Africa: - Islamic Finance News

August 2011
Africa:
The sleeping
giant
Features
Reviving lost
trade
Asset
management in
South Africa
Banking on
microfinance
African
emergence

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The beast stirs
It is impossible to describe the contrasts and complexities of the African political,
economic and social situation within the constraints of these pages. The
African continent has long remained an underachiever in terms of its economic
potential, and years of constant fi ghting and perhaps to some degree neglect,
has ravaged its people. However, as the world turns, so do peoples’ perception,
and these days Africa is seen as a diamond in the rough, with growing optimism
surrounding its fi scal and political future.
Recent political upheavals, mostly in the North; affecting Egypt, Tunisia, Libya
and Sudan, could work both ways in affecting international interest in the
continent’s investment landscape, and for now economic pundits choose to be
positive about its growth prospects. Islamic fi nance players have also begun
to turn their attention towards Africa, seeing the vast potential in areas such as
microfi nance and trade fi nance.
Long-term involvement and backing from ‘AAA’-rated fi nancial institutions
such as the Islamic Development Bank (IDB) via the Special Program for the
Development of Africa (SPDA), in which the IDB has committed US$4 billion,
are expected to elevate the continent’s social and economic standing and are
aimed at providing a platform to boost its growth.
At the recent SPDA meeting, the IDB vice president of operations, Birama
Boubacar Sidibe, highlighted the significant positive elements seen across
Africa: including strong economic growth, rapid progress of the Millennium
Development Goals leading to a drop in poverty across many African countries,
increased investments in the private sector, and a high return on investments;
as well as providing a robust climate for market-oriented, pro-poor reforms
which has led to prudent economic policies. “The IDB has acknowledged that
the situation in Africa is not what we had envisioned, the urgent need to provide
much needed resources and the participation of the member countries to help
sustain and further develop the growth of the African continent is a major factor
for us and we are here to discuss ways to bolster our relationships and share
knowledge and ideas,” he stated.
In this issue of IFN Supplements, we traverse the vast continent of Africa and
explore the opportunities that lie ahead for Islamic fi nance in the region. From
Takaful to investment prospects and regulatory updates, we endeavor to reveal
industry perception towards the region. Indeed, many see Africa as the next
Islamic fi nance haven, considering the growing saturation of the GCC and
Asian markets, and a general lackluster response in North America and Europe,
excluding the UK. Africa, they suggest, is the sleeping giant which when awoken
could allow the Islamic fi nance industry to achieve its full potential.
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August 2011
1

CONTENTS
TS
COVER STORY
4 The sleeping giant
Development, trade, labor movement, and an influx
of investors are quickly boosting the resource-rich
African economy. How high is Islamic fi nance on the
agenda of banks and fi nancial institutions alike and
what are the prospects for this sector?
FEATURES
8 Reviving lost trade
Africa, a thriving trade destination for the Middle
East, Europe, India and China up until the 19 th
century, is once more on the brink of a trade fl urry
after decades of dormancy.
10 Banking on microfinance
At present, over 410 million people in sub-Saharan
Africa are living below the poverty line. Could
Islamic microfi nance be the panacea for millions of
Africa’s poor?
11 Asset management in South Africa
Islamic fi nance has seen exponential growth in
Africa, particularly in the North African region, and
of late to the west and east of Africa as well. Africa
is home to about 412 million Muslims with a high
concentration focused in the regions mentioned
above.
13 African emergence
The African Takaful market is gearing itself up as
an important future market in the Takaful arena.
SCOTT WEBER turns his gaze towards the latest
incumbents in what is proving to be Takaful’s next
frontier.
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2 August 2011

COVER STORY
The sleeping giant
Development, trade, labor movement, and an influx of investors are
quickly boosting the resource-rich African economy. How high is
Islamic finance on the agenda of banks and financial institutions alike
and what are the prospects for this sector? NAZNEEN HALIM explores.
The birthplace of modern man, Africa has long remained an
exotic and untamed enigma. However these days, it is not
adventurous explorers who are interested in mapping this
rich and diverse continent; but investors, keen to explore the
untapped fi scal potential of the resource-rich, second most
populous continent in the world.
Decades of civil unrest, tribal clashes, and political and economic
turmoil has left Africa muddled in a morass of troubles. Despite
being home to the world’s most desirable commodities and
natural resources such as diamonds, iron, gold and of course
oil, Africa has not been able to free itself from the shackles of
poverty and remains stuck in the rut of economic stagnation.
However, things are expected to turn around for this continent
of 1 billion people. Economic pundits are ready to place their
bets on this emerging market, and investors are ready to
venture into uncharted territory.
Over the last 10 years, trade between African countries and
the rest of the world has grown signifi cantly; charting a 170%
increase in trade with the GCC, and 45% growth with China and
India; the world’s fastest growing economies. Chinese investors
have expressed much interest in Africa, and are already
heavily invested in manufacturing and infrastructure projects in
countries such as Sudan and Ghana. In places such as Ethiopia
and Ghana, over 60% of Chinese investments in the countries
constitute manufacturing. And the Chinese government is
keen to see these numbers grow. China’s push for industrial
restructuring domestically has created opportunities in Africa,
and the government, seeing this opportunity, has created
measures aimed at facilitating access to credit and simplifying
procedures for Chinese fi rms looking to invest overseas.
And with China keeping ahead of the global economic trend
these days, other countries are likely to follow suit. This is also
4 August 2011

