In part III of this series on Mobilization of Islamic Financial Resources in the region, we noted that those who seize opportunities at hand always succeed and those who hesitate, miss not only the opportunities at hand but even tomorrow’s potential opportunities. The Horn of Africa States, like other parts of Africa, remains underdeveloped, despite the rich resources and large labor force the region owns. Much of this underdevelopment, many reason, are related to politics and mismanagement. However, one should also note that the bad politics and mismanagement in the region and continent have roots in the poverty or induced poverty.

But is the region and continent really poor? We have asked ourselves this question time and again. Indeed, the region is not poor, but it is poorly managed, no doubt. Funds are scattered in the region but cannot be collected to be channeled towards developmental and profit-making opportunities. This is, in the main, related to an issue of trust and systems in place.

A market is generally the whole population of a country, where people buy and consume goods, manufactured and/or imported, and where people and corporations operate to make things or deliver services to others within the country or outside. The labor in the market and the corporations and the owners of the corporations and, indeed, the governments of a country or region are all players in the economic activities of that country or region. They all earn incomes in the process. Labor gets its wages, shareholders and owners of business earn profits and governments collect its taxes. All these incomes are used to purchase consumer goods and/or services and some are saved.

In most countries, and particularly the developed countries, all incomes are channeled through a financial system, with banking at its core. In developing countries such as the Horn of Africa States presents, most of the incomes are collected as hard cash and kept at home only to be partially used to purchase goods and/or services. Much of the incomes are, therefore, scattered in the population of the country and outside the banking system as cash in homes and peoples’ pockets/burses.

The Horn of Africa States region is typical of regions where cash transactions prevail and banking only plays a secondary role, catering only for the upper crest of society and major corporations and governments. It explains why the banking system is underdeveloped in all its forms and why the banking system has failed to play its rightful role in providing capital to those who have the capacity and wherewithal to create and innovate in the region.

This is more so for Muslim populations of the region, who do not trust the traditional banking system, which involves interest, an element prohibited in the faith. One must then look at the region and see how large such a market can be for an enabling Islamic finance institution and/or institutions. The region’s population is estimated to be around some 157 million and still growing. Of this, Somalia with some 30 million is considered as entirely Islamic. Ethiopia enjoys a Muslim population of some 50 to 60 million people out of 120 million, while Eritrea may have a population of 3 million as Muslims and Djibouti the last and smallest of the SEED countries has a population of 1 million Muslims. This puts the Muslim population of the region at 84 to 94 million people, roughly 53.5 to 59.9% out of 157 million. That represents a large market.

But the business of banking and finance does not distinguish between a Muslim and a Non-Muslim. It is a service, and it depends on how efficiently it is presented and served. In Africa there are many non-Muslim countries that provide Islamic banking and finance services. They include among others South Africa, Botswana, Zambia, Mozambique, Kenya, Tanzania, and Rwanda, and Ethiopia. The same goes for Europe, which despite only one country being Muslim, deploys Islamic banking and finance as one of the main banking products presented to the markets. Countries in Europe that deploy Islamic banking and finance products include among others the United Kingdom, France, Germany, Switzerland, the Benelux countries (The Netherlands, Belgium, and Luxemburg), and Spain.

Asia, like Africa has 27 Muslim countries that are members of the Organization of Islamic Cooperation (“OIC”), who all deploy Islamic banking. But non-Muslim countries like China, Japan, the Philippines, Thailand, Australasia including Australia and New Zealand, all deploy Islamic finance and banking. Fifty percent of Africa’s sovereign countries are members of the OIC and deploy Islamic banking and finance. This, indeed, is a product which is geared towards financing and investing in developmental activities that are not harmful to people and society in general.

The Horn of Africa States region is one of those regions in the continent where banking penetration remains very low in world and even African standards at below 25%. Despite the presence of a significant number of banks (30 in Ethiopia, 13 in Somalia, 11 in Djibouti and 3 in Eritrea) in the region, most people, do not have access to bank accounts in the region, which demonstrates that that there is an ample opportunity for the intrepid banker, and an Islamic banker at that.

There remains a knowledge gap in the continent with respect not only to Islamic banking and finance but to banking in general. Islamic banking and finance also faces many other hurdles including legal, regulatory and tax impediments that are slowly being addressed in the continent and the region.

Islamic banking and finance needs to attract a large number of the region’s population into the banking system, which they currently ignore. It is one of the problems of Africa to get scattered monies from people and help them save it in banks for onward deployment in productive sectors of the economy. It is even more difficult when people avoid banking because of their faith. Islamic banking and finance is remains to be the answer for it allows scattered monies in the population to be collected and redeployed productively. Islamic Banking and finance is selective for it avoids financing sectors that are generally considered harmful to the general society and population of the region such as gambling, drugs, prostitution, and others. It concentrates into productive sectors of the economy with respect to goods and services such as food production, clothes, shoes, houses, other consumables such as cars, health and educational equipment and so on.

Islamic banking and finance avoid risky businesses and carry out comprehensive risk studies before committing itself to a project. It, indeed, leads to a stable financial and investment system. It is also based on sharing of risks and profits with entrepreneurs in the business, that is the customers, in a proportional manner and here it offers financial justice unlike conventional and/or traditional banks which have to have their pound of flesh no matter the outcome of the business.

Islamic banking and finance is not yet a mainstream banking option in many countries and is seen as exotic. This could have repercussions on its development but then, it depends on the management of each institution and how well they work to capture and/or take advantage of a market. There is always competition in business and conventional/traditional banks not only compete among themselves but would also compete with new entrants of Islamic bankers in the market.

The Islamic banking assets of Africa comprised only 2% of global Islamic banking assets and less than 10% of total domestic banking assets in most African countries, as of December 2021, except for Sudan, where the total banking system is Islamic. According to a report of “Absolute Reports Pvt Ltd” on March 14th, 2023, global Islamic Finance market size was valued at USD 2.5 trillion in 2022 and is expected to expand at a CAGR of 12.67% to USD 5.1 trillion by 2028. Africa represents a significant portion of this growing asset base. The Horn of Africa States region, which now owns a growing Islamic banking and finance business would be a contributor to that expected growth of the market.

Many conventional/traditional banks also offer Islamic banking products through “Islamic Windows”. These include South African, Botswanan, and Ethiopian banks. Many countries in the continent employ Islamic Sukuks to raise funds for their developmental projects. South Africa, Togo, Nigeria, Senegal, Tunisia and others are among the countries that use sukuks (Islamic bonds) to raise funds. The Horn of Africa States region could deploy these and other Islamic products to raise funds for its developmental projects.

In an African Development Bank Outlook Report on the continent in 2018, it is noted that the continent would require some US$130-170 billion per year for its infrastructural financings until 2025. The need is still out there, and this would include some infrastructure projects in the Horn of Africa States, which can be financed through sukuks and other Islamic financing structures.

The need to have access to banking and finance in the Horn of Africa States region is enormous. Such accessibility would, no doubt build on what has already been achieved and Islamic banking and financial services would create an additional avenue of procuring finance for the populace and the market. This would, in due course, constitute an addition to promoting economic growth and social prosperity. The rewards of deploying Islamic banking and finance mobilization in the region would far outweigh the effort and would overcome the challenges.