The Arab Spring uprisings have brought change on an unprecedented scale to north Africa over the past couple of years, but what impact have these changes had upon the region's appetite for Islamic finance?

The changes wrought by the onset of the Arab Spring uprisings in early 2011 have significantly altered the landscape of north Africa– both politically and economically. Before last year’s events, authoritarian governments in many of the north African countries affected had either restricted or refused to promote Islamic finance for political or ideological reasons.

However, the uprisings that surged and rippled across north Africa during 2011 enabled hitherto unknown Islamist parties to emerge from the shadows and take centre-stage in the country’s new political arena. In October 2011, Tunisian moderate Islamist party Ennahda claimed victory in the first free elections brought about by the Arab Spring and now dominates the government that came to power. Hot on its heels, in November 2011, Morocco’s moderate Islamist party, Justice and Development, was elected to lead the country's new coalition government. Perhaps most significantly, in June 2012 Mohammed Morsi was sworn in as Egypt’s first Islamist president.

While all of these parties and leaders have emphasised that they want to establish a secular democracy and have no intention of creating an Islamist state, they have not shied away from opening the door to Islamic finance. This has led to a vastly improved outlook for the fortunes of the industry, and consequently its growth is expected to accelerate in the coming years.

Egypt's transformation

As Mr Morsi assumed power in Egypt in June 2012, his Freedom and Justice Party (the Muslim Brotherhood's political front) announced its desire to boost the market share of Islamic banks to 35% within the next five years from the current 5%. It has also expressed its desire to add an Islamic banking section to the country’s banking law, which currently has no specific regulations governing the sector.

Earlier in the year, in February 2012, the Egyptian government said that it was hoping to raise $2bn through its first issue of sukuk as part of efforts to plug the deficit gap – equivalent to 8.8% of the country's gross domestic product (GDP). Shortly after, the Egyptian Financial Supervisory Authority said it was finalising regulations that would allow local companies to issue sukuk. It is believed this would provide a boost to market liquidity, which is much-needed given that Egypt's stock exchange performed poorly in 2011, with activity falling by 35%.

"There is huge interest from the institutional investor community in Egypt as a market for Islamic finance, so a sovereign sukuk is likely to be welcomed,” says Farmida Bi, European head of Islamic finance at Norton Rose. "Egypt is the market that is causing the most excitement because of its large population size [84 million], its huge infrastructure needs, and its position as a leading Arab nation."

Sukuk growth

However, Egypt is not the only north African country looking to get a slice of the growing global sukuk market. Sukuk totalling $84.4bn worldwide were issued during 2011, an increase of 62% from 2010. From that, $18.5bn, nearly 23% of the total, was sold in the Gulf region. Indeed, the Gulf community is among the most active sukuk investors and so north Africa issuance would enable the countries in this region to tap into a pool of billions of dollars of Islamic investment funds.

"It is expected that Islamic finance and sukuk will be an increasing source of finance for North Africa,” says Ms Bi. "There is existing interest from Gulf investors in north Africa who have been involved in real estate developments in particular. They are also likely to be interested in investing in Islamic issues from the region." 

In February 2012, the Tunisian government announced it was planning to issue the country’s first sukuk by the end of this year to finance its swelling budget deficit. The deficit is expected to rise to 6% of GDP in 2012, from an estimated 4.5% in 2011, as the country boosts expenditure in order to kick-start its economy.

In March this year, the Tunisian government established the Council of Islamic Finance in Tunisia, which is working alongside the Ministry of Finance to establish a legislative framework that can define Islamic financial products. It is also studying how best to develop the Islamic finance industry in the country by looking at existing IF hub models and newer entrants to the scene.

The group includes representatives from the central bank and stock exchange, as well as private sector institutions such as the Bahrain-headquartered Al Baraka banking group, and its first priority is to review the country’s legal framework. Once this is in place, Tunisia will issue a sukuk, though the original deadline of the end of the year is now likely to be postponed.

