Islamic Development Bank: An Instrument for Alternative Development Financing in Africa

Islamic finance is increasingly gaining prominence in the global financial architecture. Unlike the conventional finance where interest earning constitutes significant portion of banks’ income, Islamic banking and finance promises a profit-sharing model and forbids interest earning based on shariah compliance. In this chapter, we underscore the need for using Islamic banking to finance development in Africa through a case study of the Islamic Development Bank (IsDB) model. Our study finds that out of the 57 member countries in IsDB, Africa has 27 members. Also, IsDB since its inception in 1975 has advanced over $65 billion in financing for development in Africa. It has also supported trade financing with about $20 billion. Very importantly, the chapter provides various Islamic financial products and services, the risk-mitigating mechanisms, the financing models, monitoring, evaluation, and impact assessment of projects financed by IsDB in Africa. Sukuk, is the main debt instrument used to raise money in the capital markets and it operates based on shariah principles. We find that sukuk is one of the lowest risk-bearing financial assets as compared with the conventional debt instrument. The policy implication is that Islamic finance provides a good opportunity for high debt-ridden African countries to take, especially through the issuance of sukuk, to help finance infrastructure in Africa.