In his opening speech at the Secretary-General of the IFSB at the Seminar on the Role of Islamic Finance in the Development of Africa in Mauritius cited a consensus-growth rate of Islamic financial assets of between 15 – 20 percent per annum.
The phenomenal growth in Sukuk issuances in 2011 has continued and accelerated in 2012 with strong performances by sovereign and quasi-sovereign issuances in Malaysia and the GCC for the financing of infrastructure. This underscores the enormous prospects for Islamic finance to play a mainstream role in financing the development of economies in both emerging and developed markets.
The most striking characteristic of Islamic finance is its rapid geographical spread and the high rate of growth of assets, across all asset classes.
“To put these numbers in perspective, a 10 percent per annum growth rate over 30 years, which is the growth rate of the Chinese economy, leads to a doubling of GDP every 7 years. Over a 30 year period, that represents a 16 fold increase in GDP, and is the basis of the economic miracle of Asia, and in particular of East Asia.
“In comparison, a 15 percent per annum growth rate of Islamic finance means a doubling of assets in about 5 years, or a 16-fold increase in total assets under management, if this rate of growth can be sustained over the next two decades. This is not impossible – but it does require a range of supportive policies. And even though Islamic finance is still small in terms of assets under management, expansion at current rates – sustained by appropriate policies and financial infrastructure – could help to make incalculable contributions to global economic growth and stability and to financial inclusion and poverty reduction across Asia and Africa as well as in non-traditional markets in Europe,” he added.
The broader phenomenon of Islamic finance is one in which the demand by Muslims is increasingly being supplemented by the interest and participation of non-Muslims.
There are a number of factors behind this of which I will mention just three.
First, there is the widening appeal of the Islamic finance model which stresses ethical values and leads to a focus on risk sharing and participatory finance, and to an avoidance of speculation and interest-bearing debt.
Here it is relevant to note the series of financial sector scandals in the crisis countries which have been understood by many to pose challenges to the legitimacy of the function, the vital function, of the financial system. While we may debate the precise implications of these challenges, we can all agree today that finance must serve a socially useful purpose. There is now a general consensus on the need to return banking to its basic function – to provide financial services that add value to the real economy and have strong linkages to productive economic activity. This in fact represents the very essence of Islamic finance.
Second, policy makers in many non-traditional markets view Islamic finance as a new asset class that contributes to widening consumer choice. Many of you will know that this was the explicit justification given by the FSA in approving the introduction of Islamic banking in the UK. There are significant efforts underway to introduce Islamic finance on these grounds in non-traditional markets across Europe, Asia and Africa. For example, at the IFSB we are working on these issues with European central banks to raise the awareness of Islamic finance in Europe.
Finally, many Governments and corporates are today looking to tap into the deepening global pools of Shari`ah-compliant savings for their investments whilst still others see in Shari`ah-compliant instruments such as Sukuk attractive options for their portfolio diversification programmes.
It is my pleasure to welcome all of you to the Seminar on the Role of Islamic Finance in the Development of Africa.
On behalf of the IFSB, I would like to express my sincere thanks and appreciation to His Excellency Bheenick, and the Bank of Mauritius for hosting this Seminar, as well as the workshop that was held yesterday.
I would like to also express my appreciation to the speakers and session Chairmen, many of whom have travelled long distances, and who join us here to share with us their experience and knowledge of Islamic finance.
This is not the first time that the IFSB has cooperated with Bank of Mauritius. Some of you may have attended an IFSB Seminar on Islamic Capital Markets back in May 2009, which was hosted by Bank of Mauritius and the Financial Services Commission. In addition, earlier this year in June, we held a Workshop in Mauritius on Facilitating the IFSB Standards relating to Islamic Capital Markets.
Our focus this time is the issues and challenges, as well as the prospects of Islamic finance in Africa. The timing is propitious. There is today a sense of optimism regarding economic prospects in Africa. This sense of optimism encompasses middle-income and low-income countries alike. It also encompasses Sub-Saharan Africa, which has grown strongly despite the global economic slowdown. There are differences across the region, of course, and some countries are more vulnerable than others to the slowdown in Europe. Overall, however, the IMF’s most recent regional economic survey speaks of a new business climate emerging in Africa – and of strengthened private sector efforts to drive African growth.
Islamic finance has also been growing rapidly, especially in its international dimension. There is an expanding interest in participating in this phenomenon, including in Africa — and recognition that it can contribute strongly to promoting financial inclusion, and economic growth and development.
At the IFSB our key mandate is to promote the stability, soundness and resilience of the Islamic financial services industry through the development and adoption of standards for prudential supervision and regulation. Since our establishment in 2003, we have issued 16 standards guidance notes covering various issues such as risk management, capital adequacy, Shari`ah governance and, most recently on liquidity management and stress testing. We currently have three additional standards under preparation – these are a revised capital adequacy standard, a new standard on the supervisory process, and one on risk management in Takaful undertakings.
The IFSB serves Islamic finance in a way that is comparable to our counterparts in conventional finance – the Basel Committee on Bank Supervision (BCBS), the International Association of Insurance Supervisors (IAIS), and the International Organization of Securities Commissions (IOSCO).
Another key mandate of the IFSB is to promote the global Islamic Financial Services Industry (IFSI) through knowledge sharing, awareness and capacity building, and the promotion of cooperation across jurisdictions. This Seminar falls squarely within this mandate of the IFSB.
The IFSB also collaborates with multilateral organisations such as the Islamic Development Bank (IDB), the World Bank, the International Monetary Fund, and the Asian Development Bank (ADB). These institutions have not only recognised the importance of the role which Islamic finance can play in the global financial system, but have also offered their support for its promotion and for capacity building of supervisory authorities and industry players. The IFSB is further strengthening its capabilities for capacity building through partnerships with educational institutions such as the International Centre for Education in Islamic Finance (INCEIF), and the Bahrain Institute for Business and Finance (BIBF), amongst others.
