Report: Islamic Finance Could Make Inroads into North Africa

In Standard & Poor’s recent report, Islamic Finance Could make Inroads Into North Africa, they stated that following the success Islamic Banking has seen over the last decade, it is now set to make increasing headway into North Africa. They noted that Egypt, Tunisia and Morocco have all taken steps towards implementing policies to develop Islamic finance as Islamic banking has become increasing attractive to countries with large current account deficits and declining conventional financing sources.

Both Tunisia and Egypt implemented new regulatory frameworks for sukuk issuance in late 2013; and in January 2014, the Moroccan cabinet approved the legal foundation for Islamic banks.

Islamic banking refers to any bank or banking activity that is consistent with the principles of Sharia, and its practical application, and is often referred to as ‘Sharia compliant finance’.

Islamic banking has the same purpose as conventional banking: to make money for the banking institute by lending out capital, but this is not considered the sole purpose. Adherence to Islamic law and ensuring fair play is also at the core of Islamic banking. Because Islam forbids simply lending out money at interest, Islamic rules on transactions have been created to prevent it. The basic principle of Islamic banking is based on risk-sharing which is a component of trade rather than risk-transfer which is seen in conventional banking. Islamic banking introduces concepts such as profit sharing, safekeeping, joint venture, cost plus, and leasing. Investing in businesses that provide goods or services considered contrary to Islamic principles (such as alcohol or gambling) is also prohibited.

Standard & Poor go on to say that while increased Islamic banking in the region is likely, long term success will depend on whether they can add economic value. They have the potential to create access to a new class of investors and customers by offering Sharia compliant products, but stiff price competition in the North African Banking market shows that customers are more sensitive to the costs associated with banking products. The success of Islamic banks in North Africa would be closely related to their capacity to offer products at a cost comparable with conventional banking activities.