COVER STORY
expected of the GCC, who have had a trade history with Africa,
which has recently been strengthened by the involvement of
the Saudi-based Islamic Development Bank’s efforts to aid its
African member countries, and growing interest from Middle
East investors looking to diversify their investments. Afaq
Khan, CEO of Standard Chartered Saadiq, is confi dent of the
resurrection of trade ties between the Middle East and Africa:
“The Middle East already has historical trade links with Africa
due to geographical proximity. They have done business with
each other for decades, so it is natural for them to go to Africa.
It is a question of how easy and attractive it will be for foreign
investors to do business there.”
Strengthening trade ties with the GCC, a growing Muslim
population, the need to fi nance large-scale infrastructure
and manufacturing projects, as well as a large unbanked
population, all provide a robust platform for the introduction of
Islamic banking to Africa.
The Middle East has done
business with Africa for
decades, so it is natural for them
to go there. It is a question of how
easy and attractive it will be for
foreign investors to do
business
Status Quo
Islamic banking has its roots in Egypt, one of Africa’s most
affl uent Arab countries. Having pioneered modern Islamic
banking in the 1960s, Egypt’s Islamic banking sector has not
had the chance to reach its fullest potential due to political
intervention and a general air of scepticism surrounding the
industry. Nevertheless, the country is already home to major
players such as Faisal Islamic Bank and Al Baraka Egypt
Bank, as well as Abu Dhabi Islamic Bank (ADIB), which took
the acquisition route to gain a foothold in Egypt, via its 51%
acquisition of the National Development Bank of Egypt (NBD).
Despite the country’s relatively slow progress in the sector and
an uncertain market sentiment due to recent political upheavals,
the Egypt-based unit of ADIB reported positive growth for the
first quarter of 2011 for its Islamic banking business; charting a
growth rate of 13.72% amounting to EGP2.61 billion (US$439.18
million). However, the bank saw a 14.9% decline in total assets at
EGP10.21 billion (US$1.71 billion) as at March 2011. Despite its
significant overall losses, the bank is optimistic about growing its
retail customer base and high-end banking products to attract new
consumer segments within the Egyptian market.
Other North African countries such as Sudan are also seasoned
players in Islamic fi nance, with the country’s major Islamic
banking players such as the Islamic Bank of Khartoum looking
to expand its customer base to East Africa in the medium-term,
beginning with Kenya. The Islamic Bank of Khartoum was
privatized in 2002, and is now 60% owned by Dubai Islamic
Bank. However, on the Sukuk front, Sudan has not fared too
well, with its recent Sukuk sale in February being severely
undersubscribed at SDG600 million (US$224.5 million) despite
being a SDG863 million (US$323.03 million) issue. The Sukuk,
issued by the government of Sudan and backed by its stake in
the Khartoum Refinery Company (a joint venture with China
National Petroleum Corporation), saw a 12.5% buy in by
overseas investors.
However, determined to bounce back from last year’s Sukuk
disappointment, the country is due to issue a total of SDG3.6
billion (US$1.34 billion) in Sukuk this year, beginning with a
SDG765 million (US$286.35 million) issuance in September.
According to industry players, demand for Sukuk in Sudan has
increased since its failure to launch in February this year and
is primarily from fi rms and banks. The Sukuk are expected to
yield a 15% return; 3-5% higher than traditionally afforded by
GCC banks.
The country, which recently saw a separation between the
Muslim-majority north and Christian-dominated south, currently
relies heavily on the domestic debt market after being snubbed
by international markets due to US-imposed sanctions.
However, the growing number of Arab Banks in North Sudan,
such as Qatar National Bank and Faisal Islamic Bank, bodes
well for its Islamic banking sector, and is expected to revive the
country’s struggling economy.
Morocco also began introducing Islamic banking products in
2007 under the “Alternative Financial Products” banner. The
move, which was initiated by the Moroccan Central Bank,
allows certain types of Islamic fi nancial products, and is said to
be in response to growing consumer demand.
Non-Arab dominated countries in the sub-Saharan Africa are
also beginning to see the flourishing of the Islamic banking and
finance sector, with countries such as Kenya, Tanzania, Uganda
and Nigeria ramping up their Islamic banking efforts with the
introduction of interest-free banking laws in Nigeria, a significant
growth in Islamic banking and Takaful institutions in Kenya, a
growing consumer demand for Shariah compliant products
in Tanzania, as well as Uganda’s recent pledge to set up its
first Islamic bank. Amar Meher, a senior associate at law firm
Vinson & Elkins, is optimistic on the growth of these jurisdictions:
“Countries such as Kenya, Nigeria, Egypt and South Africa are
visibly increasing their commitment to growing their respective
Islamic banking and investment space, and are starting to see
an influx of investments from Asia including the Middle East.”
Kenya began introducing Islamic banking in 2008 with the
establishment of Kenya Commercial Bank’s Amana Islamic
arm. The subsequent establishment of Gulf African Bank also
proved successful, contributing 1% to the banking sector’s
net assets. Since then, fi ve other conventional banks have
begun introducing Islamic banking products in the country. The
amendment to the Banking Act by the Central Bank of Kenya
in May 2010 is expected to further boost the country’s Islamic
banking industry.
August 2011 5

