confidence in Egypt and Morocco's stronger economic performance relative to regional peers, along with Nigeria's low banking penetration and populous markets will provide high structural demand for Islamic banking over the next decade,” Moody’s said.