The rise of Islamist parties in North Africa could potentially change the fate of Islamic banking and the sector as a whole
There is no doubt that last year's Arab spring has changed the business landscape of North Africa in a dramatic fashion. Corruption scandals, stalled projects, declining capital flows and slowed growth all forced significant revisions of forecasts and estimates for growth and opportunities. However, the shake-ups have opened up space for substantive expansion in a number of new non-traditional segments in even the most staid of industries -- such as the financial services sector, where Islamic finance has gleamed an increasing amount of attention.
North Africa hosted its first major conference on Islamic finance only last July, at the Maghreb Forum for Islamic Finance in Tunis, which was organized by the General Council for Islamic Banks and Financial Institutions. That it took so long for such an event to make its way to the region is surprising, given the dramatic expansion it has seen elsewhere. Islamic financial services certainly do not want for lack of a historical presence in North Africa; in fact, one of the first contemporary forerunners for the sector was Egypt's Mit Ghamr Savings Bank, which was started in the 1960s. However, in the intervening years, even as Shariah-compliant institutions expanded throughout southeast Asia and the Gulf, boasting portfolios that straddled the globe, the sector retained only a negligible hold on North African markets. In fact, until recently, Islamic financial institutions only accounted for around 4% of Egypt's overall banking sector, compared to 18% in Malaysia and up to 46% in the UAE.
However, that looks set to change, with the latest elections in Egypt, Tunisia and Morocco having brought renewed attention to the sector, thanks in part to the success of moderate Islamist parties who have turned to Shariah-compliant finance as a possible alternative to stimulating growth, attracting investment and reducing unemployment.
This is not purely down to religious motives. Unlike the derivatives-plagued universe of global conventional banking, Shariah-compliant institutions appear to have weathered the effects of the financial crisis relatively well. Islamic financial institutions were far from unscathed by the downturn, as firms pulled out of projects, grappled with weakened balance sheets and suffered significant losses in real estate -- a sector that often attracts a disproportionately large amount of interest from Islamic banks. In some cases, institutions that issued sukuk were forced to default. Yet, overall, Islamic banks and financial firms avoided the worst of the fallout thanks to a more conservative approach to financial risk.
The sector now boasts some 300 Shariah-compliant financial institutions worldwide, with assets estimated to have passed the symbolic $1 trillion (LE 6.03 trillion) mark. Crucially, growth is far from limited to Muslim countries. Islamic banks have been established in the Europe and the US, and major western conglomerates such as General Electric are issuing sukuk. The volume of sukuk through until the end of last summer had reached just over $15 billion (LE 90.47 billion), an increase of more than 50% year-on-year. Yet in spite of this massive growth, only 38 Islamic financial institutions operate in Africa, which means that the sector has the potential to post significant growth in the coming years, particularly if new governments in the Maghreb are able to prioritize its expansion.
In spite of the limited size of Egypt's Islamic financial services sector, it has perhaps the most expansive number of players in the region, bolstered in recent months by moves from the Freedom and Justice Party and Al-Nour Party to establish an Islamic index of Shariah-compliant institutions.
Elsewhere, activity is even more constrained. Morocco, where the Justice and Development Party (PJD) has recently assumed power, currently has no Islamic banks, although in 2007 the central bank allowed institutions to issue certain Shariah-compliant, or "alternative" products, including ijara, murabahah and musharakah. Such products accounted for only 0.1% of the country's total banking assets by the end of 2010.
Algeria has three banks offering ijara, murabahah and qard hassan, including Al-Baraka Bank, Gulf Bank Algeria and Al-Salam Bank. Together they account for only 1% of the country's total banking activity.
Tunisia also boast three designated Islamic banks, including a representative office of Noor Bank, Al Baraka Bank and most recently, Zitouna Bank, which opened its doors in 2010. Yet combined, the banks have a limited presence on the market, with roughly 2.2% of the country's total banking assets.
While the region's new governments have helped refocus efforts on increasing the size of the sector, its currently low level of development is due in large part to the lack of an appropriate regulatory framework. As a result, establishing an enabling legislative environment for Islamic finance has been one of the chief priorities for newly elected officials and is helping lay the groundwork for a potential explosion in activity in the coming years.
A rough draft text has been submitted by the Moroccan PJD to the parliament, paving the way for the country to allow the establishment of three distinct institutions: Islamic banks, Islamic windows for conventional banks and other Islamic financial institutions.
Even while legislative negotiations are underway, the Moroccan sector has already begun to attract increased attention from abroad. In late December 2011, chairman and managing director of Qatar International Islamic Bank (QIIB) Sheikh Dr Khalid bin Thani al-Thani met with Morocco's newly elected Prime Minister Abdelilah Benkirane to express interest in establishing a joint venture Islamic bank and insurance company.
Tunisian authorities have been equally active. In recent months, they have announced that new measures in favor of Islamic banking will be incorporated in to the financial law of 2012 to include services such as mubadarah, musharakah and sukuk. More recently, the ministry of finance has begun to assemble a working group, to study the country's current legal framework regulating Islamic finance and make policy recommendations on how to improve the sector's performance. The industry has already been boosted by suggestions that the government will issue its first sovereign sukuk by the end of the year, in a bid to help finance the country's fiscal deficit.
Of course, the Islamic finance sector still faces an uphill battle in the region. The sector globally suffers from a lack of universally agreed-upon guidelines for what exactly constitutes Shariah-compliance, for example. While the renewed attention represents a critical opportunity to attract much-need capital to the region and provide an alternative to funding growth, Shariah-compliant finance remains in its infancy in most of North Africa. However, the shake-up provided by the political upheavals over the past year has blown fresh wind into the industry's sails -- both through direct support, such as the prospective issuance of sukuk -- as well as through improved regulatory frameworks. The potential the sector offers is significant, and obvious from even the briefest of glances at its global performance, and could help underwrite the region's growth in the coming years.
Robert Tashima is the Africa regional editor with the Oxford Business Group, a leading provider of economic and political intelligence about the Middle East, Africa, Eastern Europe, Asia and the Caribbean.
© Business Today Egypt 2012
