The Horn of Africa States: Penetration Of Islamic Banking And Finance – OpEd


Banking and finance penetration in Africa has generally been slow until very recently. However, it has been growing lately and is on the rise, and as of 2022, it provided some kind of service to 48 % of Africa’s total population, rising from 35% in 2017 and 23% in 2013, according to, a major statistics provider. It was a good decade for banking and finance in the continent. Most of the growth of the industry was due to two major new entrants into the banking and finance industry, namely mobile banking and Islamic Banking and finance. In this article, we are concerned with the growth of Islamic banking and finance in the continent and more specifically in the Horn of Africa States.

First, we must note that the Islamic banking and finance industry is very small at US$ 4.1 trillion as of 2022 but is expected to exceed US$ 5.4 trillion by 2027, as global economies recover from the effects of the COVID-19 and the side effects of the Ukraine conflict. It is barely six decades old, but in Africa, where it started (Egypt), the industry is even smaller than in other parts of the globe. However, this is expected to rise over the next decades as the continent’s Muslim population of some 795 million adopt and move on to utilize Islamic banking services. Many non-Muslim populations also seek the services of the industry, including governments such as South Africa, Ghana, and Ivory Coast. They already have significant Sukuk portfolios. The large Muslim population of the continent accounts for 53% of Africa’s total population of 1.5 billion, providing the Islamic industry an ample market to exploit and service.

Second, one of the main constraints limiting the growth of the industry in Africa was the fact that the laws of most countries on the continent were not designed for Islamic Banking, which involves not only a different accounting system but also different tax and zakat implications. It remains one of the great challenges of the industry in the continent. This is coupled with a lack of understanding of the industry and hence unnecessary skepticism, and reticence, mostly from traditional conventional banks and bankers, which fear it would eat into their already limited business, in the continent. They do not take into consideration the fact that most of those who seek the services of the Islamic banking industry are already outside the industry and need to be brought in. Islamic banking, has, indeed, helped the growth of banking and finance in the continent.

The Islamic banking and finance industry is marked by its prohibition of interest and the sharing of risks and rewards. The fundamental principle of Islamic banking is achieving these through Shari’ah-compliant assets and is generally noted for being equity-based and/or asset-backed, ethical, and socially responsible mode of finance as opposed to conventional finance. It is, indeed, not speculative and is connected to the real economy.

Other than the regulatory issues and resistance from central banks to ease the introduction of Islamic banking and finance, many in traditional non-Islamic banking and finance business get confused as it forces changes to be made to commonly known non-Islamic economic infrastructures involving not only changes to documentation and legal processes but also tax implications and redistribution of wealth from a tiny few of the population to a more egalitarian infrastructure compared to traditional banking and finance business. The instruments and structures deployed in Islamic banking and finance, the tax implications, and the shortage of educational institutions providing such knowledge of the industry, remain acute short of the needs of the industry, although many are now acquiring these skills and knowledge. 

Many still use the old conventional banking and finance systems, which have failed the continent for over a hundred and more years. Conventional banking and finance were introduced into the continent by colonial Europe to service its local administrations and the few upper crests of local populations that were either working for or working with the colonial powers. No serious attempts were ever made by these banks to provide banking and finance services to the local populations, especially for the small and medium-sized companies which all worked with their wits. Indeed, the industry was made prohibitive through, not only high interest rates for credit transactions but also, for instance, requiring people to open accounts only when one is able to place a level of deposit higher than an ordinary African could afford.

The Horn of Africa States Banking and Finance Industry

Like the rest of the continent, the industry is growing as opposed to its past in the region. The industry was mostly government-owned and hence controlled, sometimes only supporting those who agreed to its policies and politics. It was, however, mostly based on command economies through the false socialist economies the governments of the region tried to impose on the populations which eventually led to the collapse of the region’s economies, mostly, those of Ethiopia and Somalia. The Djibouti banking and finance system was the only one based on free enterprise, but it was also like other parts of the continent hampered by the intentional limitation of the growth of the industry by the French colonial authorities and the systems inherited from them.