COVER STORY
Khan is confi dent of the growth potential in sub-Saharan Africa:
“I believe the potential is great, due to its large population,
growing economies and improved regulations. The Islamic
banking industry is also looking for new markets, so everything
is aligning well. Countries such as Nigeria and Tanzania have
expressed much interest, with Nigeria recently incorporating
the Non-interest Banking Law, and Uganda announcing plans
to set up an Islamic bank. There are all these things happening
across the board, so I think there is a good opportunity. Islamic
investors are looking for new growth markets, and as the
regulations come in place I see great potential.”
Amman Muhammad, the managing director of Absa Islamic
Bank in South Africa, believes that the sub-Saharan economies
provide a perfect petri dish for the induction of Islamic banking,
mainly due to the sheer volume of Muslims: “Countries in west
Africa such as Gambia, Guinea, Mauritania, Niger and Senegal
all have Muslim populations above 90%, and in East Africa
[countries] such as Comores, Djibouti and Somalia have similar
numbers. The countries in Africa that will fare best are naturally
those with the largest Muslim populations or those with the most
affl uent Muslim populations. In all North African countries the
Muslim population is above 90%, with the exception of Sudan
at 70%. In South Africa, although the Muslim population is only
2%, the level of affl uence of this population makes Islamic
banking a viable proposition.
“In 2010, the economic growth rates of the Central Africa
Republic, Botswana and Nigeria were well above 8%, with
Zambia and Mozambique above 7%,” he added.
South Africa, one of the most affl uent African states, has
a Muslim population of 1.3 million, making up 2.4% of the
population. Despite this, the country remains a strong contender
in the sector, and is keen on achieving hub status. Fifty eight
percent of the country’s Muslim population currently subscribes
to conventional banking, and the sector is ready to tap into this
market via an increase in education and awareness to gain
access to high net-worth accounts. Muhammad revealed: “Both
South Africa and Nigeria are keen to become hubs for Islamic
banking on the continent and are fast-tracking amendments to
conventional fi nancial legislation. The consistent high growth of
Islamic banking in South Africa is an indicator of the potential
for Islamic banking growth on the continent.”
Risky Business?
“There is always a country risk that you have to take into
consideration; and it is more substantial in that part of the
world. However, it still depends on the governments in question
and how they will play it. Political risk is defi nitely something
you would have to take into consideration, but it may work
both ways; could be for or against the industry in that area.
For instance, what impact would the change in regime have in
Egypt; would they be for or against it?” said Meher.
He added: “This mainly depends on the demographic of the
country in question. For example, would Islamic fi nance have
a higher success rate in a country like Zimbabwe instead of
Nigeria? It would be natural to say that Nigeria would have
a higher success rate, because they have a larger Muslim
population and have always demonstrated an intention to
introduce Islamic banking. Whereas Zimbabwe is obviously a
Christian/Catholic-driven society, which may not necessarily
entertain it as the Nigerians would. So the demographic there
is different.”
Sudan, for instance, has seen its economy suffer from political
turmoil; with foreign investors shying away from the country’s
economy despite its vast potential. Sukuk sales have previously
been withdrawn, with issuers citing political uncertainty as one of
the main reasons. A lack of ratings and investment grade papers
have also created cause for scepticism within the international
investment community. Prior to the separation, industry players
expressed trepidation regarding the Sudanese economy due
to its low level of transparency and diffi culty in gaining reliable
and useful information to assess the macroeconomic, and the
external and public debt situation.
Moving Forward
The sectors expected to thrive in Africa’s vast and diverse
economy include Islamic microfi nancing, trade and project
fi nancing and capital market issuances as well as agricultural
investments.
“An estimated 45-50% of the African population are Muslim,
standing between 400 and 500 million people. As a faithbased
offering, Islamic banking has the potential to appeal
to those who are currently unbanked and to those who are
under-banked, which is due to a variety of reasons. The key
reason being an aversion to conventional banking and only in
certain circumstances taking up conventional banking products
because of the lack of suitable compliant alternatives. There
are also many affl uent Muslim traders, which means that
potential Islamic banking customers fall into low, middle and
6 August 2011

