Apr 14 2011
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Uprisings and Islamic Finance
About a year ago, we were commissioned to write a substantive report on the Islamic capital markets. We were tasked with determining and projecting the future growth areas of the Islamic finance industry; both geographically, and in terms of product offerings.
Let us examine the case of Egypt. While Egypt is the birthplace of Islamic finance, and exhibits strong economic and demographic fundamentals, as well as latent demand, In our assessment from last year, we had predicted that Islamic finance will not grow (and may even decline) in Egypt for three reasons:
We witnessed, first hand, the residual effects of these barriers when we were invited to Cairo to present Islamic finance to an educated group of lawyers, bankers and professionals in late 2010. The audience displayed a very real, detectable sense of built in cynicism and aggression against the commercial applications of Islam. When the Egyptian Financial Services Authority (EFSA) finally decided to establish laws and regulations for Sukuk (Islamic bond), primarily to attract Gulf petro-liquidity, they elected to avoid regulatory terms which would indicate Islamic affiliation.
In comparison to all of our experiences in Islamic finance education across the globe (including Europe, Central Asia, Africa, and Americas) the professional intelligentsia in Egypt stood out, in its uniquely aggressive aversion to Islamic finance (especially by Muslims). Comparatively, even the bankers and lawyers from Azerbaijan, a country that has been under the shadows of atheism and communism for almost three quarters of a century (with little sign of Islamic practice), had a proactive attitude towards Islamic finance, which is evidenced by the establishment of 4 dedicated Islamic financial institutions (despite no regulatory support).
The reason we raise Egypt as an illustration is because it is a glaring example of the rapidly changing dynamics for the region and more importantly, the dynamics of Islamic finance.
The growth of Islamic finance is attributable to a number of intertwined factors, the primary drivers being:
When a country has a (r)evolutionary upheaval, like the one Egypt has just experienced, it certainly changes the dynamics and growth prospects of Islamic finance in that country. And the same goes for all the other countries experiencing this as we speak. In terms of Islamic finance, there will be some gainers and losers. The critical question is, which country will come out as a winner and which will come out as a loser?
Egypt, for example, is likely to be a gainer. Why do we say this? Well, besides the 'Islamic' investment ponzi schemes of the eighties, religion and religious practice runs deep in Egypt. A significant proportion of the population consider themselves as practicing Muslims. However, for the past 30 years, they were unable to really express their religious practices, repressed by Hosni Mubarak, who banned the Muslim Brotherhood in fear of being overthrown. The Egyptian government even has a stranglehold on the renowned and oldest educational establishment of the Muslim world, Al-Azhar University. Mubarak also did his best to ensure that the Egyptian population maintained a cool distance from doctrinal or legal Islam. The effect of this is seen far and wide with the Egyptian population, despite the fact that there is a yearning for a holistic application of Islam, as evidenced by the broad based appeal of the Muslim brotherhood.
With the upcoming independent elections, which the Egyptian people are determined to ensure, it is likely that Islamic leaning voices such as the Brotherhood will regain their rightful place in Egyptian politics, whether that is in opposition or in government. This is not to say that Egypt will turn into a hardline theocratic state. Rather, the Brotherhood, as a political movement, has demonstrated over the past 6 years, their determination to establish good government, rather than determine rules for the length of skirts.
What is relevant for Islamic finance in all of this, is not so much the overt religious leanings of the Muslim Brotherhood. Rather, it is the fact that the key impediment to the takeoff of Islamic finance in Egypt - namely the entrenched political machine - has largely been removed.
Islamic finance missed an important opportunity; some would say a 'once-in-a-lifetime' moment during the credit crisis to truly educate G-20 country regulators/institutions about asset backed financing and investing in the real economy instruments. May be lightning does strike twice in the same place! A bullet-less revolution of entrenched despots in Tunisia and Egypt, presents a very special testing ground and opportunity for 'real' Islamic finance in the region and for the region.Depositor Democracy
Consequently, Islamic finance needs to be presented to the people neither as a problem nor a solution, but afinance or investing option. It's about business, while others have made it about religion. The state's secular heavy hand of control will not be exchanged to extremist's heavy hand of control via selective interpretation of religious doctrines. Maybe we opt for an experiment of substance over form, and call it Participation Banking (ie, Turkey) over Islamic banking with its (negative today) connotations.