Over the past decade and a half, the banking and finance industry, and especially Islamic finance, in the region has taken a growth path, involving not only governmental policy changes with respect to the industry but also the growing involvement of private enterprises.  Ethiopia today owns close to 30 banks including a few of the old government-owned institutions such as the Commercial Bank of Ethiopia.  They include three fully-fledged Islamic banks. However, some 12 conventional banks also offer Islamic banking and finance through specialized windows. There are now an additional 20-plus banks under formation of which at least 4 would be fully-fledged Islamic Banking institutions. 

Somalia has by far the largest number of Islamic banks in the region. Indeed all 14 banks in the country are Islamic banks and no conventional bank has yet been licensed by the federal government of the country. The industry also involves takaful companies but no leasing and other capital market institutions.

The Republic of Djibouti has some 13 banks of which 3 are Islamic banking and finance institutions. Djibouti enjoys a strong currency pegged to the United States Dollar and an excellent central bank entuned to modern banking and finance in all its differing facets. It has, indeed, assisted in the development of private entrepreneurship in the industry in the region. Eritrea’s banking system remains in the old command economy infrastructure and the three existing banks in the region are all conventional banks.

The region’s traditional banking systems inherited from the colonial period did not help the penetration of banking and finance in the region. The industry was limited to a small market and was/is underdeveloped Its customer base in the past was restricted to government bodies in the main and a few powerful merchants. The general population in the region was not served well. 

The introduction of Islamic banking in Djibouti about a decade and a half ago presented new opportunities for the region. It introduced the industry to Somalia and Ethiopia, which countries copied Djibouti after seeing the transformation it has done to the country. Ethiopia remained reluctant although it had the most need to help its citizenry benefit from the services of banking and finance. Although it enjoys a Muslim population larger than any of the populations or even the combined populations of the other three countries of the region, the government seemed to be stuck with the old style despite being surrounded by a sea of change across the region. There are only three institutions in the country to serve a vast population of over 70 million Muslims in the country and perhaps a few microfinance institutions.

The introduction of Islamic banking certainly changed the attitude of citizens toward banking in Djibouti and the same has occurred in Somalia and is currently happening in Ethiopia with more and more people in the region getting access for the first time to banking and financial services. This is helping transform the economies of the region and even bureaucracies, which have been the main culprits in holding back the spread of Islamic banking and finance in the region.

The population of Djibouti is above 90% Muslim, however, the banking penetration in the country is at some 40% and rose from below 10 percent a decade ago. The Islamic banking sector provides about 20% of the banking services in the country. The banking industry is still growing, and the population usage of the industry is on the rise. In Ethiopia, banking penetration remains at a low 23% of the population according to the World Bank Group, indicating that Islamic banking penetration is even lower. In Somalia, Banking penetration remains a low 15.5% and is entirely Islamic banking and finance, but Somalis use mobile money services, which cover the entire bankable population of the country. No statistics on Eritrea’s banking are available except that it is government-owned and remains small and underdeveloped.

Despite the region being marked by conflicts both intra-state and inter-state, poverty and adverse climatic changes, problematic governance infrastructures, and ethno-based power struggles, the industry of banking and finance has not only shown resilience but has also started to grow over the past decade and a half. This growth of the industry is expected to continue in the foreseeable future as more and more of the region’s population is brought into the sector, mostly through Islamic banking and mobile banking.

Islamic banking and finance enjoys an ethical character and does not involve itself in interest-based transactions. It also avoids speculative businesses (gambling) and certain other products prohibited in Islam and therefore appeals to ethically conscious investors. With the large Muslim population of the region, the industry of Islamic banking and finance should continue to grow.

Dr. Suleiman Walhad

Dr. Suleiman Walhad writes on the Horn of Africa economies and politics. He can be reached at [email protected].

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