COVER STORY
high income bands. Islamic banking in Africa has enormous
potential to increase the percentage of Africans participating in
the formal banking system,” said Muhammad.
“There is enormous potential in the areas of infrastructure
development and in manufacturing. Africa has an estimated
300 million hectares of arable land, only a fraction of which is
currently being used for farming. Mineral resources continue
to play an important economic role and some African countries
also have rich untapped oil resources. Our experience in
Tanzania also shows us that Muslim customers respond well to
an offering that speaks to their faith. There is generally a high
demand for microfi nancing products so this would be a popular
offering, provided that suitable Shariah compliant structures
are utilized to deliver this type of funding,” he added.
Meher concurs, stating: “The potential for microfi nance has
a signifi cant role in Africa - particularly in Islamic fi nance.
Two big areas for me are sovereign Sukuk issuances and
the development of more socially conscious investments;
particularly microfi nance in Africa. I do not see much potential
in lending with commodity Murabahah and Ijarah, but sovereign
Sukuk issuances, microfi nance and trade fi nance are defi nitely
a strong growth area in that part of the world.”
The country, which recently
saw a separation between
the Muslim-majority north and
Christian-dominated south,
currently relies heavily on the
domestic debt market after being
snubbed by international
markets
Khan is also confi dent of the corporate banking prospects
Africa has to offer: “I think it will start with corporate banking;
driven by trade fi nance. Once there is critical mass and enough
product education, the likes of Kenya, Tanzania, and Nigeria
will look to the retail market. It will start traditionally; similar to
Malaysia and Indonesia, and will follow the same pattern. First
trade, then retail, then capital markets.
“Some countries in Africa have pledged to issue Sukuk in
the short to medium-term, but a sovereign Sukuk issuance is
different to having a Sukuk market. The market will take time to
develop, but a strong statement of support by any sovereign is
a positive sign, and shows that the lawmakers and government
are serious about Islamic banking. The local currency Sukuk
market will develop based on the conventional local capital
market. Without a local currency capital market, it is diffi cult
to develop a local currency Sukuk market. You need capital
market people and investors who can understand the risks, as
well as proper systems put in place; all these elements have
to exist.”
In terms of regulatory and tax updates, African countries seem
to be on the right track with some nations such as Nigeria
making serious commitments by incorporating non-interest
banking into its fi nancial system. However, as demonstrated in
many jurisdictions across the globe, desire itself is not suffi cient
in guaranteeing the success of a country’s Islamic capital
market. “Similar to other jurisdictions, these jurisdictions would
have to consider the regulatory hurdles unique to the countries
and whether or not [they are] willing to overcome those hurdles.
So… if they have expressed an intention and desire, like
most other countries, are they willing to make the necessary
changes to facilitate the industry? And each of these will be
bespoke to the country in question. From my understanding,
African countries all share similar legal systems, but they will
defi nitely have to revisit those and see whether or not [Islamic
banking] works from their country’s perspective,” said Meher.
Double-digit growth
“Muslim customers in Africa have shown a strong preference
for the Islamic brand, even paying a premium for the products
offered by Islamic banks. The regional industry has shown
double-digit growth rates although from a relatively low absolute
base,” said Khalid Howladar, the head of Islamic Financial
Institutions at Moody’s.
Meher is excited about Africa’s potential contribution to the
Islamic fi nance industry as a whole: “Africa is a sleeping giant,
in the sense that people have always looked to the GCC and
Asia for development, and there was a period when people
were looking at North America and Europe, but for some
reason, people have overlooked Africa where the potential
in the immediate-term is enormous. Africa has the right
ingredients; Islamic fi nance offers the right product areas, and
it is just dependent on the countries in question whether or not
they decide to develop the industry, which involves revisiting
the legal and regulatory regimes and introducing Islamic
institutions. Hopefully Africa won’t be one to disappoint. We
as market participants have been watching Africa very closely;
particularly those based in the GCC, due to geographical
proximity.”
Khan also affi rmed that the Islamic banking community is keen
on the continent: “Islamic investors are on the lookout for new
markets, growth markets, diversifi cation, and good returns from
capital investments. The Islamic industry generally prefers to
make investments and understand the relationship and credit,
as opposed to investing based on ratings. The primary focus
of the bank is the business model and understanding the
management team in order to do business.”
With proper regulations, increased transparency, education,
and an objective, non-political perspective of the Shariah
compliant sector, Islamic banking in Africa has the potential
to thrive. Increased interest from Gulf investors in terms of
agricultural land acquisitions and the mergers and acquisitions
of fi nancial institutions, as well as a growing Asian investor base,
particularly in manufacturing and project fi nance, is expected to
grow the African economy signifi cantly. As it stands, Africa has
everything to gain and nothing to lose by growing its Islamic
banking sector.
August 2011 7

FEATURE
Reviving lost trade
Africa, a thriving trade destination for the Middle East, Europe, India
and China up until the 19 th century, is once more on the brink of a
trade flurry after decades of dormancy. NAZNEEN HALIM examines the
prospects for Islamic trade and project financing in the continent, and
the initiatives already in place.
To date, the Islamic Development Bank (IDB) has provided up
to US$6 billion in fi nancing to Africa; out of which US$4.3 billion
was allocated to fi nance development projects and US$1.7
billion to fund trade. The IDB has recently reiterated its pledge
to aid in the development of the African economy, in particular
its member countries, and is actively encouraging trade and
project fi nance activities, especially in the agricultural sector.
Industry players are also optimistic about the future of these
two sectors in Africa, considering positive growth patterns and
a signifi cant increase in bilateral trade between Africa and
emerging economies; particularly China and India. Between
2000 and 2009 Africa’s trade with the GCC grew by 170%,
whilst bilateral trade with China reached US$115 billion in 2010
and trade with India saw a 45.5% increase to US$13.8 billion
in 2009.
Set against the cacophonous background of the African
socioeconomic landscape, Islamic trade and project fi nancing
are expected to thrive; capitalizing on untapped opportunities
in construction and infrastructure development including roads,
highways, and power plants, as well as manufacturing. Backed
by the IDB, trade fi nancing in Africa is also expected to kick off
as trade between OIC member African countries increases and
more trade programs and corridors are developed.
Amman Muhammad, the managing director of Absa Islamic
Bank in South Africa, believes that the growth opportunities in
8 August 2011

FEATURE
these sectors are promising: “Based on the attention that Islamic
project and trade fi nance are currently receiving the prospects
are exciting, provided the appropriate vehicles are available
to support this development. There is enormous potential in
the areas of infrastructure development and in manufacturing.
Africa has an estimated 300 million hectares of arable land,
and only a fraction is currently being used for farming. Mineral
resources continue to play an important economic role, and
some African countries also have rich untapped oil resources.
The Islamic Development Bank also aims to make agriculture
one of its main areas of focus in Africa, stating: “Considering
that poverty in the majority of member countries is a rural
phenomenon, investment in the agricultural sector, which the
bulk of the population depends on for its livelihood, is an obvious
target for any poverty reduction program. It is imperative that
the Bank’s assistance in agriculture is targeted in high valueadded
sub-sectors such as agro-processing, irrigation and
crop development, marketing and storage facilities, as well as
micro-credit schemes.
The sheer size and volume
of the continent affords
abundant opportunities to
investors
Agro-processing is one area that has a high value-addition,
especially in Africa, and therefore will have a greater impact on
improving the living conditions of the most vulnerable groups
in society.”
Amar Meher, senior associate at Vinson & Elkins, also believes
that the agricultural sector in Africa will grow as demand for
arable land increases among GCC investors: “At the moment,
GCC investors are most interested in acquiring agricultural
land for growing fruits and vegetables to bring back to their
respective home countries; mostly on a micro-level. GCC
investors look to Africa with the view of managing infl ation
through the acquisition of agricultural land. Crop prices have
gone up, whilst supply has decreased, and it becomes quite
hard to manage as a supplier, because your production costs
have gone up. There is also the issue of managing the price
caps that have been imposed by GCC countries during certain
periods in a year. The acquisition of agricultural land in Africa
allows them to manage infl ation on a micro-level.”
Affi liates of the IDB, such as the Islamic Corporation for the
Development of the Private Sector (ICD), are also actively
increasing their focus on Africa. Khaled Al-Aboodi, CEO of ICD,
revealed: “At present our businesses are mainly in the Middle
East and North Africa region. We want to move to sub-Saharan
Africa, East Asia and Central Asia.” Among the ICD’s plans
for sub-Saharan Africa are schemes to set up non-banking
fi nancial institutions to fi nance projects as well as support the
housing sector, and establish special economic zones. “We
also want to prepare projects to be bankable,” he added. The
ICD has spent more than US$1.6 billion on various projects
and helped mobilize funds from other fi nanciers for projects
worth US$5 billion.
Tunisia, which has been elected as a representing board
member of the IDB’s North Africa Group for the 2011-2014
period, is also expected to gain from its affi liation with the IDB;
having recently received two fi nancing facilities worth TND50
million (US$36 million) and TND30 million (US$21.62 million)
for the fi nancing of integrated agricultural development projects
and to support the Tunisian Solidarity Bank’s micro-credit
program.
With the implementation of proper regulations and the creation
of a level playing fi eld for tax, industry players are confi dent
of the growth of the continent’s Islamic project and trade
fi nancing sectors, as well as an infl ux of Islamic investors;
particularly from the GCC. The sheer size and volume of the
continent affords abundant opportunities to investors, whilst its
people have much to gain from infrastructure and development
projects.
9 August 2011

