Countries in East Africa, those lining the Red Sea coast and those further south, are increasingly joining the Islamic finance industry as their Muslim population grows and demand for Shariah-compliant banking and finance rises. This development is closely watched by Gulf Co-operation Council nations since it could open interesting new business opportunities.
After all, the countries of East Africa and the Gulf share close geographical, historical, cultural and political links, and a strong Islamic finance sector on both sides of the Red Sea could provide African companies with significant opportunities to access the Gulf’s financial power, and Gulf States with a plethora of Shariah-compliant investment opportunities in prospering East Africa.
Apart from Sudan, where Islamic finance is already well-established and its roots go back to the 1970s, and Djibouti, which has built up a small, but vital Islamic finance sector over the past two decades, Shariah-compliant banking is increasingly being adopted and developed in Egypt, which is working on a regulatory framework to encourage the launch of more Islamic banks from currently only three.
In Ethiopia, which back in March this year got its first-ever Muslim national leader, the central bank is planning to develop Islamic finance in order to improve financial inclusion, while Somalia’s central bank, re-established in 2009, has since given licences to six Islamic Banks and two takaful companies.
Both Tanzania and Kenya have recognised the huge potential of Islamic finance in their respective countries and unveiled a package of initiatives to develop the industry, and in Rwanda, Islamic finance made its debut in 2016 with an Islamic microfinance Institution.
Only Burundi and South Sudan currently don’t have ambitions to set up Islamic banks owing to their Christian-majority population, and Eritrea, where around half of the people are Muslim, due to its underdeveloped banking system.
The latest regional entrant in the Islamic finance sector is Uganda, whose finance minister Patrick Ocailap on June 18 said that a framework for the implementation of Islamic banking in the country has been developed and will be operational by October 2018.
“After parliament passed the Islamic Banking law two years ago, we now have set up adequate regulations and we hope that by October, Islamic banking will be operational,” Ocailap said.
While the minister did not reveal whether there will be a licensing process for Islamic banks and financial institutions immediately following, most analysts are convinced that Uganda, being East Africa’s third-largest economy, has great potential for Islamic banking as many Muslims – who make up 14% of Uganda’s 45mn population – have avoided existing conventional lenders because they charge interest. This would make a case for financial institutions focusing on entrepreneurs, small businesses and micro finance in the Muslim communities, as well as for agricultural lenders, and for the government to increase financial inclusion in the country which would give further impulses for Uganda’s current sustained economic growth.
Uganda’s central bank said earlier this year that there were a number of applicants for Islamic banking that have been waiting for regulations to be finally put in place, but did not reveal their names. Only one lender, Tropical Bank Ltd, owned by the Libyan government through the Libyan Foreign Bank, has confirmed it plans to set up an Islamic finance unit by establishing a subsidiary, according to a Bloomberg News report, which also stated that a group of Ugandan investors is currently setting up a new, fully-fledged Islamic financial institution called Midsoc Bank.
According to other sources, the bank is a start-up venture of a former deputy governor of the Bank of Uganda supported by the Islamic Development Bank. It says it will focus on the rural agricultural sector and city suburbs that harbour most of the financially excluded in Uganda and provide economic development initiatives based on Islamic finance.