A new report outlines the severe economic fallout from the COVID-19 pandemic and limited fiscal space for economies in the North African region that are pushing governments to tap into all sources of financing, including those compliant with Sharia law. However, the lack of a favorable regulatory environment in the region is a major hurdle that has so far detracted from the success of Islamic finance there.
S&P Global Ratings new report ‘Islamic Finance Is Still Finding Its Feet in North Africa‘ outlines how it believes that sukuk issuance could help mobilize external resources, it is neither a panacea nor free money.
And while investors are actively chasing yield given the lower-for-longer interest rate environment, issuers with weaker credit quality are likely to find it more difficult to access the market. In this context, some North African countries might face some restrictions in tapping the market, even if they decide to follow the Islamic route. Islamic finance is not only about sukuk issuance, it also includes banking and insurance activities.
While it has become slightly more prevalent over the past five years, the contribution of Islamic banks to the overall banking system in North Africa remains limited. This is largely because Islamic banks have focused less on their economic added value and more on leveraging their religious differentiation, sometimes offering products that are more expensive than conventional peers. In some countries, the limited refinancing sources for Islamic banks has also stymied their growth.
Key takeaways from S&P include:
- Despite some progress over the past decade, the contribution of Islamic finance to North African economies remains small.
- We believe that some North African countries will slowly turn to the sukuk market to help finance the post-COVID-19 economic recovery.
- The industry is still trying to leverage its religious differentiation, though a stronger focus on its economic added value would be beneficial to shore up Islamic finance growth in the region.
To read the report in full visit S&P Global Ratings.