FEATURE
Banking on microfinance
At present, over 410 million people in sub-Saharan Africa are living
below the poverty line. Could Islamic microfinance be the panacea for
millions of Africa’s poor? NAZNEEN HALIM explores.
According to the Multidimensional Poverty Index, produced
by the United Nations Development Program (UNDP) and the
Oxford Poverty & Human Development Initiative, 24 out of the
25 poorest countries in the world are located in Africa. The
continent’s fragile socio-economic situation, despite seeing
some improvement over the last decade, is still dire.
High on the agenda of the Islamic Development Bank (IDB)
and Islamic Financial Services Board’s Ten-year Framework
for the development of the Islamic fi nance industry is poverty
alleviation through Islamic microfi nance, particularly among the
IDB member countries; which at present rank among the lowest
in the UNDP’s Human Development Index for 120 developing
countries. What is needed to move the African economy
forward, according to economists, is a substantial increase in
real per capita GDP and improved social conditions.
Industry players believe that Islamic microfi nance could
play a signifi cant role in growing and developing the sub-
Saharan African economies due to its low cost and ability
to entice small entrepreneurs and the large unbanked
African population to fully participate in the economy. Based
purely on volume, Africa’s Islamic microfi nance initiatives
have incredible potential. Benjamin Nkungi, CEO of the
Association of Microfi nance Institutions, stated: “The next big
thing we are likely to see is the establishment of exclusive
Islamic microfi nance institutions across sub-Saharan Africa
as a result of outstanding grassroots demand.” The impact
across Africa, he says, is expected to be huge; creating a
signifi cant supply of liquidity based on retail-based deposits
and investments in Shariah compliant deposits and premiums
among corporate and institutional investors.
Power to the people
Microfi nance is not an alien concept to Africa, with its main
client base comprising of organized women groups. The most
popular microfi nance model, according to the IDB report, is the
Village Bank model; which involves an implementing agency
that establishes a village bank with around fi fty members, and
provides external capital for onward fi nancing to individual
members. Individual loans are repaid at weekly intervals over
four months, at which time the village bank returns the principal
with interest and profi ts to the implementing agency.
As a village bank accumulates suffi cient capital internally,
it eventually becomes an autonomous and self-sustaining
institution. However, unlike Islamic microfi nance, the interest
rates for conventional microfi nance loans in Africa at present
are sky-high; sometimes even touching 20%, and predatory
lenders are plentiful.
Recognizing the potential of microfi nance, the Central Bank of
Sudan in 2010 called for a minimum allocation of 12% of every
bank’s portfolio to microfi nance, and for the establishment
of specialized units to develop the industry. Banks are also
required to submit annual reports to the central bank on their
microfi nance activities, and to create public awareness and
education initiatives.
Based purely on
volume, Africa’s Islamic
microfinance initiatives
have incredible potential
Among the fi rst Islamic microfi nance institutions in sub-Saharan
Africa was Azaouad Finances, resulting from a development
project by the German Technical Cooperation and German
Financial Cooperation after the eruption of fi erce confl icts in the
three poorest northern regions of Mali; spanning Timbuktu,Gao
and Kidal, beginning in 1990 and ending in 1995. The aim of
the project was to provide fi nancial services to all the tribes
in Northern Mali, and based on general consensus, it was
decided that an Islamic bank would be most appealing to the
areas’ tribes.
Since then, the Islamic microfi nance scene in Africa has been
rather muted, but a revival is due very soon. Takaful companies
such as Takaful Insurance of Africa have begun introducing
microfi nance-linked products such as Takaful micro insurance,
while Kenya’s Equity Bank recently introduced a Shariah
compliant microfi nance lending product in the country. Other
institutions such as Ghana Islamic Microfi nance (GIM) aim to
capitalize on the growing demand for microfi nance products
in Africa, and will offer Shariah compliant microfi nance
transactions to Muslims and non-Muslims alike. According to
the bank, GIM aims to provide an alternative avenue to loan
seekers outside of the conventional sphere, allowing them to
escape the web of predatory lending.
At present, Shariah compliant microfi nancing products in Africa
are based on the Wadiah, Mudarabah and Ijarah contracts,
while Bai Bithaman Ajil is a common feature among its debtbased
products. The further development of Africa’s tax and
regulatory environments is expected to spur the introduction
of newer and more sophisticated forms of lending, as well as
create a more diverse product range for its currently underserved
poor population.
10 August 2011

