In the countries swept by the Arab Spring, recent elections were dominated by Islamist parties. This will further encourage the development of the Islamic finance market, experts believe.
"The recent free elections in a number of the affected countries have shown a desire by the people to organise their financial affairs in a manner that reflects their religious beliefs," notes Tariq Hameed, managing associate at Simmons & Simmons in Dubai.
In a report entitled "Blue Print for Islamic Finance Following the Arab Spring" published in February 2012, Hameed notes that the parties winning the most seats in the recent elections in Tunisia, Morocco, Egypt and Libya have all stated their support for Islamic finance.
"The countries affected by the Arab Spring will be expected to deliver economic solutions that directly affect the people that recently voted for them," he argues.
Apart from the desire of the population to move towards a more religious society, there are several reasons why Islamic finance should proliferate in the countries that witnessed the protests of the Arab Spring.
First: the current lack of banking facilities.
A 2010 study by Dr Dhafer Saidane for the United Nations notes the proportion of people with access to banking services in some North African countries is extremely low - approximately 25% in Morocco and 33% in Tunisia.
Hameed notes only 10% of Egyptians have access to a bank. "There was a lack of offerings," he says. "Many didn't engage with the conventional banking system."
For the new governments ready to introduce their people into the financial system, Islamic banking therefore represents an attractive alternative to the 'conventional', distrusted Western banking system.
"Introducing Shariah-compliant current and savings accounts would therefore be important to draw people into the financial system," Hameed says.
In Tunisia, the country where the Arab Spring movement allegedly started in December 2010 in the wake of Mohamed Bouazizi's self-immolation in protest of police corruption and ill treatment, steps have already been taken to develop Islamic banking and finance.
In its Finance Act 2012, Nahda, the Islamist party which has claimed victory in Tunisia's October 2011 elections, has incorporated several changes to facilitate the spread of Islamic finance practices, including a special taxation framework for Islamic banking and the introduction of a regulatory framework for Islamic bonds.
The Tunisian government not only supports the development of Islamic finance, but also sees it as a tool to turn the country into a finance hub in North Africa.
In reality, the industry in the region is up for grabs. Islamic finance has so far failed to take off in North Africa, which currently has less than a 1% share of global Islamic banking assets, according to a report by consultancy McKinsey.
"There are three factors that account for the relative underdevelopment of Islamic banking in North Africa; first the limited development of retail banking generally; second the lack of knowledge of Islamic banking amongst potential clients; and third the absence of (the former) government support," said the African Development Bank in a report on Islamic Banking and Finance in North Africa published late last year.
So with governments across North Africa now openly supporting Islamic Finance, this is likely to change.
Away from retail and commercial banking, one opportunity could come from the development in Islamic microfinance offerings, Hameed notes, as institutions will have to serve demand from rural communities and micro-enterprises.
"The same institution could also provide the community with Islamic micro-insurance (micro-Takaful) to help low-income families to protect against health risks and micro enterprises to protect against property risks," Hameed adds.
Islamic finance could also provide an answer to the need for infrastructure projects, with successful Islamic financing of infrastructure projects already in existence in Bahrain, Saudi Arabia and Bangladesh, Hameed notes.
"Islamic finance can play a prime role in financing big projects in North Africa that require large investments and significant borrowing volumes," said Tunisia's former finance minister, Jalloul Ayed, during a July 2011 summit on Islamic finance opportunities in North Africa.
Tunisia itself has financing needs of around USD 40 billion over the next five years, Ayed said, and could soon create a sovereign fund called "Fund for the Generations".
There is a substantial need for project finance in North Africa given the poor state of much of the region's infrastructure. Existing Islamic project financing covering 24 schemes in North Africa worth over USD 2.4 billion has already been approved, according to the African Bank for Development.
The newly elected governments of Arab Spring countries know too well that investing in infrastructure and real estate - in particular, affordable housing, of which there is a severe shortage in North Africa, thus fueling growth and creating jobs - is the only to stabilize the region politically and enhance social cohesion.
Many experts believe Egypt will pave the way for the industry's expansion in the region.
"Egypt will be a great force in steering Islamic finance in a different direction. We will see the development of new products as the market which Islamic finance will serve is a different clientele, and will be needed to solve different problems. Al Azhar University in Cairo should play a role in developing Islamic finance in the country," argues Sahar Ata, a senior lecturer in Islamic finance at the London School of Business and Finance.
Egypt, the most populous state in the region, already has the highest proportion of Shariah-compliant assets in relation to total bank assets (around 5%). The country is "where Islamic finance has the greatest potential", the African Development Bank said.
However, despite promising prospects, there remain challenges for the Islamic finance industry before the potential of these markets can be reaped, Hameed believes. Strengthening of consumer protection laws, clarifying governance, and establishing central Shariah boards for finance will have to be addressed, he argues.
(Zawya / 22 March 2012)
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