Implications of Islamic Finance in Africa’s Socio-Economic Development

By Basheer Oshodi

Africa, a continent which still feels the scars of slave trade, the wounds of colonialism and apartheid, the disaster of neo-liberalisation, and the proliferating neo-patrimonial governance structure. With unblemished evidence that the IMF and World Bank economic prescriptions have consistently delivered too little, what then, are the expectations of Islamic finance?  


The Socio-economic Setting of the Africa State

At least Korea, Brazil, India and Nigeria had about the same GDP in 1960. It will now take the whole of Africa till 2050 to become as big as Brazil and India in GDP terms.1 We found relative socio-political stability before slave trade and little or no poverty before colonialism in Africa. As countries gained independence in the 1960s African economies had prospects and the commodity market strengthened these new states. The military started to show interest in state affairs and many were aided by Western powers. The case of Zaire now Democratic Republic of Congo seem a very good example. The “divide and rule” joker of the colonial masters were put on the table again to promote austerity and the structural adjustment programmes through the military in the 80s and the Washington Consensus was given potency. African leaders themselves had no clear and realistic direction and allowed ethno-religious diversity to pollute their focus. The influence of the African triple heritage has indeed come to play – a heritage of Semitic religion, western influence and indigenous bias.2 These three heritages manipulated the mind of Africans and greatly influence decisions; it helped to breed neo-patrimony; good politics but terrible economics; and alignment with foreign economic thoughts without regard for social ontology. Therefore a huge gap was created in Africa – the fissure of unimaginable corruption, uncontrollable state and market capture, and senseless rivalry culminating into extreme poverty, unemployment and widened income inequality.  


The Lies of Economic Theories and Disingenuous Washington Consensus

As neo-classical economic theories gained influence after the Second World War, there was also a need to expand markets and trade liberalisation was sold like a life-saving product to the developing nations. South American economies were quick to gain some consciousness and created their own terms for dependency theories, and indeed neo-dependency theories. Raul Prebish, the Argentinian economist stressed on trade protectionism for southern economies as a strategy to allow them to be self-sustaining and favoured import-substitution industrialisation.3 Meanwhile, African economists have become engrossed with knowledge gained from Western universities and enthralled with the books that were shipped from the United States and Great Britain. And so, they were quick to follow the neo-classical schools. And as if Karl Marx and Frederick Engels were of no use to Western Europe with their Communist Manifesto; and as if European bourgeois and monarchies at some point did not produce too many peasants; and as if that was not what lead to the welfare approach in modern Europe, one would have assumed that Western Europe had been such a perfect territory. So African economists rushed after the Nobel Prize winner in economics – Robert Solow who expanded the works of Harrod-Domar by including labour as a second factor and technology as a third independent variable to the growth equation.4 Again, Paul Romer’s endogenous new growth theory sincerely addresses technological spill overs in the industrialisation process, but many policy makers perhaps did not quickly realise that this theory would be fruitless only and until assumptions made are within the realm of reality in a jurisdiction that such theory would be applied. It is at this point that a well-intended theory becomes an inapplicable policy in a developing economy due to lack of adequate information, sound infrastructures, imperfect capital market, ineffective institutions and poor governance indicators. Thus, if the Washington Consensus had imagined that the ten agenda which includes deregulation, trade liberalisation and privatisation among others would be effective, then such a decision was indeed a blunder. So Africa witnessed unguided deregulation and state and market actors’ quickly shared national assets to themselves. Certainly, they could not manage these assets and so their cronies in power provided additional subsides that are still in place. And there was a big mess of the Washington Consensus. At this time South Korea learnt from Japan’s embedded autonomy5 and created a cohesive capitalist state6 even though they distorted the market force mechanism to an extent where state and market formed a symbiotic partnership.

[ms-protect-content id=”5662″]

Islamic economics and financial system

A huge gap was created in Africa – the fissure of unimaginable corruption, uncontrollable state and market capture, and senseless rivalry culminating into extreme poverty, unemployment and widened income inequality.

Karla Hoff and Joseph Stiglitz observed that “economist who tried to design policies to fit developing country markets generally assumed rigidities in markets, but did not explain them by reference to a choice-based perspective”.7 With the influence of the triple heritage, Africa is again caught in the web of Islamic finance without Islamic economics, at least in theory. The Islamic economic model is an entire encyclopaedia based on the rules of Islamic commercial jurisprudence. The GCC have created the elite club and it became easy for Islamic finance within these oil rich states to foster. Thus this somewhat new industry is enjoying petro-dollars to spread its message. Malaysia on the other hand built Islamic finance and indeed Islamic economics by learning from scratch while aligning with developmental schools of the Asian Tigers. On the other hand, Europe led by the United Kingdom has become the hub for Islamic finance. Africa indeed now has a new bride – Islamic finance. So what really do Africans want with Islamic finance? Is it just to align with the GCC, Malaysia and the UK as partners in faith? Or, is it to solve the continent’s economic woes? Meanwhile, financial aids from the West are mainly used to pay international consultants and experts to develop economic policies. In the case of Islamic finance, grants, trade lines and direct funding are lodged with African financial institutions and governments. The Standing Committee for Economic and Commercial Cooperation of the Organization of Islamic Cooperation (COMCEC) in the financial outlook of the OIC member countries in 2015 referred to the World Bank income categories and found 13 African states out of the 15 OIC countries in the low-income category. They include Benin, Burkina Faso, Chad, Guinea, Guinea-Bissau, Mali, Mozambique, Niger, Sierra Leone, Somalia, Gambia, Togo and Uganda. In the lower middle income group 9 out of 19 countries are African countries and in the upper middle income countries 4 out of 16 countries are African nations and none in the high income group. This shows that with over 45 years of OIC membership of African states, their economic situation has hardly been positively affected. It also means that the Islamic economic model has now been properly digested into the economies of Africa. More specifically, Islamic economics and finance in the last ten years that it has become more popular has been of little or no effect in the development of Africa. In the same light, issues around poverty, unemployment and closing of the inequality gap is yet to be addressed effectively. Thus, relevant actors would need to visit the strategy desk and represent a proposition that works. The CGG, UK and Malaysia did not look at the poverty side in the development of Islamic finance contracts – of partnership, sales and lease and so they were mainly designed to earn profit. This “profit-only” model would only get more capital into the hands of egocentric state and market actors in Africa. The Islamic Solidarity Development Fund of the Islamic Development Bank (IDB) is focused towards touching lives and reducing the multidimensional poverty index in OIC states. This should work effectively by collaborating more with other multilateral development institutions and donor countries globally, thereby harmonising fragmented programmes into a more cohesive one.