FEATURE
Asset management in South Africa
Islamic finance has seen exponential growth in Africa, particularly in the
North African region, and of late to the west and east of Africa as well.
Africa is home to about 412 million Muslims with a high concentration
focused in the regions mentioned above. North Africa is an obvious
choice for Islamic finance due in part to its close proximity to the Middle
Whilst Islamic banking is seeing rapid growth in countries such
as Nigeria, Kenya, Uganda and even Tanzania, where half the
population is Muslim, South Africa has had two decades of
experience, being one of the fi rst non-Muslim countries in Africa
to establish Islamic fi nance.
Constituting only 2% of its total population, South Africa has
the smallest number of Muslims on the continent. This did not
prevent Al Baraka Bank from establishing the only fully fl edged
Islamic bank in South Africa in 1989. Subsequently, four other
banks opened Islamic windows alongside their conventional
practices.
Islamic asset management
On the investment front, there are a number of Shariah
investment funds available in the market. Currently, 11
asset management companies in South Africa offer Shariah
compliant investment schemes or mutual funds as well as
discretionary and multi-managed portfolios. That makes up a
quarter of the total number of asset management companies
registered under the country’s Financial Services Board (FSB).
The company managing the largest number of Islamic funds
is the Oasis Group’s Oasis Asset Management. It is reported
that the Oasis family of funds currently manages 63 Shariah
compliant domestic and offshore funds.
The fi rst Islamic fund to be launched in South Africa was
the Futuregrowth Albaraka Equity Fund which was initially
managed by Element Investment Managers, formerly Frater
Asset Management, from 2000 to 2005. It was then managed
by Futuregrowth, which has since become a member of the Old
Mutual Investment Group (OMIGSA).
Mogammad Saliegh Salaam, an investment manager at Old
Mutual Investment Group, says there is interest to expand
Shariah compliant investment in South Africa, as can be seen
by a number of new asset management companies that have
come into the market to provide various products across the
board.
“Also the product offering has also started to cater for the asset
allocation requirements of Muslim investors. There have been
a number of banks that have come up with Islamic windows or
products for high net worth individuals. We have seen one or
two companies offer their products and services for high net
worth individuals,” he says, adding that the majority of mutual
Eurekahedge Islamic South Africa Fund Index
funds that dominate the Shariah landscape in South Africa are
for the mass market.
As with the world over, Islamic equity funds are also very
popular in South Africa. However, Salaam notes that the South
African investor is evolving. “Not everybody wants to invest
totally in equity. Even if the markets are not volatile, people
have different profi les, tolerances and preferences.
“It has been an equity-centric environment but as the market
develops clients are becoming more sophisticated and have
different requirements,” he elaborates, before briefl y mentioning
that Old Mutual launched its Islamic balanced fund in the fourth
quarter of last year.
Less well known is that South Africa is also home to Africa’s fi rst
Shariah compliant exchange traded fund (ETF), launched in
2009 by NewFunds, a joint venture between Absa Capital and
Vunani Capital. The Shariah Top 40 Exchange Traded Fund
(ETF) includes Shariah compliant companies that are selected
from the FTSE/JSE Top 40 index listed on the main board of
the Johannesburg Stock Exchange, as measured by market
capitalization.
Reception of Islamic Funds
The Eurekahedge Islamic South Africa Fund Index reveals that
the value of funds has increased by 135.26% in May 2011, up
11 August 2011

FEATURE
Performance of a sample of South Africa domiciled funds
As of May 2011 Return
Fund Name Date of inception Return since
Inception
Return since
Mar 2010
2011 Return
YTD
Element Islamic Equity Fund February 2006 65.33% 11.23% 1.62%
Futuregrowth Albaraka Equity Fund June 1992 1215.60% 17.41% 2.32%
Kagiso Islamic Equity Fund July 2009 52.20% 22.05% 3.46%
Oasis Crescent Balanced High Equity Fund of Funds April 2010 10.99% 10.99% 2.94%
Oasis Crescent Balanced Stable Fund of Funds April 2010 8.90% 8.90% 2.85%
STANLIB Shari’ah Equity Fund A June 2007 -4.66% 10.85% 2.51%
Symmetry Islamic Fund December 2005 75.77% 7.16% 2.53%
Source: Eurekahedge
19.47% from a year earlier. Despite the positive performance,
Salaam laments the slow uptake of funds. “It has been a tough
market generally to try to sell any product that has some other
market linkage to it,” he explains.
Institutional investors, he continues, are less receptive to
Shariah compliant solutions. The only instance of the uptake
is termed as ‘member level choice’ – the equivalent to the
US’ 401 plan where employees of a company can choose to
make contributions for their retirement plan. “In South Africa,
a number of pension funds have allowed members of that
platform to select Shariah compliant vehicles to invest their
pension savings,” Salaam elucidates.
Ongoing campaigns are being promoted by all the asset
management companies to create further awareness of
Shariah compliant investing, targeting not only Muslim but non-
Muslim investors as well.
has garnered almost no foreign investor interest either from the
Middle East, Asia or Europe. The asset management industry
is no exception with most mergers and acquisitions being
completed only at the domestic level. With the exception of a
small handful of funds that have been marketed globally, the
Islamic funds are catered to domestic investors.
“We haven’t seen much foreign demand for Shariah compliant
local products. It is conducive for foreign investors to invest but
we just have not seen any major foreign interest.”
As the excitement to develop Islamic fi nance in the western
and eastern regions of Africa continues to build, it would do
South Africa some good to lure some of the attraction in its own
direction. It is well positioned to promote the industry, with good
structures in the areas of regulation, legislation, governance and
compliance as well as a sturdy risk management framework.
The other challenge faced by companies managing Islamic
funds is the lack of investment tools available. Salaam says:
“We need a lot more products from the various investment
banks. They need to provide us a lot more Shariah compliant
products or avenues in which to deploy our cash. That is
probably by far the biggest challenge.”
Investment banks dealing with these asset management
companies are normally faced with the issue of Shariah
compliance. “The products that they come up with may not
necessarily satisfy our Shariah board. We need to make sure
that all the products satisfy our Shariah boards.”
In its bid to promote and maintain a sound fi nancial investment
environment in South Africa, the FSB has recently introduced
several exemptions for Islamic funds. Notice 1503 of 2005,
which was published in the terms of the Collective Investment
Schemes Control Act of 2002, now allows managers of a
Shariah compliant fund to invest up to 50% of the market value
of total assets in a particular portfolio, from the previous 10%
limitation.
The exemption applied on the 1 st July 2011 until the 31 st May
2013.
Despite coming a long way with Islamic fi nance, South Africa
12 August 2011