The IFSB has a diverse membership base which comprises 187 members drawn from over 40 jurisdictions. One third of our members are central banks and other regulators, as well as international institutions such as the World Bank, IDB, ADB and IMF. From the African region, these regulators also include the central banks of Djibouti, Egypt, Mauritius, Morocco, Nigeria, Sudan and Zambia, as well as the Ministry of Economy and Finance of Senegal. Two thirds of our members are private financial institutions. The diversity of our membership and its wide geographical spread is a source of strength for the IFSB and helps to keep our work and knowledge up to date and relevant.
Over the years, Mauritius has transformed itself from a mono-crop economy into one of the most successful economies in Africa.
Much of the country’s success can be ascribed to sound policies planned and implemented over a sustained period. The country’s adoption of international best business practices and sustainable development policies has also been acknowledged by a number of international agencies.
Mauritius has also taken steps to promote a dual financial system by developing Islamic finance alongside the conventional system so as to increase the country’s business opportunities, diversify its financial markets and contribute towards economic growth. Since then, Mauritius has witnessed a number of encouraging developments in the Islamic finance industry. This includes the introduction of Shari`ah-compliant leasing products under an Ijarah structure and Takaful products, and the establishment of the first Islamic window in Mauritius. Mauritius is also home to a number of Shari`ah-compliant funds5. A further, significant breakthrough came last year with the establishment of the first Islamic bank6 in the country.
Let me turn to a specific challenge facing the Islamic finance industry in Mauritius – one that it shares with many other countries in Africa and elsewhere. In order to grow the industry, it will be critical to ensure that there is a sufficient supply of well-versed and skilled human resources in Islamic finance to undertake, among others, product innovation, Sukuk structuring, cross-border transactions, and most importantly, to staff the appropriate supervisory and regulatory structure.
Joining the IFSB as a full member in 2007 was one of the steps undertaken by Mauritius to narrow the human resources gap. This allows Mauritius to, among others, (i) receive assistance with respect to the implementation of the IFSB Standards and Guidelines, and (ii) participate in the IFSB awareness programmes, namely the workshops, roundtables, conferences and seminars such as the one we are having today. In addition, in 2010, the Bank of Mauritius entered into a Memorandum of Understanding with Bank Negara Malaysia to establish a collaborative framework aimed at enhancing mutual co-operation on capacity building and human capital development in the financial services industry, including in the area of Islamic financial services sector.
The growth and development of Islamic finance in Mauritius can act as a catalyst to the development of Islamic finance in Africa. I hope that Mauritius’ success will encourage other countries in the continent to take notice and undertake corresponding measures to develop Islamic finance in their respective jurisdictions.
However, it must be said, that although Islamic finance commenced in the early 1960s in Egypt, the industry is still in early stages of development across the continent, with the exception of Sudan. While the demand for Islamic financial services has continued to grow in the continent, Islamic financial institutions have not always been able to fully take advantage of the opportunities afforded. Major obstacles that hamper the ability of Islamic finance to blossom in Africa include the lack of expertise in Islamic finance, fragile or absent financial infrastructure for Islamic finance, as well as uncertainty in some cases on how best to sequence policies and reforms to support its growth.
Nevertheless, besides Mauritius, the continent has seen positive developments in other countries such as Senegal, The Gambia, Nigeria and South Africa, who are also taking steps to develop the Islamic finance industry. Some of the factors that will help to support growth of Islamic finance in the continent include (i) increasing awareness in Sub-Sahara Africa on the back of growing trade interactions with Middle Eastern countries, (ii) growing demand for Shari`ah-compliant products and services by Muslims who wish to comply with their religious beliefs, (iii) increasing demand for the ethical, risk-sharing approach offered by Islamic finance, in particular in the wake of the recent global financial crisis, as well as (iv) measures undertaken by some African governments to review and reform their respective banking laws to allow Islamic financial institutions to be established and prosper.
These are promising developments, ones which the IFSB follows with great interest and stands ready to support.
The most recent edition of a well known Islamic finance journal focuses on Africa. This is appropriate. Many exciting developments are taking place in Africa. The magazine’s cover poses a question: Africa – An Uncertain Future?
To this question one can answer that the future is always uncertain. But the point is taken. There is a need for optimism when facing uncertainty, but we must also be practical.
I would like to suggest the following, as a benchmark against which to measure our expectations and hopes.
First, there is a tremendous shift under-way in the global economy that corresponds to the rise of emerging economies. This is the rise of Asia and the Middle East, of Latin America but also of Africa. Each of these regions is becoming better connected with each other and with the global economy.
Second, the gathering momentum of Islamic finance is increasingly becoming a global phenomenon that is linked, but not limited to, the rise of emerging markets.
In these two developments, taken together, lies the potential for the upliftment of the lives of billions of people across the globe.
Third, and finally, no individual country can take its own rise for granted because this depends on policy. Policies are needed in each country and jurisdiction to take advantage of the looming opportunities. For Islamic finance, this means enabling environments must be improved, regulatory and supervisory frameworks strengthened, and provision must be made for capacity and human resources development – in conjunction with the private sector, so that it is able to bring all its energy and innovation to bear on the all important task of generating sustainable growth through a finance that is linked to the real economy, and to a prosperity that is shared across society.
There is much to do, but Africa’s great strength, and that of Mauritius, is the dynamism of its people and its societies. There is a powerful spirit of innovation that Africa brings to so many of the challenges it faces. I am confident that the interaction between Africa and Islamic finance will be fruitful and of benefit to both.