By Arno Maierbrugger Gulf Times Correspondent / Bangkok
The small republic at the Horn of Africa, Djibouti, is not in the business news very often, but when it happens, it can be insightful.
Djibouti, which has built up a small, but vital Islamic finance sector over the past two decades, is part of the growing number of East African countries to push Islamic finance as a core strategy for their banking sector. It is further – together with Sudan – yet the only country in the region to have reached meaningful levels of Islamic banking assets as a proportion of their total banking assets.
It is no coincidence that this has been noticed by the Islamic Research and Training Institute (IRTI) of the Islamic Development Bank which on April 4 released an Islamic Finance country report on Djibouti, which reviews the industry in the country very thoroughly by analysing the country’s Islamic finance ecosystem and identifying opportunities in the sector.
Islamic finance is a relatively young industry in Djibouti. The first Islamic bank, Saba Islamic Bank, was established in 2006 amid an absence of legal provisions and regulations supervising Islamic financial transactions. The regulatory authorities had nevertheless tolerated the opening of this bank, which was soon joined by Salaam Islamic Bank in 2008 and Dahabshiil Bank International in 2009, which since 2015 operates as East Africa Bank.
Islamic banking in Djibouti has been growing steadily since. As per latest available figures as of end-2017, the three Islamic banks (out of a total of eleven banks in the country) accounted for 20.9% of total banking assets.
“The untapped demand of a [comparably] large Muslim population, the low financial inclusion and the introduction of new Islamic banking regulations have contributed to the growth of the Islamic banking sector,” the report says.
There is, however, still a lot of action needed to drive things further forward. Apart from the three Islamic banks with their mainstream corporate and retail banking offerings, there is just a small microfinance sector that accounts for less than 1% of total industry assets. And although a takaful law has been introduced, there is still no takaful company operating in Djibouti, and there is still no market or legal framework for sukuk yet.
Meanwhile, the government is co-operating with other African countries to develop and offer Islamic finance products and increase the capacity of Islamic financial institutions. Besides, Djibouti has been hosting the annual International Islamic Banking Summit Africa for a number of years to promote Islamic finance in the region.
The report notes that Djibouti’s three Islamic banks have made significant progress in terms of scope and access to financial services. From 2013 to 2017, the market share of Islamic banks increased from 16% to 36% in terms of ATMs ownership, from 28% to 33% in number of branches and from 42% to 50% as per the number of bank accounts.
“This reflects a significant contribution of Islamic banks to improving financial inclusion in Djibouti as indicated by the rate of banked population which rose from 10% in 2006 to 25% in 2017,” the report notes.
Islamic banks in Djibouti have also managed to increase their market share both in terms of total assets which stood at 34.5bn Djiboutian franc ($194mn), or 17.7% of the total banking assets, in 2013. In 2017, their assets were estimated at 91.5bn Djiboutian franc ($514mn), representing the above mentioned market share of 20.9%.
As a roadmap for Islamic finance in Djibouti, the report recommends to improve Shariah governance, develop human resources for the industry, strengthen the role of takaful and sukuk, adjust tax laws for Islamic banks, allow for government institutions to utilise Islamic finance, capitalise on Djibouti’s favourable geostrategic location by setting up Islamic finance options for the shipping and logistics industry and, finally, develop a halal industry hub at the Horn of Africa in which Islamic banks take over the important role of financing.
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