FEATURE
African emergence
The African Takaful market is gearing itself up as an important future
market in the Takaful arena. SCOTT WEBER turns his gaze towards the
latest incumbents in what is proving to be Takaful’s next frontier.
Africa is a new market for Takaful operations, and many
countries with Muslim majority populations and developed
banking sectors are looking at the alternative industry to
diversify their operations and hopefully attract a new, previously
untapped customer base. This growth potential is clearly shown
by the number of new Takaful operators and Islamic windows
sprouting up across the continent.
Larger reinsurance
companies should take it as
a responsibility to see the rapid
growth of Takaful in third
world countries
Cross-continent rollout
The emergence of Takaful has begun in earnest, with the
Takaful industry looking to replicate its successes in Southeast
Asia and the GCC. Hassan Bashir, CEO at Takaful Insurance of
Africa, says that: “There are companies now operating Takaful
models in the north, south, west and east of Africa. The African
continent offers signifi cant opportunities for the Takaful industry,
particularly because the Takaful model fi ts very well with the
traditional African way of life that is fundamentally based on
a self-help, group support social structure.” Bashir goes on to
state that: “If presented well, the Takaful model is…at home
in Africa and as a result there is an exciting prospect for the
Takaful industry in Africa”.
Africa does however remain a relatively isolated market. The
continent as a whole is yet to fully connect with the world
market. According to Bashir: “Markets in other regions must
play a signifi cant role in the development of Takaful in Africa.
The Takaful industry in Africa will rely on other regions such as
Asia and Arabia for knowledge, training and capital.” However,
as Bashir goes on to say: “Many markets in Africa will benefi t
from such partnerships.” African start-ups will benefi t from the
expertise of mature fi rms entering from other regions but it is
also heavily reliant on re-Takaful fi rms from other regions for
support and protection.
Issues raised
Issues do continually present themselves in the African
market, according to Bashir, and there are numerous Africa-
13 August 2011

FEATURE
specifi c limitations to offering Takaful coverage: “First, African
markets are largely governed by conventional insurance acts
that have little or no consideration for the needs of a Takaful
model.” This presents challenges in the areas of governance
and investment. Secondly, African markets (with the exception
of North Africa) lack any form of Shariah compliant capital
market. “This presents signifi cant operational diffi culties in
many markets where conventional insurance acts restrict
investment in foreign markets,” according to Bashir, who
faces this situation in Kenya. Third, is the limitation of Shariah
scholars in corresponding their understanding of business,
fi nance and risk management to the challenges that Africa
presents. Bashir’s fi nal point is that there still remains a lack
of well-trained human capital and resources to support the fast
emerging Islamic fi nance sector in Africa.
The conventional insurance market in Africa has been
somewhat dominated by the larger international players and
Bashir believes that this could happen with the Takaful market.
“In the case of re-Takaful, we have already seen signs of this
with foreign players showing equal interest as local reinsurers.”
In Bashir’s view, Takaful can hardly exist without the Islamic
banking sector, and the key to this is “the development of a
vibrant Islamic capital market.” Without this, “any Takaful
operations will be fundamentally fl awed”.
There are companies now
operating Takaful models
in the North, South, West
and East of Africa
The Gambian example
Gambia provides a good case study for the issues facing
Takaful operators in the country. Gambia previously had
11 conventional banks, one of which was Islamic, and 12
registered insurance companies, none of which were Islamic.
That all changed when a taskforce was set up to facilitate the
passing of Takaful regulations in 2005; comprising of members
from the international investment department (Gambia
investment promotion), the chamber of commerce, the central
bank, members of the justice department and fi nanciers.
According to Momodou Joof, the managing director and CEO
at Takaful Gambia: “It took many meetings with all invested
parties explaining to them the economic benefi ts such an
operation could provide,” as the Gambian Takaful regulations,
based on those in Malaysia, would have been blocked by those
in government with a vested interest in the conventional system
as this would have proved a threat to their operations.
Takaful operations in Gambia are still in their infancy having
only been in operation for three years. The current focus is only
on general insurance, but Takaful Gambia has plans to open a
Family Takaful operation when their general insurance operation
breaks even. Joof admits that he is missing a large segment of
the market and that: “The society assistance models offered
through Family Takaful offer a greater opportunity for poverty
alleviation,” and the fl exibility of Family Takaful would offer the
opportunity to come up with unique Shariah specifi c solutions
allowing them to work with SMEs and small businesses.
Joof is personally invested in this project and is looking to take
the Gambian model into West Africa. Takaful Gambia is actively
looking at creating a network of Takaful companies in a similar
vein to the pan-African Ecobank, which is proving successful in
its own right. “Nothing is stopping Takaful from taking the lead
and jumping into the countries around Gambia,” Joof adds.
There is a signifi cant market in Sudan, which is solely Islamic,
and considerable interest is being shown in both Nigeria and
Senegal, who have appointed Egyptian consultants to review
their legislation for the possibility of offering Islamic banking
and Takaful and are working hard on supporting its adoption;
having hosted several seminars on the issue and even inviting
the IDB to open a regional African offi ce in Dhaka.
Challenges abound
Bureaucracy remains the greatest challenge on the African
scene, with networking playing an important role in opening
doors that could otherwise remain reluctant to such proposals.
According to Joof, it will take “the governments to appreciate
what is being achieved in Gambia and either replicating or
consulting with more experienced nations to advise on the
feasibility of gaining operational licenses to operate subsidiaries
in their markets”.
Other challenges that have emerged are in competition
with the conventional market which according to Joof “are
creating a price war, which is not sustainable”. Eventually
the governments are going to have to step in and regulate as
this trend is not benefi cial for the industry to allow unhealthy
competition through pricing.
14 August 2011

