Success of Islamic finance in North Africa hinges on economic added value

Success of Islamic finance in North Africa hinges on economic added value

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GLOBAL: In a research report released by S&P yesterday, it was indicated that the Shariah compliant finance industry possesses the potential to develop in North Africa. The report entitled ‘Islamic Finance Could Make Inroads Into North Africa’, observed that due to the large current account deficits and declining conventional financing sources, sovereigns in Arab Spring countries have taken steps to implement policies to support the development of Islamic finance. In an exclusive interview with Islamic Finance news, S&P’s credit analyst Mohamed Damak, elaborates further on the prospects of the North African region by first describing the current state of Islamic finance in the region as “embryonic”. “Today, Islamic finance represents less than 1% of the banking system assets in these countries and collectively, North Africa represents less than 1% of the global Islamic finance (with global industry assets estimated at US$1.4 trillion),” he said. There is an increase in public awareness and a change in perception towards Islamic finance. Countries in which S&P rates banks such as Egypt Tunisia and Morocco, have all demonstrated positive developments: Tunisia plans to issue Sukuk to attract new class of investors; Egypt implemented new regulatory frameworks for Sukuk issuance; and Morocco is laying the legal foundation for Islamic banks. “The degree of the success of the Tunisian Sukuk will not only be determinant for other issuances out of the country itself but also at regional level. If Sukuk proves to create access to a new class of investors, we think that other issuers in the country (corporate, banks, etc.) might follow suit,” said Damak. For example, the US$1.5 billion Sukuk issued by Turkey was subscribed at 60% by investors based in the GCC region. At the regional level, S&P believes that financing needs remain high for countries such as Morocco and Egypt and if the Sukuk of Tunisia proves to be a success, authorities in these countries may look at the opportunities offered by the Sukuk market. Several projects in renewable energy, transport infrastructure, and communication are ongoing or expected to be launched in the future in North African countries. S&P is of the view that Islamic instruments are a good fit to finance these projects, as well as assist in diversifying investor bases and tap additional pools of resources. According to the report, the success and growth of Islamic banks in the region is contingent upon the capability to demonstrate their economic added value. This could be achieved through offering Shariah compliant products at costs comparable with their conventional counterparts. Damak opined: “Price competition is stiff in North Africa (Tunisia and Morocco are good examples) and offering these products at a higher margin, like we have observed in other parts of the world, may put a serious brake to the development of Islamic finance in North Africa.”