How Islamic finance is enabling access to capital in African markets

A few years ago, a major family-owned enterprise in South Africa’s consumer goods sector began a phased transition towards Islamic-aligned financing. This strategic decision, grounded not in cost, but in conviction, signalled to financial institutions that all future lending would need to comply with Islamic values, giving them time to develop suitable products.

Islamic finance, rooted in centuries-old principles, prohibits interest and is anchored on asset-based structures that promote risk-sharing and productive investment. Common instruments include murabaha, a cost-plus arrangement where an asset is purchased and resold at a markup, and ijara, which mirrors lease financing. While traditionally applied to straightforward purchases such as property or vehicles, Islamic instruments are increasingly being adopted to meet more complex corporate financing needs. When the business recently sought funding to support an acquisition, its financial partner, Absa, structured a solution that preserved the economic substance of a term loan while remaining fully Shariah-compliant.

The transaction provided the liquidity required to pursue a strategic acquisition and continue scaling the business. It also signals a growing institutional capability to meet sophisticated financing needs while abiding to Shariah principles, expanding the applicability of Islamic finance beyond retail banking and into corporate capital structuring.

The global Islamic finance market was estimated at almost US$8 billion in 2024 with projections indicating it will surpass US$12 billion by 2030. This growth reflects not only rising demand but a broader institutional readiness to offer more diverse, commercially viable products.

Beyond traditional retail-focused structures, the market now includes instruments designed to accommodate working apital needs, balance sheet optimisation, and long-term investment – including Murabaha used in structured trade, sukuk for scale capital funding, and syndicated Shariah-compliant facilities that replicate the economics of conventional loans within an ethical framework.

While the framework prohibits interest, excessive uncertainty, and speculation, it supports a wide range of financial arrangements that align with ethical governance and productive use of capital. This includes asset acquisition, working capital, infrastructure development, trade finance, and equity participation. Its principles are designed to ensure that financing structures serve real economic purposes, which allows financial institutions to structure purpose-built, compliant solutions across a spectrum of client needs.
Say, for example, a business seeks to acquire new operational premises to expand its manufacturing capacity.

Under a conventional structure, this would typically be financedthrough an interest-bearing loan secured against the property.

Within a Shariah-compliant framework, however, a diminishing musharakah model can be applied. The bank and business jointly purchase the property, with the business gradually acquiring the bank’s share over time through scheduled payments. The business also pays rent on the portion it does not yet own, compensating the bank for use of its capital. This structure enables asset acquisition without interest and ensures the financing arrangement remains anchored in shared risk and tangible economic value.

Importantly, Islamic finance is not exclusive to Muslims. Its principles offer practical value to a broad range of businesses seeking transparent, values-aligned financing, which many African enterprises do.

For the entrepreneur with deeply rooted cultural beliefs, who considers traditional banking channels as inappropriate, Islamic finance can provide a critical pathway toward building financial systems that are both responsive and structurally inclusive.

Islamic finance offers instruments that can be adapted to fit these informal or semi-formal contexts without compromising rigour. For example, a mudarabah partnership allows the financier to provide capital while the entrepreneur contributes labour and expertise, with profit shared according to pre-agreed ratios. This structure recognises the value of enterprise capacity even when formal collateral is absent. Similarly, a murabaha contract can facilitate inventory purchases or equipment upgrades through clearly defined, asset-backed arrangements that avoid interest and enhance transparency.
These mechanisms matter in markets where businesses are active but underserved, not because they are unviable, but because the models used to assess them are misaligned.

While the widescale adoption of Islamic finance presents certain complexities, progress is steadily being made. The global effort to harmonise Shariah interpretations, supported by organisations like AAOIFI, is helping to reduce uncertainty in product design.

However, public awareness remains limited, even in uslim-majority markets, where understanding of core concepts is often low. And while financial institutions can develop compliant products, without an enabling regulatory environment, scale remains constrained. Across the continent, tax frameworks, disclosure rules, and licensing regimes are gradually adapting, but further alignment is needed to support consistent implementation.

Islamic finance is shaped by time-tested principles, yet it is becoming increasingly relevant as African businesses seek to diversify sources of capital. Unlocking its full value, however, will require moving beyond cookie-cutter models and enabling more adaptive, purpose-built solutions that reflect the realities of African enterprise. The foundations are already in place – what is needed now is more deliberate integration across regulation and design.