Still springtime in North Africa?

As the reverberations from the Arab awakening begin to settle, interest in Islamic finance is rising

It may still be 'too early' to gauge the full impact of the events that led to regime change across much of the Arab world and are still being played out in Syria and elsewhere. It is, however, clear that one beneficiary is the Islamic finance sector. Unmet economic need was one of the key triggers for the protests.  New governments in Tunisia, Libya and Egypt are now moving to embed Shari'ah-compliant finance into their economic systems.

For example, on 29 September 2012, plans were revealed in Tunisia to issue Sukuk early this year. Reuters reported Chadli Avari, Governor of the Banque Centrale de Tunisie, as saying "Tunisia will begin issuing Islamic bonds early next year ... This is part of the draft budget for 2013." His comments were supported and underlined in November by then Acting Minister of Finance Slim Besbes, who told state radio, "One billion dinars will be available from Islamic bonds in the 2013 budget..." Elyes Fakhfakh, from the Ettakatol Party, was appointed Finance Minister in December and has reiterated a commitment to structural reform.

Committees set up by the finance ministry, religious affairs ministry and the Central Bank are working on an Islamic finance law in order to encourage Islamic banking in Tunisia. According to Governor Avari the two Islamic banks presently operating in Tunisia have total assets of TND 1.4 billion ($893 million), equivalent to just 2.5 per cent of the total assets of the Tunisian banking sector. Morocco, too, is keen to capitalise on Islamic financial services but there is interest in all the countries of the Maghreb.

North Africa, as defined by the African Development Bank (AfDB), includes Egypt, Libya, Tunisia, Algeria, Morocco and Mauritania. Existing Islamic financial institutions in these states account for only a small proportion of total bank deposits and total bank assets, around five per cent at best. Egypt has the longest history of Islamic banking and finance, dating from the 1960s and lays claim to be among the earliest adopters of 'modern' Islamic finance, yet even there the industry is effectively underdeveloped compared to the countries of the Gulf Co-operation Council (GCC) and Malaysia.


In recent months, financial software provider Path Solutions signed a succession of deals to provide nascent institutions in Mauritania with Islamic banking systems. Most recently, Bank Al Muamelat Assahiha (BMS) revealed at the World Islamic Banking Conference, Bahrain, in December 2012 that it had chosen Path Solutions' Enterprise Islamic Banking System - iMAL to support the launch of its Islamic banking operations across four initial branches.

Abdallah Ahmed El Mokhtar, General Manager of BMS, commented that, "Path Solutions has demonstrated a sound understanding of the Islamic banking processes and products and a commitment to ethical business practices."

In fact BMS was the third bank in Mauritania to have chosen Path Solutions' iMal product. Previously, in November, Banque Populaire de Mauritanie (BPM) selected iMAL as its Islamic Core Banking Solution and, in October, Banque Islamique de Mauritanie (BIM) announced the successful 'go live' of iMAL at its main branch in Nouakchott.

BPM is 100 per cent owned by Groupe Mauritanie Leasing, one of Mauritania's largest financial services groups. "We are committed to provide a genuine alternative to conventional banks, to do away with disparity and build socio-economic infrastructure in Mauritania", said Limam Ould Ebnou, AGM of Groupe Mauritanie Leasing, in November.

BIM is one of the four West African banks falling under Dakar-based Tamweel Africa Group, which engaged Path Solutions in December 2010 to align their core banking systems. It is a startup universal bank with a paid-up capital of MRO 6 billion ($20 million). Tamweel Africa Holding, the main shareholder of BIM (99.99 per cent) is a joint-venture between the ICD (60 per cent), the private sector arm of the Islamic Development Bank Group, and Bank Asya (40 per cent), a Turkish participation bank.


Shari'ah-compliant banking is still a niche market in North Africa. In Prospects For Islamic Banking In North Africa Improve Following The Arab Spring, Standard & Poor's analysts underline this point, noting that the changing political landscapes in North Africa following the Arab spring led to renewed debates on the development of the Islamic banking industry in the region. Further, they suggest, "The development of Islamic banking activities, among other financial initiatives, in North African countries where we rate banks--Egypt, Tunisia, and Morocco--could in our view help alleviate some financial pressures that those countries face. For instance, it could increase banking penetration and intermediation, and broaden access to funding sources for regional corporates and sovereigns. These favourable regional developments could, in turn, help the Islamic banking industry become more sophisticated and integrated globally."

