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Worlds Poorest Nations Look to Islamic Banking to Stimulate Economic

Growth

Senegal, Pakistan and Afghanistan, among the world’s 50 poorest

nations, are turning to Islamic banking to spur economic growth by

encouraging people to take out loans and open savings accounts.

Outstanding domestic bank lending accounted for 3.5 percent of Afghanistan’s

gross domestic product in 2008, 25 percent in Senegal, 27 percent in Nigeria

and 46 percent in Pakistan, according to data compiled by the World Bank.

The rates compare with 224 percent in the U.S. and 115 percent in Malaysia, a

global hub for finance that conforms with Shariah principles.

Developing Islamic nations have shunned banking in part because of the

religion’s ban on interest, limiting access to funds for project financing and

stunting business growth, according to the International Monetary Fund.

Governments should improve regulations, products and institutions that comply

with Shariah law to accelerate the industry’s development, Patrick Imam and

Kangni Kpodar, economists at the IMF, said in a telephone interview from

Washington on Sept. 14.

“Islamic banks provide access to finance to a segment of the population that is

underbanked,” said Imam. Once “they start putting money in these banks you

start a process of financial intermediation, where savings are channeled from

individuals via Islamic banks to investments,” he said.

‘Closer to Religion’

Senegal is reviewing legislation that would allow lenders to set up Islamic units

in a nation where 94 percent of people don’t have savings accounts, Birahim

Seck, chief executive officer of SYM International Finance Corp. in Dakar, said

in a Sept. 14 interview. Pakistan’s central bank is pushing Shariah banks to

boost financing to small- and medium-sized businesses, Saleem Ullah, the

director of Islamic banking, said on Sept. 16.

Afghanistan is planning to issue three banking licenses, the first to offer a full

range of financial services that comply with Muslim tenets, paving the way for

its first sale of Shariah-compliant debt, Aimal Hashoor, a central bank

spokesman in Kabul, said in an interview on Aug. 15.

Global sales of sukuk, which use asset returns instead of interest to pay

investors, fell 24 percent to $10.7 billion so far this year, according to data

compiled by Bloomberg. Issuance will increase in the second half as

international market conditions improve, Standard & Poor’s said in a statement

on July 28.

“In poorer countries, people are generally closer to the religion so it is much

easier to attract them toward anything associated to their belief,” Pervez Said,

chief executive officer of Dawood Islamic Bank Ltd. in Pakistan, said in a

phone interview from Karachi on Sept. 14.

Legal Issues

Afghanistan had a per capita gross national income of $370, compared with

$590 in Bangladesh, $1,040 in Senegal, and $1,140 in Nigeria, according to

World Bank 2009 data published in July. In contrast, the figure was $47,240 in

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2010-09-29

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the U.S. and $7,230 in Malaysia. About 99 percent of Afghanistan’s 33 million

population practice Islam, while 95 percent of people in Senegal are Muslims,

according to the 2009 CIA World Factbook.

Nigeria, which has 75 million Muslims accounting for 50 percent of the total

population, drafted Islamic banking guidelines last year, including the types of

Shariah-compliant products and risk recommendations for banks.

Jaiz International Bank, based in Abuja, Nigeria, has yet to start its Islamic

banking operations after receiving a license from the country’s central bank

this year, Muhammad Mustapha Bintube, the lender’s managing director, said

in an interview on Sept. 18.

“There are still some legal and regulatory issues to be sorted out,” he said.

“There’s a lack of skills and a lack of knowledge” about the industry, he said,

adding that between 50 percent and 60 percent of the population don’t use

banks.

Assets to Increase

The Islamic Financial Services Board, a global standard- setting body, and the

Islamic Development Bank predicted in April that assets held by Islamic

financial institutions may climb to $1.6 trillion by 2012 from about $1 trillion this

year. The IMF and the World Bank are members of the IFSB.

The United Arab Emirates accounts for 22 percent of total Islamic banking

assets, followed by Saudi Arabia, Bahrain and Kuwait, according to a

September report from the IMF.

Sukuk have returned 10.6 percent this year, compared with 24 percent in the

same period in 2009, according to the HSBC/NASDAQ Dubai US Dollar Sukuk

Index. Debt in developing markets gained 12.6 percent, JPMorgan Chase &

Co.’s EMBI Global Diversified Index shows.

The spread between the average yield for Islamic bonds and the London

interbank offered rate has narrowed 92 basis points this year to 375, according

to the HSBC/NASDAQ Index. The gauge climbed five basis points yesterday.

A basis point is 0.01 percentage point.

Reward and Failure

Malaysia’s 3.928 percent dollar-denominated Islamic bonds due June 2015

have returned 4.2 percent this quarter, compared with 6.4 percent for the

Dubai Department of Finance’s 6.396 percent sukuk, according to prices from

Royal Bank of Scotland Group Plc.

The yield on Malaysia’s note dropped two basis points to 2.7 percent today.

The rate on the Dubai bond climbed six basis points to 6.42 percent. The extra

yield investors demand to hold the Dubai November 2014 securities rather

than Malaysia’s widened seven basis points to 372. The gap has narrowed 45

basis points, or 0.45 percentage point, this quarter.

Senegal would lure funds from the Middle East with a system to facilitate

Islamic financing, said Seck at SYM International. A lack of regulation and

sufficient knowledge are hampering growth, said Seck, whose company helps

bring investment from members of the Organization of the Islamic Conference

into West Africa.

“You have to have a strong system in place and most West African countries

do not have regulation that can allow Islamic banking to operate,” he said.

The concept of risk-sharing in Shariah banking that prohibits interest payments

would be more useful in Muslim countries because their economies are less

diversified, the IMF economists said.

“In the Islamic banking system, both the bank and entrepreneur share the

reward and failure, and in many developing countries such risk sharing might

allow entrepreneurs to undertake projects that they couldn’t otherwise

contemplate,” said Kpodar at the IMF.

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A key remining industry issue is the

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2010-09-29

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