Study on Islamic Finance in Eastern Africa

Abstract

The practice of riba is forbidden by Islam. According to Islamic laws (Sharia), it is not allowed to charge any interest on money lent to someone. This prohibition originates during the Middle Ages in the Arab peninsula (Martens, 2021). However, the concept of modern Islamic finance was launched in the 1940s under the impulse of the Pakistani Sunni theologian Sayyid Abul Ala Maududi. Over the past decades, Islamic finance had a significant expansion across the world. The total assets of financial institutions offering Islamic products and services have grown by almost 25% a year over the past decade to reach US$2.7 trillion4 in 2020. It is important for East African countries to properly design policies that enable them to attract Islamic financial institutions and investments into their economies. The countries of the region, therefore, need to have an in-depth understanding of Islamic finance, its rules, standards, requirements, and investment criteria to design an appropriate legal and regulatory framework that meets these requirements. This is the high-level objective of this study launched by ECA/SRO-EA on Islamic finance. This report presents the results as well as the recommendations of the study carried out by the consultant. After this introduction, the second part will focus on some definitions and generalities of Islamic finance. This part of the report will also discuss the worldwide evolution and trend in Islamic finance development. The third part will review and analyses the current state of Islamic finance in Eastern Africa, whereas the fourth part of the report will analyses the link between Islamic finance, financing needs, and the development of the sub-region’s economies. The fifth part of the report will discuss, in addition to the sector regulatory requirements, the skills, competencies gaps, and other constraints in the sector in the context of Eastern African economies. The last part will conclude the report by providing policy recommendations.