Can Africa Industrialise with Sukuk?

Thomson Reuters8 referred to the ICD-Thomson Reuters and asserted that total global Islamic finance asset reached USD1.8 trillion in 2014 in which sukuk (Islamic investment certificates) made USD295 billion or 16% of total Islamic finance asset. Islamic banking is however the largest sector with USD1.3 trillion, or 74% of total Islamic finance asset. It was also observed that Malaysia is the world’s sukuk leader in terms of number of issuance, value and sukuk outstanding. In a 2015 survey by Thomson Reuters for preferred market for sukuk shows UAE, Saudi Arabia, Malaysia and the UK consecutively as the most preferred market.9 No African market made the first 12 countries. Out of the 11 emerging Islamic finance markets Egypt and Tunisia made the list in which USA, China and France were the most preferred consecutively. With the free fall of crude oil prices and negative 2016 budget deficit in 5 out of 6 GCC countries, the Thomson Reuters research still shows that the risk in investing in these economies are mild. Senegal, Cote d’Ivoire and South Africa issued sovereign sukuk in 2015 with the support of the Islamic Corporation for the Development of the Private Sector (ICD), a member of the Islamic Development Bank (IDB), and Nigeria is considering to issue one in 2017. Unfortunately, these sukuk do not seem to have guarantees from any multilateral institution making it more difficult for them to attract foreign inflow couple with foreign exchange risk and rapid devaluation of currencies of African markets. Foreign investors including foreign Islamic investments would prefer very short portfolio investment which allows them exit very quickly thereby further destabilising the African economic architecture. Of what benefit then is the Islamic finance proposition and where is the Maqasid al Shariah which seeks to achieve human wellbeing and communal good-life while enriching and safeguarding the human self, faith, intellect, prosperity and wealth?


The Trajectory of Development Rather Than Growth

Africa is yet to have a development model and plan. The African Development Bank (ADB), the Afriexim Bank, Islamic Development Bank together with the United Nations, World Bank/IMF and countries that have demonstrated practical commitments like the Chinese among others need to work with African governments to draw the trajectory for development through the embedded autonomy approach. One would give preference to the Korean style of development where precise goods and services within the realm of import substitution within Africa, and export promotion outside Africa are well articulated. Like a small enterprise, access to required funds for trade and industrialisation, access to defined market needs to be established, and the required skills or capacity and technology needed to set forth this industrialisation agenda be built in Africa in such states where production cost is largely low. It then makes sense to treat Africa like one country where labour may move freely but with consciousness of extreme circumstances. Africa may then relegate those empty GDP and GNI growth to the backdoor and pursue human welfare through employment and good enough governance aimed at industrialisation where gaps from state, market, value and socio reality are properly coordinated yet borrowing from neo-classical, dependency, world system and Islamic economics schools. This indeed may be referred to as integral socio-economic development framework with its “dynamic balance”.10


About the Author

oshodi-webDr. Basheer Oshodi is the Group Head, Sterling Alternative Finance Proposition and he drives the non-interest banking (Islamic banking) franchise in Sterling Bank. He has over 17 years work experience in banking, real-estate and management consultancy. He is a member of the Securities and Exchange Commission (SEC) Alternative Finance Market Master Plan Committee; and a member of the Islamic Finance Working Group – sponsored by EFInA (DFID programme). Basheer holds a B.Sc. and M.Sc. in Estate Management and General Management respectively from the University of Lagos. He has a PGD from the Institute of Islamic Banking & Insurance (IIBI), London and he is an Associate Fellow of the institution.


O’Neill J. 2013. The BRIC Road to Growth. London Publishing Partner.
2. Mazrui, A. 1986. The African: A Triple Heritage. London. Guild Publishing.
3. Oshodi B. A. 2014. An Integral Approach to Development Economics: Islamic Finance in an African Context. Farnham: Gower Publishing.
4. Todaro M. P. and Smith S. C. 2009. Economic Development. Upper Saddle River, NJ: Pearson Education.
5. Evans P. 1995. Embedded Autonomy: State and Industrial Transformation. Princeton, NJ: Princeton University Press.
6. Kohli, A. 2004. State-directed Development: Political Power and Industrialization in the Global Periphery. Cambridge: Cambridge University Press.
7. Hoff, K. and Stiglitz J. 2008. Modern Economic Theory and Development. Washington, DC: World Bank, Development Research Group –Macroeconomics and Growth Groups, Policy Research Working Paper.
8. Thomson Reuters. 2016. Industry at Crossroads: Thomson Reuters Barwa Sukuk Perceptions & Forecast 2016. Thomson Reuters.
9. Thomson Reuters, page 26
10. Lessem R. and Schieffer. 2010. Integral Research and Innovation: Transforming Enterprise and Society. Farnham: Gower Publishing.