Inside Senegal’s push for Islamic SME investments

Senegal-based Khuwaylid Capital is entering a segment that remains largely unexplored by Islamic private equity managers – equity and quasi-equity investments in SMEs – through its debut Shariah compliant Khuwaylid Capital Fund I.

"Khuwaylid Capital operates at the intersection of Islamic microfinance and Islamic banking," Founder and Director-General Diago Dieye told IFN Investor.

"Islamic microfinance is essential for smaller ticket sizes, while Islamic banks play a critical role in deposits, trade finance and asset-based lending. Our role is different: we provide Shariah compliant equity and quasi-equity to SMEs that need patient, growth-oriented capital,” she said.

The firm estimates Senegal's SME financing gap at more than CFA800 billion (US$1.36 billion), equivalent to around 5% of GDP. Despite the country's population being more than 95% Muslim, Shariah compliant financial assets account for less than 2% of the financial system.

"The mismatch points to a large, underserved market for values-based financing solutions that are better adapted to SME realities,” Diago said.

She stressed that the same dynamics extend across the West African Economic and Monetary Union and the wider Economic Community of West African States region, where underserved SMEs coexist with limited supplies of Shariah compliant capital.

The fund focuses on agribusiness, education and healthcare value chains, which management says align with long-term development priorities. The firm targets to raise EUR15 million (US$17.42 million) for the vehicle.

"They directly contribute to food security, human capital formation, access to care, job creation and inclusive growth," Diago said.

Activities such as trading, consulting, alcohol, tobacco and weapons are excluded. However, Khuwaylid says its mandate goes beyond negative screening.

"Our objective is not merely to deploy capital, but to back enterprises that generate measurable economic and social value in their local markets,” Diago said.

Agribusiness currently dominates the pipeline, which comprises close to 30 projects. Two investments have already been announced, with up to three more targeted before year-end, subject to due diligence and investment committee approval.

Senegal has made progress in developing Islamic finance infrastructure through sovereign Sukuk issuances, Islamic banking institutions, a High Authority for Waqf and growing interest in Islamic microfinance. Yet Khuwaylid argues gaps remain, particularly in private capital markets.

"The regulatory and market infrastructure for Shariah compliant private equity, quasi-equity and SME investment vehicles is still nascent,” Diago said.

According to the firm, this places responsibility for deal structuring, investor education, legal documentation and Shariah governance largely on the fund itself.

"The main challenge is therefore not demand; SME appetite for financing is significant," Diago said. "The challenge is to create investable, bankable and Shariah compliant structures that can satisfy investors, regulators, entrepreneurs and Shariah scholars at the same time."

Khuwaylid's investor base currently consists mainly of local qualified investors including individuals, institutions and family offices. The firm argues that strengthening domestic capital pools is becoming increasingly strategic as global capital flows grow more selective.

At the same time, it views catalytic and impact-oriented investors – including foundations, family offices and development finance-backed platforms – as important partners in helping absorb early market-building risk.

Looking ahead, Khuwaylid sees climate-linked investments and Shariah compliant housing finance as future growth areas across West Africa. A partner in Côte d'Ivoire has already been identified for its housing finance initiative.

"We do not view the market primarily through the lens of competition," Diago said. "No single fund can close the SME financing gap alone."