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Friday, 29 August 2008

As Islamic finance booms globally, Egypt needs to play catch-up

Source: Daily News-Egypt
By Pascale Nader

First Published: August 27, 2008

CAIRO: A convergence between two systems of finance is taking place in the global arena: The world is looking to modern Islamic finance as an alternative to what are now considered “conventional” Western systems.

Islam and the West may clash on socio-political fronts, but economic goals and financial innovation are where they meet. This is most vividly expressed as the global credit market turns to Islamic finance for liquidity.

No longer a niche industry, Islamic finance is quickly becoming a confident participant in the global scene of profit-and-loss sharing, venture capital and ethical investment.

The Islamic finance industry was nearly non-existent 30 years ago, but in 2006, Islamic financial institutions’ (IFIs) assets worldwide were estimated at more than $300 billion, with another $400 billion in financial investments, according to a study by accounting firm KPMG.

Islamic finance is growing at a rate of about 15 percent annually, the study found. Consulting firm McKinsey & Co. predicts at least a 20 percent growth over the next five years.

Egypt began experimenting with Islamic finance in 1963 in the form of the Mit Ghamr Savings Bank, but that’s as far as the country’s pioneering spirit on Islamic banking went.

Market players say Islamic banking has been in a “deep freezer” since the 1980s. The number of Islamic financial institutions is estimated at about 396 in 53 countries. Egypt has only two: Faisal Islamic Bank of Egypt and the Egyptian Saudi Finance Bank.

There are 13 conventional banks with Islamic windows, and although they have thousands of branches nationwide, Islamic finance products are offered at no more than 128 of these branches.

Mahmoud Rashwan, senior corporate sales for Islamic products at the National Bank of Egypt, said “With only two fully operational Islamic banks working in a monopolizing environment — mainly one institution, the Faisal Islamic Bank — there is low incentive for development because there is no competition.”

Meanwhile, the market is booming elsewhere. Record high oil prices, an emerging Muslim middle class and liquidity returning to Muslim markets following September 11 have all led to the rapid development of Islamic finance in Gulf and European markets.

Earlier this month, Reuters reported that “the global credit crisis presents the $1 trillion Islamic finance industry with an opportunity to expand its appeal beyond devout Muslim investors as a haven from speculative excess.”

While conventional banks are suffering losses of more than $400 billion from the credit crisis, Islamic banks are nearly unaffected. This is showing shareholders, bondholders, borrowers and depositors that Islamic banks may present “comfort [because of] the stricter rules imposed on lending by Islamic law.”

Islamic finance is built on the premise that while “commerce had always been central to Islamic tradition, profits from pure finance [are] viewed with suspicion. Profits from commerce are fundamentally different from those generated by money-lending.”

Islam prohibits riba (“extra” or interest) and usury (excessive interest), because fixed, pre-determined interest-based lending casts an inherent risk of lender exploiting borrower. Islamic banking differs in the relationships between borrower and lender, favoring profit-and-loss sharing or partnership finance.

This links the fate of the financier with the firm being invested in — much the same as modern venture capital does today. Also, banks take on the role to manage and contribute to zakat (charity) funds for social purposes.

Most large western financial institutions have Islamic subsidiaries or at least Islamic products. In the US, a Dow Jones Islamic market index (DJIM) was launched in 1999 to benchmark Sharia-compliant portfolios, even employing a board of Sharia scholars.

London firms have successfully catered to this nascent market, and the city bills itself as the “gateway to Islamic finance and trade.” With a large Muslim community, Paris is looking to overtake London as the European hub for Islamic finance, according to a Moody’s report.

The wave has touched Asia, with state-owned Japan Bank for International Cooperation (JBIC) saying it would sell $100 million of Islamic bonds in the first quarter of 2007.

In Egypt, Islamic banks are looking to the Central Bank of Egypt (CBE) for support, regulation and governance so the industry can flourish. With minimal regulation and disclosure of Islamic services offered by conventional banks, sizing Islamic financial assets, deposits or loans (tawzifat in Islamic terms) is a challenge for the CBE.

Industry experts agree that while the Islamic banking market was estimated at 3 percent of Egypt’s banking sector two years ago, the potential is so much greater.


Mohamed El Dakdouki, deputy general manger of Islamic services at Al Watany Bank, said, “Following September 11, we have seen increasing proportions of money returning to Egypt’s economy. Customers would like Islamic products similar to what they were used to in the Gulf, for example.”


Islamic finance can also add much needed diversity by providing “at least 11 different financial instruments next to traditional banking options of just one tool, being loans,” Rashwan said.

Despite its current popularity, consultants have criticized the Islamic finance industry’s weaknesses. Daily Banking News said, “Modern Islamic banking is just three decades old and certain products, such as sukuk (Islamic bonds) product, may be less than 10 years old. This fact combined with the general location of Islamic banking in the developing world means that corporate governance and risk management are facets of the business model that require further development.”

Another weakness is the lack of professionals skilled in both the financial world and fully aware of Sharia. However, analysts agree that this should not greatly hinder the expected 20 percent growth rate, saying that the expansion of the industry will lead to further diversification.

Ashraf Mohamed Talaat, head of the Islamic desk at the National Bank of Egypt (NBE), is working with his team to reengineer retail products for the local Islamic financial market. A panelist in the Islamic Finance News Forum held in Cairo this past June, he said the main obstacle to the development of Islamic finance in Egypt “is the lack of available money market instruments in which to investment surplus cash. “

“We are currently working on a blueprint to launch an ijara sukuk (leasing bond), to present and convince the Central Bank of Egypt and the Ministry of Finance to channel money into Sharia-compliant offers.

“For now, 70 percent of the Islamic retail market is Murabaha (cost-plus financing), a relatively simple and widely understood instrument in the industry. However, more complex tools like ijara (leasing facility) or salam (deferred delivery sale) have more sophisticated legal, economic and philosophical dimensions.”

The National Bank of Egypt has a formal association with educational institutions and advisors such as Dr Hussein Hamed Hassan (a prominent Sharia scholar who chairs a number of Sharia boards at leading IFIs in the Emirates).

Talaat believes knowledge sharing with GCC markets, particularly Dubai, is key to development. He points to the Abu Dhabi Islamic Bank Egypt (ADIB), which recently entered the Egyptian market, as a positive example.

Training employees with the required skills is also essential. A number of NBE staff obtained Certified Islamic Professional Accountant degrees.

“If the CBE provided a network to unify Islamic banking investments and information, this would give a helpful push to the industry,” Rashwan said.

Echoing similar sentiments, Talaat said, “We are aware that the CBE is busy with standardization and best practice implementation, and that the Islamic banks are next on the agenda. [However], a deadline or time-frame is still unclear.”

Once the systems are in place, El Dakdouki said, “We don’t even need to market Islamic banking, the customers are at our door.”

Related link on Islamic finance: www.globalpro.com.my

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