One of the lessons from both movements, and implications for Yemen, Syria, Jordan, and elsewhere where Islamic finance is a flickering flame, is people want options, including the option of making mistakes. The 'free will' to want Islamic finance should be demand determinative - not imposed, otherwise it will surely backfire.
Much like a political party in democratic state, Islamic finance is largely a function of demand from the investors, and wins its 'votes' (deposit), only when there is the ability to place the 'votes' (deposit) and not when some invisible hand of regulators coerces the population.
We know that the latent demand exists from the fundamentals. Anecdotally, a banker tells us that the demand for Islamic finance is so strong that his multinational bank has been receiving daily requests from the local office to open Islamic branches in Egypt.
Hence, for Islamic finance to prosper in Egypt, all it needs is an open door, the same one open to the conventional banking sector; a door that has been, unfortunately, closed for Islamic banking sector over the past thirty years.
Hence, the forecasted growth trends which we predicted for Egypt in our study in Figure 1 (dating back to 2009/10), should perhaps be revised to reflect the stronger opportunities, now that the key impediment is removed.
Perhaps much of the fundamentals here can be transferred to Tunisia , another country that was once ruled under the strong arm of a secularist dictator. It was interesting to note the jubilance of thousands of supporters, both Islamist leaning and non-Islamist come to support the Islamist leaning Tunisian opposition figure Rachid Ghannouchi. Perhaps, Tunisia will also have its fair share of representative democracy, which includes representation from all segments of society, including the Islamic segments.
Perhaps Libya will also be a growth prospect, if its governance infrastructure survives the overthrow of the existing regime. However, a distinct disadvantage of Libya is its lack of infrastructure development when it comes to banking and financial services, which may hinder the growth of the banking industry in general, let alone Islamic finance.
This is not to say that upheavals are always a good thing for Islamic finance. The events that took place over the past couple of weeks in Bahrain along with the negative internatioal media representation have shaken the international community's perception of the 'Business Friendly' Investment Hub. This, according to senior bankers in Bahrain , may lead to repatriation of funds and relocation of offices to locations such as Dubai and Qatar which have become all the more attractive. However, the growth prospects of Islamic finance and in general, the financial services industry will largely rest on the upcoming decisions of the Bahrain government. On the media side, the progressive elements of the government need to immediately create an environment within the country that can lead to a rapid restoration of its image followed by a positive PR campaign and re-engagement with the international financial community (by offering material incentives to financial institutions to relocate their operations back here). The excellent work carried out by the Bahrain Economic Development Board (EDB) needs to be sustained and even boosted given the circumstances.
On the political side, if Bahrain wants to avoid the events of the past couple of months being perceived as a recurring affair and therefore implying political risk volatility, it needs to start engaging in civic discourse with the opposition that yields material economic and political rights and benefits to all classes of society. Despite the events of the last few weeks, Bahrain can turn this into a more positive affair if it is perceived (through a concerted PR campaign) that elements of the government and the future leaders of the country embrace change and will strive to maintain Bahrain's economic and financial services competitiveness at all costs. If the country manages to walk and talk the appropriate PR campaign, Bahrain as an investment and financial hub, may survive with its reputation intact. Let us wait and see.
About the Authors:
Dr. Sayd Farook, Global Head Islamic Capital Markets, Thomson Reuters, E-mail: email@example.com
Dr Sayd Farook leads up Thomson Reuters' Islamic capital markets transactions initiative as Global Head of Islamic Capital Markets. Prior to this, he has held senior roles in the Islamic finance industry including with AAOIFI, BIBF and Dar Al Istithmar.
Rushdi Siddiqui is responsible for Thomson Reuters' Islamic Finance and OIC initiatives. Prior to this, he was responsible for establishing and running the Dow Jones Islamic Market Indexes.
Disclaimer: This article represents Authors views in their personal capacity and does not in any way represent the views of Thomson Reuters.
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