Djibouti enlists Islamic finance to boost banking penetration

Nov 7 (Reuters) – Djibouti is promoting Islamic finance to increase banking penetration in the tiny African nation and help fund upgrades to the country’s infrastructure, its central bank governor said.

Djibouti enlists Islamic finance to boost banking penetration

Djibouti enlists Islamic finance to boost banking penetration

More than most countries, where Islamic banking developed in the shadow of a large conventional banking sector, Djibouti sees sharia-compliant finance as a way to pull itself out of poverty.

That’s because most people are still not customers of banks, which limits the economy’s ability to assemble capital for investment.

Central bank governor Ahmed Osman said banking penetration had risen from 10 percent of the population six years ago to 17 or 18 percent now, but that conventional banks were not attractive to many people for religious reasons.

“There is big appetite – 90 percent of the population is Muslim and we understand the rate of bank penetration is low due to religious beliefs,” he said in a telephone interview.

The spread of Islamic banking will also help authorities move more business activity from the informal economy, which is unregulated and untaxed, to the formal sector, he added.

Foreign investment from Gulf countries has improved Djibouti’s economic outlook but 42 percent of the population of about 900,000 lives in extreme poverty and 48 percent of the labour force is unemployed, according to an April report by the International Monetary Fund.

BANKING LAW

An Islamic banking law introduced in 2011 and seven guidance notes from Djibouti’s central bank have helped to develop the industry, which follows religious principles such as bans on interest and gambling.

Four of the 11 small banks in the Horn of Africa state are Islamic: Saba Islamic Bank, Salaam African Bank, Dahabshil Bank International and Shoura Bank. The latter two were set up in 2010.

The Islamic banks, which now account for about 15 percent of the country’s total banking assets and 12 percent of deposits, are backed by investors from Yemen, Somalia, the United Arab Emirates and Egypt – regional links which Djibouti hopes to strengthen.

“We are pushing them to grow. Two of them are new and they need training, new technology, new products,” Osman said.

Islamic banks have been growing at an annual rate of 20 percent, and as many as three other banks are considering whether to establish Islamic windows, although there are no current applications, he added.

The IMF forecasts real gross domestic product growth in Djibouti of 5 percent for 2013, buoyed by port activity, trade with Ethiopia, construction, and foreign direct investment. Djibouti hosts a French military base and a U.S. base; its port is used by foreign navies protecting the Gulf of Aden’s shipping lanes, some of the busiest in the world, from Somali pirates.

The government wants to finance projects which include upgrading ports, rebuilding the railway in the south and developing new road and rail links with Ethiopia. This is an opportunity for Islamic finance, which could help to attract regional investors for the projects, Osman said.

“Financing of infrastructure is definitely an option, if we find more financial vehicles that are more adapted and more cost-effective.”

The country’s Doraleh container terminal was built through a venture between the government and Dubai’s DP World ; financing came through a $396 million Islamic deal partly funded by the Jeddah-based Islamic Development Bank. (Editing by Andrew Torchia)

http://www.reuters.com/article/2013/11/07/islamic-finance-djibouti-idUSL5N0IR1FJ20131107

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