Take Nigeria, where 50% of the population (80 million) are Muslims. The countrys only stand-alone Islamic institution, Jaiz Bank, which started operating in January 2012, has increased its number of branches from three to 10 in the past year and a half.
Jaiz Bank aims to expand outside northern Nigeria and open 100 branches by 2017 an objective that Bashir Aliyu Umar, special adviser on non-interest banking to Nigerias central bank governor, says is quite possible.
Local conventional banks are getting ready to move into Islamic finance too, including Sterling Bank, which recently gained a licence to open an Islamic window. If the market continues to develop, it could galvanize others to apply for [Islamic banking] window licences, says Umar.
Despite Kenyas smaller Muslim population of 4.3 million (11% of the population), the countrys Islamic finance sector is also emerging. The two biggest banks offering Islamic banking there experienced triple-digit growth last year: Gulf African Bank, for example, enjoyed over 154% net profit growth to $2.8 million.
Kenyas First Community Bank, which offers Islamic products, increased its net profit by 238% to roughly the same value. And in July, Standard Chartered announced that it would soon start offering Islamic banking products in Kenya, before moving into other countries in the region.
Experts are heartened that the sector will continue to prosper. According to Wasim Saifi, global head of Islamic banking at Standard Chartered, the market could grow to 10% of the local banking sector in such countries as Kenya and Nigeria within the next decade.
Africa is emerging as the next centre of Islamic finance and is the new frontier, says Saifi.
|Ahmed Jaffer, director for KPMGs global Islamic finance and investments group in South Africa|
Regulatory reform partly explains this new wave of activity and interest in Islamic banking. In March, Nigerias Securities and Exchange Commission brought in new guidelines for sukuk. A month later, the countrys insurance regulator came up with guidelines for takaful (Islamic insurance).
Kenya is some steps ahead. It handed out its first takaful licence in 2011 and has since been working on reforms that will enable more complex products, such as Shariah-compliant real estate investment trusts.
In January, South Africa tinkered with its tax laws to make definitions of Shariah-compliant products more transparent. Further amendments weaving non-interest finance into the tax code are expected to be finished later this year.
Other countries are eager to catch up: Zambia is hammering out a new Islamic banking framework. Uganda, with a 12% Muslim population, is also making regulatory changes. Umar says Botswana is one to watch: Theres fast economic growth there and interest in Islamic banking. And its close to South Africa, which has experience of the industry.
But many in the industry would like to see more progress. Things are not progressing quickly enough, says Jaffer of KPMG, who argues that there is still inequality in regulation across the continent in terms of conventional versus Islamic banking.
Even in pioneering countries such as South Africa, there are calls for a faster pace of change. Banks in South Africa want greater lucidity in terms of tax legislation, for example. Some are also concerned that conventional banking laws continue to dictate Islamic finance.
In Nigeria, politics has got in the way. With the Nigerian government, its turned into a bit of a balancing act trying to please Muslims and Christians, which means things havent developed at a satisfactory pace, says Jaffer from KPMG.
The fact that in Nigeria they use the term non-interest banking and never refer to it as Shariah banking is telling, he adds.
There are other challenges facing Islamic banking. One is the need for institutions to appeal to customers beyond the Muslim market something that can only be achieved through transparency and attractive products.
Lack of competition might make the latter goal more difficult to achieve. In Nigeria, where there is only one stand-alone bank, people have already started complaining that products are expensive, says Bashir Aliyu Umar.
He adds: If Islamic banks dont meet the same service delivery standards as conventional products, this will be a big problem as well.
Raising awareness will also be important. A survey in November by Lagos-based financial sector development organization Efina found that over 60% of Nigerian bank users were not familiar with Islamic finance.
Poor knowledge and experience of Islamic banking within the financial-sector labour pool poses an equal problem, prompting calls for more recruitment of Islamic banking talent from the Middle East and Asia.