Zitouna moves on

In June this year, the Tunisian government launched Theemar, the country’s first Islamic mutual fund, with capital of about $30m. Meanwhile, the country's budget for 2012 plans to provide tax advantages for Islamic financial institutions so that they can compete on a level playing field with conventional ones.

Indeed, Tunisia currently has only one Islamic lender – Zitouna Bank – which launched in May 2010. Founded by Mohamed Sakher El Materi, the son-in-law of former dictator Ben Ali, the central bank seized control of its assets after the end of the revolution. The state now owns 87% of the bank’s capital, with the remaining 13% owned by private shareholders, mainly comprising Tunisian families.

However, according to a source who asked not to be identified, Zitouna is planning to sell 20% to 30% of its capital to the Saudi Arabia-headquartered Islamic Development Bank (IDB). The remaining share is to be sold to strategic partners, with keen interest already seen from the Gulf countries of Kuwait, Qatar, the United Arab Emirates and Saudi Arabia.

Ezzedine Khoja, chief executive of Zitouna, confirms that the bank is in talks with the IDB. “Zitouna has set a strategy to increase its capital in order to improve its own funding base,” he says. “An excellent relationship has been established between Zitouna and IDB, and recently the two parties have engaged in practical measures to transform this close relationship to a real partnership before the end of 2012. There is also widespread interest from European, US and Gulf institutions to contribute to the bank’s capital. Zitouna appreciates these propositions that could be crystallised in details during 2013.”

Zitouna broke even at the end of June 2012 and today has total assets of TD604,000 ($386,000), total liabilities of TD547,000, total capital of TD70,000, and 41,500 customers. It has launched the country’s first Islamic insurance product – Zitouna takaful – and now operates 30 branches across the country.  

“After achieving success in the areas of retail and corporate banking, we plan to extend activities and develop the bank through direct participation and the creation of Islamic investment funds, launching sukuk and giving importance to microfinance, especially in light of the new various laws that the government plans to issue before the end of the year,” says Mr Khoja.

Morocco enters the fray

In March 2012, the Moroccan government confirmed its intention to develop Islamic finance in the country. This was followed by a statement in May by El Hassan Eddez, deputy director, treasury and external finance at the economy ministry's debt office, who said the country's government is also considering issuing sukuk once the legal framework is in place, possibly by 2013.

The government has submitted to parliament a draft bill with a set of regulations for the introduction of Islamic finance products which specialised lenders will be able to offer. A vote on the bill is scheduled for the second half of 2012.

In 2010, Morocco started allowing conventional banks to offer a limited set of sharia services and products, although it currently does not permit standalone Islamic institutions. However, this is set to change in 2013, when the country will launch its first fully fledged Islamic bank as Morocco aims to become a regional financial hub. Foreign Islamic lenders will be allowed to acquire up to 49% of the institution. To date, only Attijariwafa, the country’s largest bank, offers four sharia services based on murabaha financing.

Gulf Islamic banks have shown a keen interest in establishing a foothold in Morocco and the central bank has already received two foreign requests for permission to invest in the sector. If the Moroccan Islamic bank proves to be a success by the end of 2013, then the government has said it will be happy to authorise more Islamic lenders.

The Moroccan government believes that opening up the Islamic finance industry could play an invaluable role in overcoming the severe liquidity shortage in the country and, in turn, speed up economic growth. The liquidity shortage has forced the central bank to inject between Dh30bn ($3.52bn) to Dh35bn into the banking system each week. Furthermore, it believes that Islamic finance should be a key cornerstone in its overarching ambition to establish a regional finance hub in Casablanca, known as the Casablanca Finance City.   

“We are keen to capitalise on the stability we enjoy here to turn Morocco into a regional Islamic finance platform,” said Najib Boulif, Morocco’s general affairs and governance minister, at a conference in March this year, before adding that Tunisia and Libya may harbour similar ambitions. “Good investment opportunities don’t wait. I think we will have to work pretty quickly to enact the new law in 2012 and not squander a very good and rare opportunity.”

