Islamic finance could be the answer to Africa’s growth problems

3 May    Blog

Access to finance and infrastructure funding can help Africa’s economic development journey. Islamic finance can increase access to finance and can help bridge the infrastructure gap in Africa. The G20’s German Presidency introduced a new initiative for sustainable economic development in Africa known as the G20 African Partnership. The partnership offers various tools and strategies for Africa’s development and the rapid growth of Islamic finance in Africa offers a great opportunity to support it.

What is the G20 Africa Partnership?

Looking at sustainable economic development in Africa in a holistic way, the partnership seeks to bring together diverse stakeholders on one platform, including G20 countries, multilateral development finance institutions, private investors and international organizations, all with an aim “to support private investment, sustainable infrastructure and employment in African countries”. In June 2017, the G20 welcomed 10 African countries to join the Compact with Africa — a country-specific investment framework as part of the partnership to advance various existing regional and global initiatives focused on Africa.

Islamic Finance today

The G20 Antalya Summit supported Islamic finance “to facilitate better intermediation for SMEs and infrastructure investment”, referring to it as asset-based finance. B20’s Infrastructure and Financing Growth Taskforce Policy Paper 2017 considers Islamic finance to be one of the key tools that can help boost sustainable economic development in Africa. It is already a $2 trillion industry and most global financial institutions are part of this niche market. With its unique asset-oriented structure, Islamic finance is quite relevant to the financing of large infrastructure projects.

Islamic finance transactions do not include interest but instead, use risk sharing to justify earning of profit. Other main considerations include avoiding businesses that could be deemed as harmful, such as tobacco, liquor, pornography, and those that deal with excessive uncertainty, such as gambling. Islamic finance investments also avoid highly leveraged businesses as payment of interest is one of the main financial activities for such businesses.

Christine Lagarde, Managing Director of the International Monetary Fund, has said that: “Islamic finance’s underpinning principles of promoting participation, equity, property rights and ethics are all universal values.” She said she regards inclusivity and stability as the main reasons behind the appeal of Islamic finance and noted its potential to support an underserved population, SMEs, start-ups and infrastructure investments. Lagarde has also highlighted the risk-sharing and asset-backed features of Islamic finance that help to reduce leverage and contribute to greater stability.

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