There is a hill to climb; in a report issued in 2011, the African Development Bank cited three factors that account for the relative underdevelopment of Islamic banking in North Africa:

n the limited development of retail banking generally,

n the lack of knowledge of Islamic banking amongst potential clients, and

n the absence of  government support.

Banking generally, and not just Islamic banking, is relatively less developed in North Africa with commercial banking rather than retail banking the dominant sector.

North African countries have relatively large populations but low banking penetration, and this is especially true of Egypt. Introducing financial products that are compatible with religious beliefs could help narrow that gap. According to a report published by the World Bank, such an initiative could increase the share of adults in the Middle East and North Africa with a formal bank account by up to 10 percentage points.

This is significant because it has largely been the retail Islamic model which has led the way in the GCC and Malaysia. The lack of knowledge of Islamic banking in North Africa, said the AfDB, is also an issue, partly because of limited marketing. In the Gulf and Malaysia Islamic banks have a much higher public profile, not least because as primarily retail institutions they have to compete strongly with each other, as well as with conventional banks offering contracts based on interest payments and receipts.

Serious commitment is required from policymakers. The AfDB notes that there are no comprehensive Islamic banking laws in North Africa apart from the limited provisions made in Egypt under law number 48 of 1977 and the licensing requirements for Islamic banks are generally identical to those for conventional banks in terms of capital requirements, liquidity ratios and financial reporting.

Standard & Poor's said, "Compared with other North African countries, the Islamic banking sector in Egypt is the most developed. In Egypt, 13 financial institutions have an Islamic banking licence granted by the Central Bank of Egypt. Of these 13 banks, three of them offer exclusively Islamic products, while the other 10 operate in the field through Islamic windows alongside their conventional banking activities. In Tunisia, the sector remains embryonic and it has yet to gain presence in Morocco."


However, the continuing reverberations of the Arab spring are still being felt with governments now actively engaging in major development initiatives to address the needs of their populations, facilitating the development of the formal banking sector to open up access for retail customers and small and midsize enterprises (SMEs) - the process of financial inclusion. "We expect the Islamic retail segment to experience the most dynamic growth, with initiatives focusing on deposit collection and a medium-term objective of reducing cash transactions in favour of alternative banking solutions.

"Banks are therefore preparing for the next generations of clients and aiming to increase business diversification outside of the corporate segment, their historical strategic focus. A broader customer deposit base could also facilitate banking intermediation at a time where we see pressures on banks' financial profiles. Egyptian banks have supportive loan-to-deposit ratios of about 50 per cent on average according to the Central Bank of Egypt, but most banks' excess liquidity is invested in domestic Government debt. A broader customer base could therefore help mitigate the risk of crowding out private sector borrowing, created by the Egyptian Government's heavy reliance on bank financing. In Morocco and Tunisia, the average loan-to-deposit ratio for the banking system is closer to 90 per cent. Banks are therefore looking for alternative funding sources, from deposit collection to financial market products."


However, despite financial incentives, despite political will and despite a fertile breeding ground for growth, progress, said Standard & Poor's, 'may only be gradual'. There are three reasons for this:

n A need for a stable political environment. Islamic banking activities require a more stable political environment to develop, which should enable the amendment of current legal frameworks to accommodate for industry-specific features.

n A need for clearly defined operating and supervisory frameworks. From a regulatory perspective, governments face the challenge of allowing new entrants and introducing new products while maintaining banking systems' stability. The establishing of a robust Islamic banking sector requires the definition and implementation of a solidly regulated framework to guide a new industry that is characterised by financial innovation. This new framework will have to be tested through a full economic cycle.

n Likely competitive fight-back from existing conventional banks in the region. Policymakers are also conscious that a hastened introduction of Islamic banking could affect competitive dynamics. Substituting conventional banking activities with Islamic ones alone would not bring any benefit to the system. The opening of this market could lead to an elevated risk appetite for existing banks to compensate for reducing market shares, or for new entrants to gain market shares. Varying access to this segment may also create market distortions, especially in retail banking where customers are said to be the most sensitive to religious issues.

Financial institutions operating in Islamic banking will require solid marketing initiatives to attract and retain customers - just being Shari'ah-compliant is unlikely to be enough. Gulf-based banks with good marketing experience already have a track record of diversifying their geographic presence and this trend is likely to continue. For example, Al Baraka Banking Group, Ahli United Bank, National Bank of Kuwait and Abu Dhabi Islamic Bank are all actively offering Islamic banking products in Egypt.

© Banker Middle East 2013

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