Keeping the faith: Islamic finance could help increase banking penetration

Amid the steady expansion of Djibouti’s financial sector over recent years, Islamic finance has been taking an increasingly prominent role. Of the 10 existing banks in late 2015, four were Islamic, and the segment currently accounts for between 15% and 20% of the overall market.

According to fourth-quarter 2015 information from the Central Bank of Djibouti (Banque Centrale de Djibouti, BCD) the four Islamic Banks operating in Djibouti had assets of over DJF50bn ($280m), disbursed 15% of total credits allocated in the country and accounted for 14% of total assets in the banking sector. “The Islamic banks have invested heavily on the economy, with assets focusing on land and real estate,” Abdirahman Robleh, head of statistics at the BCD, told OBG.

Regional Trend

 Islamic Banks are focusing on all segments of the population and sectors of the economy making their mark in the local economy. Economies throughout Africa have seen an uptick in interest in Islamic finance, in part as regulators seek greater diversity of products and services to aid with inclusion, and increase competition to bring down high rates. According to the World Bank, as of 2012 there were 38 Islamic finance institutions in Africa, with 17 of these based in sub-Saharan African countries. Total Islamic finance assets in sub-Saharan Africa accounted for 16.6% of Islamic finance assets worldwide.

Expanding Global Market

The global Islamic finance market has been expanding at an average annual rate of 10-12% over the past decade, according to 2015 figures from the World Bank, and it now accounts for assets approaching $2trn. This process has been accelerated by the robust growth of Islamic financial service providers in the Gulf and Malaysia – two of the largest regions for sharia-compliant financial activity – which in many cases are looking for new opportunities abroad.

With Djibouti’s banking customer base still largely underdeveloped, growing product offers by Islamic banking institutions might help attract a considerable number of unbanked Djiboutians into the banking system, and this is something the government has sought to encourage. In November 2015, for example, the BCD organised the fourth African Conference on Islamic Finance, in a bid to further raise the country’s profile.

Growth Drive

The first Islamic bank to enter the Djiboutian market was Saba Islamic Bank Djibouti Branch, backed by Yemeni capital. Its move was followed by the Djibouti-owned Salaam African Bank in 2008. In 2009 Dahabshiil Bank International, which is owned by Africa’s biggest money transfer business, then established a presence in Djibouti, subsequently rebranding as East African Bank. A fourth Islamic bank, Egypt’s Shoura Bank, has shut down its operations as of 2016. According to central bank figures, the biggest of these was Dahabshiil Bank International, with total capital of DJF3.16bn ($17.7m), followed by Salaam African Bank at DJF1bn ($5.6m), and Saba Islamic Bank with DJF300m ($1.7m). The BCD is also working to set up a National Sharia Council within the institution, in order to assist in the oversight of the segment. In 2015 the country joined the General Council for Islamic Banks and Financial Institutions, a sector body based in Bahrain which groups several industry players from across the globe. In addition, the University of Djibouti has started offering Islamic finance courses to improve the calibre of local human resources.

Opening A New Segment

The attraction of Djibouti as an Islamic banking destination is fairly clear. In addition to the predominantly Muslim population – which aids but is not necessarily a prerequisite for the expansion of sharia-compliant services, as countries such as the UK and South Africa have demonstrated – banking penetration rates in the country remain relatively low.

Although the rate of financial inclusion saw a steep increase after the sector was liberalised in 2006 – going from 5% of the adult population in 2007 to some 20% in 2015, according to figures from the BCD – a large proportion of Djibouti’s population remains unbanked.

Joining The Club

The expansion of Islamic finance in Djibouti has also prompted regular commercial banks to explore the sharia-compliant segment as a further avenue for growth. In 2011 the central bank reinforced Islamic finance regulation and allowed for this possibility.

However, the regulation states that any commercial bank wishing to open an Islamic finance branch will have to keep its assets, operations and management separate from regular banking operations. The minimum capital for these Islamic banking branches within commercial banks was set at DJF300m ($1.7m).

The first regular bank set to take advantage of the law was Banque pour le Commerce et L’ Industrie Mer Rouge (BCI-MR), one of the country’s oldest banks, which has announced plans to open an Islamic banking branch. According to the BCD, the necessary documentation has already been submitted and the new Islamic finance branch is expected to begin operations in 2016.


“The fact that the central bank allowed commercial banks to open Islamic branches is also a way to expand the bankable population. It allows them to reach potential customers that would not go to conventional banks, which would be contrary to their faith,” said Ismail Guyo, chief financial officer at East Africa Bank.

Islamic banking practices are also having an impact on other areas of the financial sector. In early 2013 the authorities launched a microfinance pilot project backed by the Islamic Djibouti Social Development Agency, encouraging access to an Islamic financing scheme for 10,000 households in the country. In many aspects, however, Islamic banking services will face the same hurdles that traditional banking is having to overcome in order to grow in Djibouti.

“The country still has a cash culture, and there is a need to establish a proper ATM network to change that,” Nur Abdi Mohamed, general manager of Salaam African Bank, told OBG.

Big Ticket- Financing

Although domestic providers are modestly sized and – like the country’s commercial banks – have limited scope for financing the multi-billion-dollar infrastructure projects being built in Djibouti, foreign sharia-compliant institutions have been prominent in supporting a number of the country’s capital projects.

The building of Doraleh Container Port, for example, was facilitated by a $427m loan that was backed by the Multilateral Investment Guarantee Agency, which is part of the World Bank, and funded by Dubai Islamic Bank in conjunction with Standard Chartered. Reinsurance for the deal was covered by the Islamic Corporation for Insurance of Investment and Export Credit.

Looking Forward

Islamic finance is set to become increasingly integrated with the country’s financial sector over the coming years, and its impact on the competitive landscape is already being felt in some ways. A law regulating Islamic insurance was published in 2014, for example. For the time being, a market study commissioned by an insurance pool is under way, with results due by the end of 2016 on the feasibility of marketing sharia-compliant products. If successful, this may add new challenges in terms of banking regulation. However, it will also present new opportunities for the sector to raise overall penetration of banking services. Besides the possibility of expanding retail banking in the country, Islamic financing vehicles might also get a larger share of infrastructure development projects in the future.