By Arno Maierbrugger/Gulf Times Correspondent /Bangkok
Governments in North Africa are increasingly leaning towards solid regulations for Islamic finance in a quest to find Shariah-compliant alternatives for decreasing conventional funding sources in order to rein in their current account and budget deficits. These initiatives come at a time when the share of global Islamic finance assets of Muslim-majority North African countries stand at just around 1%, according to calculations by Standard & Poor’s, indicating substantial potential for the entire banking and finance sector in the region. Currently, just a few Islamic retail banks operate in North African states, and they account for only a very small proportion of total bank deposits, while corporate Islamic banking is rarely heard of.
After Morocco, whose central bank in March this year delivered an Islamic finance regulation framework that allows the launch of Islamic banks with the aim of tapping Islamic investors, Algeria emerged as the next North African country to venture into the Islamic finance industry, this time to counter a significant drop in oil income. The North African Opec member is now for the first time initiating an action plan that encompasses preparations to establish a regulatory and legal framework for “participatory funding” – read: Islamic finance – and to issue “sovereign bonds for participatory funding” – read: sukuk. Plans are to set up no less than six state-run Islamic banks overseen by a yet-to-establish national Shariah board to start Islamic financial services by the end of 2017 or in early 2018.
These activities of widening the footprint of Islamic finance in North Africa are being initiated in a region where a combination of lacklustre economic growth, informal economic structures, a general lack of banking services outside urban centres, the economic fallout from the Arab Spring and lower sovereign income from commodities have made changes in the structure of the financial sector necessary, if not imperative. And, as a result of the global economic slowdown over the past decade, the limited capacity of multilateral lending institutions has also pushed North African countries to consider Islamic finance structures as an alternative to raise foreign currency funds.
Algeria is more a laggard, though. Aside from Morocco, Tunisia and Egypt implemented new laws allowing for the issuance of Islamic bonds in late 2013. While the government of Mauritania committed to developing an Islamic finance system in 2014, Libya in the same year said it aims at running its entire economy and banking system on Islamic lines. But the country keeps struggling with the implementation of this plan with its economy in shambles and internal strife unabated.
The African Development Bank (AfDB) in a study came to the conclusion that North Africa has significant demand for an Islamic finance system to provide Shariah-compliant banking services with its domestic population and to tap global Islamic investors, with a focus on the Gulf.
North Africa has poor infrastructure and therefore a substantial need for project finance, the AfDB said, adding that Islamic financing facilities had the potential to harness funds for both commercial and development projects, could diversify funding sources, ensure better monitoring of funds deployment and could contribute to private sector development in North Africa. Even more so since there has been some positive capital market development in North Africa, with stock markets in Egypt, Morocco and Tunisia showing more liquidity and higher trading activity in the recent past, while sovereign and corporate sukuk could attract investment funds from Arab investors and provide a useful instrument for liquid holdings of Islamic banks.
According to Mohamed Damak, global head of Islamic finance at Standard & Poor’s, North African project finance would strongly benefit from more Islamic fund inflows.
“Shariah-compliant banking previously presented an attractiveness that was at best exotic for regulators and banks active in these markets. Now, the perception is changing and public awareness is increasing,” he said.
“We believe that Islamic finance can be a good fit for infrastructure and project finance in the region, as banks lack long-term funding capability required by these projects,” he added, noting that several projects in renewable energy, transport infrastructure and communication are ongoing or expected to be launched in the future in North African countries.
“Using sukuk to finance some of these projects could help diversify investor bases and tap additional pools of resources,” Damak said.
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