Fitch Ratings-London/Dubai: Approval of a law governing sharia-compliant insurance (takaful) and the introduction of new types of financing products for the country's Islamic banks, locally referred to as 'participation banks', support Morocco's efforts to form a cohesive Islamic finance regulatory framework, says Fitch Ratings. However, the absence of a developed Islamic finance infrastructure, especially with regard to funding, and the lack of public awareness will constrain the sector's expansion over the medium term.

We expect most participation banks to soon start offering financing through different types of sharia-compliant structures such as Mudarabah, Ijara and Istisna contracts. This should boost Islamic Bank financing growth, although deposit inflows will remain structurally constrained by an already high banking penetration rate in Morocco (70% of adults already hold a bank account). This means that high financing-to-deposits ratios (247% at end-April 2019) and strained liquidity conditions will remain. 

Morocco's first Islamic banking licences were issued in 2017. Despite rapid growth (110% between June 2018 and April 2019), Islamic banking still accounted for less than 1% of the banking sector's total loans at end-2018. Most Islamic banks have only provided mortgage and auto financing, mostly to retail customers in the form of 'murabaha' contracts, constraining lending opportunities. The new legislation on sharia-compliant insurance will support Islamic banks' expansion into the corporate segment as it introduces Takaful products to insure banks and banking transactions, broadening banks' product offerings.

Nevertheless, we do not expect participation banks to take a significant market share from the well-established conventional banks in the medium term. Further growth is constrained by limited funding sources and the lack of public awareness and trust in Islamic financial services. Building greater consumer awareness and achieving trust will take time, in our view. Notably, when Islamic banking was introduced in other countries, such as Turkey and Indonesia, it saw early strong growth from a low base but then stalled at around 5%-6% of total lending in the banking system. 

Link to Infogram: Morocco Participation Banks' Financing/Deposits Ratio

Funding is a major challenge for participation banks, with competition for deposits set to remain strong. Banks have started to offer profit-sharing investment accounts, but such products remain underdeveloped. Reliance on parent funding and deposits from conventional peers in the form of sharia-compliant deposits ('wakala bil istithmar') will persist. These are more expensive but provide a much-needed additional source of liquidity. Alternative sources of funding are limited and banks do not have access to funding from the central bank of Morocco or the domestic capital market. The Moroccan sovereign issued its first sovereign sukuk in October 2018, but the framework under which participation banks can issue has yet to be developed; this further exacerbates banks' tight liquidity conditions.

The largest conventional banks in Morocco have opted to establish separate Islamic banking subsidiaries as opposed to Islamic windows. Attijariwafa Bank's Islamic subsidiary Bank Assafa is the market leader with a market share of 53% by financing and 63% by deposits. The Moroccan authorities' increasing efforts to act as a driving force in stimulating Islamic finance are positive for growth, but the regulatory framework still lags behind other African countries. Neighbouring Tunisia already has a sukuk framework in place and an Islamic bank issued the first sukuk in June 2019.


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