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It's Islamic, but not as we know it

July 2007
Morocco is opening up its financial markets to new types of finance, but is Islamic finance going to be part of it? Mike Gallagher investigates
There is no Islamic banking in Morocco. That is the official line. What there is, however, is a number of new, alternative financial products and every bank in the kingdom can offer them. Those are Ijara, Musharaka and Murabaha.

Morocco is in a quandary. It has a secular government that is combating Muslim extremism amongst an impoverished population, but needs Islamic finance to help reboot the economy. So as not to give the fundamentalists ammunition, the government has labelled Islamic financial products as alternative assets.

The government says the introduction of the alternative products such as Ijara, Musharakah and Mourabaha should make it possible to widen the range of banking services and to draw more people into the banking system. Currently only 20 per cent of the population has a bank account. The Central Bank of Morocco , known as Bank Al-Maghrib has, in a common agreement with the bank association, defined a framework to govern how these products are offered.

The announcement from Bank Al-Maghrib says, "The offer of these products takes place on the basis of rules enacted by the Accounting and Auditing Organization for Islamic Financial Institutions ( AAOIFI )." Bank Al-Maghrib defined the methods of accounting of these products and said it would "allow a widening of banking services" that would "contribute to a higher rate of banking in the economy."

The government has been under considerable pressure from the banks to introduce legislation to allow Islamic finance in Morocco for some time, but was uncertain how to do this. The country's banks had lobbied hard, citing the state of the stagnating economy and the fact that Islamic finance would evidently help to boost the financial markets by offering new products that would increase capital inflows.

It was becoming increasingly difficult to ignore the success of Islamic finance. Economies everywhere from the UK to Malaysia were being boosted by the introduction of Islamic finance. Large Islamic financial institutions from the GCC such as Gulf Finance House that were making fortunes from Islamic financial instruments in the Middle East were investing in large tourism projects in Morocco, such as the $1.4 billion in Gateway to Morocco project in Marrakech and Malabata and the success of such financial institutions did not go unnoticed by the government.

The government eventually relented, but not without preconditions, so it hammered out a deal with the banks to call them alternative. It was hesitant to designate anything as Islamic, lest it become a source of inspiration for radicalised Muslims and cause ethno-religious divisions in the population. Morocco wants to keep its version of Islam inside the mosque as much as possible, while it tries to overhaul the economy and deal with a large population of disgruntled, unemployed and easily radicalised youth, some of whom would be attracted by the more militant forms of Islam.

The government felt that some elements would insist that everything in the country be labelled as Islamic, from the banks to the schools and across society in general. Morocco appears to be trying to allow for a certain separation of religion and state, not unlike France, although to a lesser degree. The government felt that it would be better if the banks marketed the products as being interest free and a different type of ethical investment, because they do not invest in things like pork or alcohol.

Some of the banks were not very happy about this arrangement because they claimed it would restrict their ability to market the new products effectively. There was a desire amongst certain segments of the population for a type of banking that reflected their religious beliefs and would invest with them rather than conventional banks, which they felt were out of touch with their way of living.

Morocco has a large population of young people with an average age of 24 years old that makes up well over half of the total and most of them do not have a bank account, making them a very attractive target demographic and the banks felt that this area needed to be concentrated on, much as it is in other countries. But the government was adamant. They would have to market the products in much the same way as they did the conventional products, except as an alternative. All banks would remain conventional. The government fears that labelling anything as Islamic will send the wrong signals to a disaffected population of frustrated young men, so it is introducing the new products carefully and with as little fanfare as possible.

Financial institutions from the GCC were not impressed by the decision because they saw Morocco, with its large, young population as an increasingly attractive market to invest in. They wanted to set up shop in the country, but the new legislation would make it unattractive because it would be harder to differentiate themselves from the conventional banks, especially as everyone would be offering pretty much the same kinds of products, although this has not stopped Qatar Islamic Bank from applying for a licence.

Bank Al Maghrib has been monitoring the success of Islamic finance for some time and signed a memorandum of understanding with the Central Bank of Bahrain that should help it develop new types of 'alternative products' in Morocco that are similar to the Islamic products that can be found all over the GCC and MENA region.

The government is attempting to push Morocco as an alternative destination for tourists that are drawn by the country's ancient mystique and does not want to do anything to tarnish that image. It hopes that tourist levels will rise from the current 6.5 million to around 10 million by 2010 and has launched Plan Azur to increase the number of low cost airlines that are coming to the country. It is also creating six new coastal resorts a government-backed initiative called Vision 2010 which hopes to add 10,000 hotel beds a year.

Several local banks have become involved, with financial institutions like Banque Marocaine du Commerce Extérieur, Caisse de Dépôt et de Gestion and Attijariwafabank launching funds to take advantage of the tourism boom that the government is promoting. Attijariwafabank plans to use some of the money from one its funds to help construct around 40 hotels.

Morocco's economy has been growing by around 7 per cent a year and a report by Standard and Poor's said that, "banking competition within the most financially mature countries of the Maghreb is intensifying, and that, as a consequence, Islamic finance can represent a good means of achieving strategic differentiation beyond the classic strategies of pricing and quality."

The report also said that, "the existence of public-sector banks that could be privatised in each of the countries of the Maghreb may attract Islamic banks in the Mashreq inclined toward external growth: in Morocco, Crédit Industriel et Hôtelier and Crédit Agricole du Maroc could be put up for sale." Islamic banks from the GCC could buy into Moroccan banks that are being privatised and gradually offer an increasing range of 'alternative products' through their branches.

Morocco will eventually have Islamic banks, but it will not be for quite some time. The new products will be carefully watched to see how popular they become and what their effect on the economy is before the government decides to introduce any more.

© Banker Middle East 2007