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Friday, 6 April 2012

Egypt: Flirting with Islamic finance

With Egyptian newspaper headlines signalling Islamists' increasing hold on politics, the economy pages are regularly filled with information on all kinds of investment products that adhere to Islamic principles. Sharia law bans both interest and speculative trading.

The Egyptian media echoes the social transformation that is currently underway. Ikram El-Sayed, a 62-year-old housewife, said she is transferring all her savings to Islamic banks, after spending the past 15 years unwillingly investing her money in interest-bearing investment certificates. She feels good making this change, and blames recent life failures on having made investments she considered religiously prohibited. "The certificates' yield that I get every six months is never blessed, as most of it was spent over the years on my late husband's treatment for cancer, as well as on a failed private business for my only son."

El-Sayed said she hates usury. But as her relatives had told her that even Islamic banks in Egypt did not apply Sharia law completely, she and her husband had decided to invest the savings they had made from working in the Gulf in conventional banks. But now, "with Islamists rising to power, banks will strictly abide by Sharia, and I will be sure that my money is 100 per cent halal," or Sharia-compliant.

Banks and other financial institutions have already started to feel the new market beat. Egypt currently has two fully-fledged Islamic banks -- namely Faisal Islamic Bank and El-Baraka Bank. Another handful of banks are applying for licences to open branches for Islamic transactions. They include Ahli United Bank, Audi Bank and the Bank of Alexandria. Moreover, the Central Bank of Egypt (CBE) is planning on setting up a new unit specialised in monitoring Islamic banks.

Participants in a recent conference on Islamic finance in Egypt expected the market share of Islamic banks to increase from the current four to 20 per cent of overall banking.

And in February, the Egyptian Financial Supervisory Authority (EFSA) amended the capital market law to accommodate the issuance of Islamic bonds, or sukuk. Islamic investment funds have achieved the highest yield since the beginning of the year, exceeding 30 per cent in some cases. Starting mid-2011, Egypt added three new Islamic funds to raise the overall number to 11 out of the 60 currently working in Egypt. There is also a keen interest in Egypt for Islamic insurance, ortakaful, which currently makes up five per cent of Egypt's $1.45 billion insurance market. This area is expected to grow dramatically, according to a March report by Islamic consultancy BMB Islamic.

Further, Islamic finance has been gaining much popularity worldwide since the 2008 financial crisis exploded on the back of virtual transactions. Such transactions were based on derivatives and securitisation, both of which are banned by Islamic law and cost the world billions of dollars. Experts believe that one key factor in the expansion of Islamic finance is the fact that it can attract savings by Egyptians working in Islamic Gulf countries, as well as millions of Muslims worldwide.

"In a post-Mubarak era, the urgency of rebuilding and changing things will clash with the absence of resources and lack of money," Ibrahim Warde, adjunct professor at the Fletcher School of Diplomacy at Tufts University recently told Reuters news agency. "Egypt is going to look towards the Gulf for money, and it's going to have to offer Islamic options to maximise investments," he added.

The National Bank for Development, which is currently transferring all its activities to become Sharia-compliant, is owned by the Abu Dhabi Islamic Bank. And the fully Sharia-compliant bank Al-Baraka Misr is entirely owned by the Bahraini Baraka Bank. According to data from Thomson Reuters, Egypt could see Islamic finance assets grow to $10 billion in 2013, from $6 billion in 2007.

Still, the road ahead is full of challenges. Investment expert Hani Tawfiq said the new trend shows that the market is flirting with the Islamists who are now in power, by trying to offer products that might appease them. However, this interest will soon fade when profit and loss calculations prove that the market still lacks much- needed infrastructure.

"Even if there is a demand on anything dubbed Islamic in a religiously sensitive society like Egypt, the market still lacks products that can accommodate the demand," said Tawfiq.

Sukuk is a good example of this. Tawfiq explained that it is a growing industry worldwide, but that it depends on sharing profit and loss. And as most Egyptian individual investors have small savings and are looking for a regular income, investing in sukuk could be risky unless they are used to finance projects with definitive revenues. Such projects might include drilling and oil exploration operations of oil wells with large proven reserves. "Such projects are few in the Egyptian market," he said.

Seeking halal investments in the stock market through Islamic funds, for example, is extremely difficult, according to Tawfiq. This is because investors have to exclude companies working in industries that are not permitted in Islam, such as tobacco, alcohol and gambling. Moreover, some Islamic funds only invest in companies with a maximum of 30 per cent of their assets financed by interest-bearing debt. "You can hardly find good companies to invest in after all those filters," the expert said.

For many years, Egyptians have had reservations against Islamic finance, after firms like Al-Rayan and Al-Saad stripped thousands of Egyptians of millions of pounds in Ponzi schemes in the mid-1980s.

That is one reason why Islamic finance witnessed very slow growth in Egypt, despite the fact that this was among the first countries that embraced Islamic finance. Islamic banking has yet to become a real success here. No new licences are being given out to set up new banks, while there are no incentives whatsoever to encourage banks to open branches for Islamic transactions. They even used to operate under the same regulations that traditional banks are governed with, according to May El-Haggar, deputy head of research and banking analyst at Al-Naeem Brokerage. She also pointed out that demand on Islamic banking products is so far limited. "On the corporate level, what really matters is getting the best terms for credit finance, be it Sharia-compliant or not."

This leaves us with individual bank customers, whose main aim would be to get interest-free loans to buy a car or a house, or obtain a halal credit card. They are likely to be disappointed by the limited available options on these retail services. In fact, retail services in Egyptian banks, Islamic or not, are still very underdeveloped.

El-Haggar added that she talked to senior officials in several top banks, who said they are not considering applying for a licence to offer Sharia-compliant products. Their economic feasibility in Egypt today, they say, is not particularly high.

(Al-Ahram Weekly Online / 05 April 2012)

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