Libya's first

Indeed, the Libyan interim government has arguably made the boldest statement of all north African countries to date about how central a role it envisages Islam playing in its society, when, in October 2011, the National Transitional Council (NTC) chief Mustafa Abdel Jalil declared: “We as a Muslim nation have taken sharia as the source of legislation, therefore any law that contradicts the principles of Islam is legally nullified.”

And Libya has already pipped Tunisia, Morocco and Egypt to the post in approving an Islamic banking law in May this year. The country is expected to experience strong growth in Islamic banking because of the strong Islamist element to Libyan society and politics. 

However, in Egypt the story is somewhat different. To date, the Egyptian central bank has refused to issue a licence for the establishment of new standalone Islamic banks. It claims its decision is aimed at protecting the banking market in Egypt, but has said that it will allow existing banks to continue to open Islamic banking departments.    

There are currently 14 institutions with Islamic banking licences in Egypt, but only three of them are standalone – Faisal Islamic Bank of Egypt, Al Baraka Egypt and Abu Dhabi Islamic Bank of Egypt. Consequently, the roughly E£120bn ($19.7bn) of Egyptian Islamic banking assets is a small percentage of the entire sector’s assets of E£1300bn.

There is also scepticism from industry observers about the pace at which such plans in Egypt can be achieved. “We do not believe the Muslim Brotherhood’s target is realistic,” says Sara Boutros, banking analyst at Egypt’s Beltone Financial. “We expect growth in this segment, but we believe a market share of 35% in five years is far fetched. However, we could see major Islamic Gulf Co-operation Council institutions entering the market through joint ventures with major conventional banks, or through acquiring stakes in existing Islamic banks, which would accelerate the growth in the segment.”

Furthermore, the dissolution of the Egyptian parliament in June has delayed any planned addition of an Islamic banking law. “As we stand today, we do not have a parliament in place, which will remain the case until we have the constitution ready, finalised and approved by the Egyptian people through a referendum, after which we will carry out lower-house elections. In other words, it is a lengthy process and it will take time before we see new laws passed,” says Ms Boutros.

Indeed, the upheaval caused by the Arab Spring means that it will take time before sound regulation and watertight laws can be drawn up and implemented in Egypt. “Any progress is subject to appropriate legislation being in place to accommodate Islamic finance structures in order to ensure that investors are protected,” says Ms Bi at Norton Rose. “This will be a new market for Islamic finance and may need time to develop fully."

Window of opportunity

Certainly, the changes ushered in since the start of 2011 have opened up a window for the emergence of Islamic finance across north Africa, and countries within the region are moving quickly to capitalise on this. But it remains uncharted territory.  

Years of suspicion among the former authoritarian governments that Islamic finance would be used as a tool by Islamists to gain prominence has left such countries trailing their Gulf neighbours and other Islamic financial hubs such as Malaysia. Consequently, the lack of knowledge and understanding of the industry among the populations of those countries will need to be improved. In this regard, Egypt seems to hold an advantage.

“I personally think that Egypt has the biggest potential, simply because it has the most important factor, which is the human capital and knowledge,” says Dr Elias Boukrami, senior lecturer in banking and finance at London’s Regent College.

“Islamic banking can only be successfully developed if it is in an environment dominated by knowledgeable scholars able to adopt the concepts. [Also], it needs serious and credible independent academic institutions that ensure continuous research and education which can feed the system with efficient regulators. In this regard, Egypt has the historic institution of Al-Azhar University, and at a lower stage, Morocco could be a candidate with Alqarwyin school.”

Founded in 970, Al-Azhar is dedicated to Arabic literature and Islamic learning, and the university’s stated mission includes the propagation of Islamic religion and culture. Furthermore, Mr Boukrami points out that the culturally different context in which Islamic finance will be practiced across north Africa should be appreciated. 

“It could be strongly argued that the north African Islamic banking model has to take into account the characteristics of the north African Muslims and societies (Maliki and Shafii), as these countries are closer to Europe and are more affected by historic events that Muslims from other parts of the world have not been subject to,” he says.


All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker

For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Top 1000 2023

Request a demonstration to The Banker Database

Join our community

The Banker on Twitter