The image of Africa generally brings to mind poverty, adventure and wildlife. All of these are part of the picture, but there is far more to Africa! The world is realising the size of Africa's potential across all metrics and investing in the significant business opportunities it offers.
One such investment was the purchase of the leading retail bank in South Africa by Barclays Bank PLC in 2004. This was the largest foreign direct investment in South Africa at that time. In March 2006, the bank supported the launch of Absa Islamic Banking, based on research on the potential of both local and African markets.
Vast Potential
South Africa is home to a million Muslims, 2 percent of the population, but they contribute significantly to the GDP. There are 400 million Muslims in Africa, making for a significant Islamic banking opportunity for Absa and Barclays on the continent.
Barclays currently operates in 12 countries across Africa and the Indian Ocean: Botswana, Ghana, Kenya, Mauritius, Seychelles, South Africa (through Absa), Tanzania, Uganda, Zambia and Zimbabwe. The bank also participates in structured deals in countries where it does not have a presence, for example, through Absa subsidaries Banco Comercial Angolano in Angola and Banco Austral in Mozambique. These operations will form the launch pad for the Absa Islamic Banking's Africa expansion programme.
The initial research into the feasibility of adding Islamic banking to the traditional banking product mix demonstrated the value of delivering niche products to meet the needs of a very diverse client base. The addition of Shariah-compliant products demonstrates commitment and delivery of value to a market that had not previously been able to bank as well as protecting the current client base from competition.
Laying a Foundation
The first imperative of the new operation in South Africa was the establishment of a Shariah Supervisory Board. After only six months in operation, Barclays in the UAE was offering an innovative, Shariah-compliant investment product developed by the Absa Islamic Banking team in South Africa. More products are now being explored with Barclays in other African countries.
The Shariah Supervisory Board has overseen the development of a range of products for the local market. These include chequeing accounts, contractual and discretionary savings with transactional capability and well as Shariah wills for the personal market. Vehicle and asset finance are offered to both business and personal clients, while transactional accounts and surplus cash management are available to the business market and structured term deposits to institutions and companies.
In addition to this basic product range, the executive team of Absa Islamic Banking rose to the challenge of developing a structured R 100 million trade in response to the needs of a particular client at the end of 2006. This entirely new offering, which was delivered in less than two months from approval by the Shariah Supervisory Board, is a demonstration of the aggressively responsive approach being followed in South Africa. It was recognised by Islamic Finance News as the 2006 Deal of the Year in South Africa.
Filling in the Gaps
Currently, 58 percent of the South African Muslim population uses conventional banks. Islamic banking is offered by two conventional banks, Absa and Albaraka Bank, a niche market Islamic bank. Conventional banks in South Africa have or are intending to launch Islamic banking as part of their customer retention strategy, as there is a definite tendency in South Africa and internationally for Muslim customers to move to Islamic banking.
The need for Islamic banking products is not yet being fully met in any sector of the market. The demands of business are not yet being matched with appropriate Islamic banking products, leading to limited uptake. Similarly, the need for private banking services has not been appropriately addressed, so private banking clients are still using conventional banking services. Although both Islamic banking institutions in South Africa currently offer savings and chequeing accounts, vehicle and asset finance, insurance, Islamic wills and unit trusts, only Absa Islamic Banking offers a petrol card and Albaraka Bank offers trade finance. None currently offer an Islamic credit card, personal loans or finance for working capital. Asset management companies that offer Shariah-compliant products have to some degree been successful in capturing the unit trust/ mutual fund market.
Absa Islamic Banking has identified the opportunity of taking a holistic view of the market and aims to provide a complete Shariah offering. Its products are aimed at customers across all retail and business segments and geographic locations throughout South Africa and have the advantage of the established Absa brand. Integrated sales and delivery of Islamic banking products are accomplished through the branch network, contact centres, Internet and ATMs. The current product range will be expanded during 2007.
The initial slow uptake of Islamic banking products in South Africa has developed into a growing demand as customers become aware of and comfortable with the product range. However, Islamic banks face a number of challenges in the market. The geographic footprint is an issue for niche players in the market, as it impacts their ability to reach clients, access appropriate staff and provide banking infrastructure more widely. A current lack of industry expertise is due to the fact that this sector is in its infancy in South Africa and, as competition increases, the challenge of satisfying the demand for Islamic banking skills will only increase.
In spite of these challenges, competition in the market is expected to increase significantly during 2007 rate as new players move in to maximise prevailing opportunities, although education and awareness remain major challenges for all institutions in the market.
Ahmed Moola is Managing Director of Absa Islamic Banking. Ahmed qualified as a Chartered Accountant in South Africa and furthered his studies by achieving a Higher Diploma in Financial Markets and Instruments, followed by a Program for Management Development at IESE Business School, University of Navarra, Madrid, Spain. His professional experience includes Absa Corporate & Merchant Bank, Absa Private Bank and Investec Bank. Ahmed was responsible for designing and developing Absa's Islamic Banking division.
By Ahmed Moola
© Business Islamica 2007
