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BREAKINGVIEWS-Egypt may struggle to meet Islamic finance target

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own)

By Una Galani

CAIRO, Nov 8 (Reuters Breakingviews) - Egypt may struggle to meet its Islamic finance targets. The new Muslim Brotherhood government aims to boost the sharia-compliant share of total banking assets from 5 to 35 percent within five years. The potential is undoubtedly big. Egypt is predominantly Muslim and only 10 percent of the 80 million people have bank accounts. But the rise of Islamic finance in Egypt might be slow.

Hosni Mubarak, the long-time former president, didn't hold back Islamic finance, although he didn't encourage it either. However the nascent sector was badly tarnished in the 1990s by a series of investment scams. Demand was also restrained by a 1989 declaration from a top Egyptian scholar and preacher that some forms of financial interest on deposits were permissible to Muslims. Out of Egypt's more than 30 banks, only three are full-fledged Islamic institutions.

The government can gain from developing Islamic finance. New regulatory structures will allow it to tap a new pool of capital by issuing sukuks, or Islamic bonds. Still, the Brotherhood's ambition to grow Islamic banking seems to be mostly driven by ideology. In a country with so many pressing economic needs and where the banking sector is in good shape, it seems an odd thing to prioritise.

In any case, the goal looks ambitious. The uptake of Islamic banking has been gradual in other countries where it co-exists with conventional finance. Islamic banking assets account for an average of 25 percent of the total in the Gulf region, according to Ernst and Young. The International Monetary Fund says it took Malaysia, now the world's biggest market for Islamic bonds, six years and a relaxation of its foreign ownership rules to almost double its Islamic finance share to 22 percent.

The only way to give Islamic finance a big boost in Egypt would be to issue new banking licences and offer tax incentives to institutions managing Islamic funds. For a weak government in need of more revenue, that hardly sounds like the way to go. The Brotherhood would be better off spending its limited political capital elsewhere.

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CONTEXT NEWS

- Egypt's Muslim Brotherhood aims to boost the market share of Islamic banks in the country from 5 to 35 percent within five years, according to officials from the movement's ruling Freedom and Justice Party (FJP). They say that they intend to do this by increasing the size of the banking sector and not by penalising conventional banks.

- The government is preparing to issue its first Islamic sovereign bond by the end of the year, according to a person familiar with the situation.

- The FJP presented parliament with draft amendments to the country's central bank law to include a new section on Islamic banking before the assembly was abruptly dissolved in June 2012.

- Egypt has three fully fledged Islamic banks, Al Baraka Egypt bank , Faisal Islamic Bank of Egypt , and National Bank for Development . Fourteen banks in total have licences to operate Islamic banking services.

- Global Islamic banking assets will cross $1.1 trillion in 2012, according to a study by Ernst and Young.

- For previous columns by the author, Reuters customers can click on

(Editing by Edward Hadas and David Evans)

((una.galani@thomsonreuters.com))

((Reuters messaging: una.galani.thomsonreuters.com@reuters.net))

Keywords: BREAKINGVIEWS EGYPT/FINANCE

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