FEATURE
Investment is still key to rolling out Takaful, proving that
Takaful is a legitimate and profi table solution. According to
Joof: “The larger reinsurance companies should take it as a
responsibility to see the rapid growth of Takaful in third world
countries and aid such institutions in their capacity building
efforts.” Governmental support is one thing, but getting it right
is important and this can only be achieved with support from
reinsurance companies.
The Takaful model fits very
well with the traditional
African way of life that is
fundamentally based on a selfhelp,
group support social
structure
The floodgates open
Numerous Takaful and conventional operators have sought
entry into the lucrative Takaful sector, attracted by its capacity
to open up previously untapped segments of the market.
This is demonstrated by the recent announcement by Kenya
Reinsurance corporation (Kenya Re)’s plan to begin operating
a re-Takaful window to grow its current income and to tap into
the expanding Islamic fi nance sector as part of the company’s
fi ve year plan of product diversifi cation.
“The intention is to have a department that fully complies with
all… re-Takaful requirements so that Takaful fi rms are not shy
to give us business,” according to Jadiah Mwarania, chief
executive offi cer of Kenya Re.
By expanding its product offerings to include re-Takaful, Kenya
Re is responding to regional insurance market dynamics
following this year’s launch of Takaful Insurance of Africa, a
fully fl edged Shariah compliant insurance company that plans
to expand its operations into Tanzania and Uganda.
Kenya has continually shown its interest towards the
alternative insurance industry with the launch of the fi rst Takaful
company, GulfCap Takaful, followed a short time later by the
establishment of two other new fi rms: FCB Takaful and Takaful
Insurance Agency.
Competitive market
Last year, Kenya Re’s direct competitor Africa Re launched its
own re-Takaful subsidiary, Africa re-Takaful, in order to tap into
the burgeoning African Takaful market. In September 2010,
Africa Re launched a subsidiary company based in Egypt
to offer exclusive re-Takaful services while Comesa-owned
reinsurer ZEP-RE, where Kenya Re is also a shareholder, set
up a Sudan-based re-Takaful subsidiary in September 2009.
By entering into the competitive re-Takaful business, Kenya
Re is responding to regional insurance market dynamics.
Insurance companies are racing to launch Shariah compliant
products across the African continent in order to tap into the
growing Muslim middle class.
The shift towards re-Takaful will mean more business fl ows into
the company from predominantly Muslim regions like Sudan
and particularly North Africa, where Kenya Re is expanding its
presence.
But Kenya Re, like many other operators, will have to reinvest
income from their re-Takaful department outside the country
because Kenya does not currently have the necessary Shariah
compliant capital market products for reinvestment.
Kenya Re currently underwrites business for all 47 insurance
companies in Kenya, which are by law required to cede 18%
of their reinsurance to the company up to 2015. This valuable
revenue stream currently accounts for 40% of Kenya Re’s
gross premium income.
Growth will also be driven by an expected tripling of mortgage
lending, which shot from an annual KES100 million (US$1.1
million) to KES300 million (US$3.3million) as of January 2011.
Despite market prospects, Kenya’s only other Takaful
underwriter, Takaful Insurance of Africa, has continually raised
concerns over the inability of Kenya’s capital markets authority
to license Shariah compliant products.
Its re-Takaful focus will also enable Kenya Re to widen its
business partnerships in the West African market, where it has
reopened its offi ces after the end of the civil war in Ivory Coast.
There are many obstacles that continue to cause concern for
the budding industry; for instance the lack of qualifi ed Takaful
professionals in the region and the absence of the necessary
Shariah compliant legal framework for investment and Shariah
compliant instruments.
Premium potential
Morgan Stanley has previously stated that Kenyan Takaful
premiums could potentially reach KES20 billion (US$221.73
million) by 2014, or 31% of total insurance premiums.
Barclays Bank was the fi rst fi nancial institution to test the
market with a Shariah compliant product in December 2005,
and since then Islamic fi nancial products have exploded with at
least eight commercial banks tapping into the market.
Two Islamic-driven banks with roots in the Middle East are Gulf
African and First Community. Both banks opened up shop in
2007 and have since moved to the profi t zone, illustrating the
vibrancy of the halal economy in the country.
They are seeking to deepen penetration in a market where
conventional insurance has suffered from consumer apathy
and ignorance, with uptake remaining at below 3% over the
decade.
15 August 2011

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