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Tuesday, 24 April 2012

Prospect and challenges of Islamic finance in Egypt

Last year's ouster of president Hosni Mubarak, whose regime neglected or discouraged Islamic finance for ideological reasons, has cleared the way for rapid growth of Islamic finance in Egypt, bankers believe.

But growth will require a regulatory framework, and a year after Mubarak left, basic decisions about regulation have not yet been made - and may not be made for many more months, as Egypt's transition to democracy distracts the government and political parties bicker over what form of Islamic jurisprudence the country should adopt.

The country of over 80 million people is potentially an attractive market for Islamic finance, which is based on religious principles such as a ban on interest payments. Over two decades ago Egypt was a pioneer in developing the industry, before a scandal erupted over money management firms that touted Islamic investments at returns above prevailing interest rates.

Egypt currently has 14 Islamic banking licenses. Operators include three full-fledged Islamic banks, such as Faisal Islamic Bank of Egypt, and several which use Islamic windows, including National Bank of Egypt and Ahli United Bank, part of Bahrain's Ahli United Bank group, according to Mohamed El-Beltagy, head of the Egyptian Society for Islamic Finance.

The industry's roughly 200 branches and 120 billion Egyptian pounds ($19.9 billion) of assets are dwarfed by Egypt's conventional banking industry; total assets of the entire banking sector are about 1.3 trillion pounds, the latest central bank data show. By comparison, Islamic banks account for over a quarter of assets in the Gulf's commercial banking market, according to an estimate by consultants Ernst & Young.

Some Islamic mutual funds were launched last year, by Al Watany Bank of Egypt, Naeem Financial and Banque du Caire, but only eight of 72 mutual fund products available in the market are Islamic.

AlexBank, majority owned by Italy's Intesa Sanpaolo, intends to use ten of its 200 branches to offer Islamic consumer banking products across the country, said Bassel Rahmy, head of retail banking.

United Bank, majority owned by the central bank, has announced its intention to convert to Islamic operations by the end of 2012.

Meanwhile the Egyptian government has been considering the possibility of raising about $2 billion by issuing its first sukuk, or Islamic bond, according to Sheikh Hussein Hamid Hassan, a prominent Dubai-based Islamic scholar who is familiar with its planning. A sovereign issue could ultimately encourage sukuk sales by private Egyptian companies.


But expansion of the industry will need a legal framework to attract investors and limit risks to the banking financial system, and here progress is slow.

AlexBank's Rahmy told Reuters that commercial bankers had been discussing the subject with the central bank governor, who had indicated regulations would be prepared this year. The Egyptian Financial Supervisory Authority (EFSA) has said it is drafting rules to facilitate corporate sukuk issues.

But there have been no clear public statements on the direction of policy. Senior EFSA officials did not appear at an Islamic finance seminar held in Cairo last month by Amanie, a global advisory firm in the industry. Although political parties have submitted proposals for regulations, economic officials from the parties decline to discuss them openly.

An industry source told Reuters that proposals on regulation were split between a moderate, more laissez-faire view of the industry espoused by the EFSA, and more restrictive, conservative views promoted by Islamist parties.

For example the EFSA differs with the Muslim Brotherhood, which won the most seats in January's parliamentary elections, and the Salafi Al-Nour Party, which came second, on how sukuk should be structured, the source said.

The source declined to elaborate on the disagreement, but it may be related to differences of opinion among Islamic scholars and bankers globally on the merits of asset-based products, which use real assets such as land as references for their value, versus asset-backed products, which actually give investors ownership in the assets. Many scholars view asset-backed products as closer to Islamic principles, but land transfer fees and other issues can make them more complex and expensive to arrange.

The Brotherhood is generally more moderate and pragmatic than the hardline Al-Nour Party, so it might be more willing to compromise on regulatory principles. On the other hand, if it is forced into horse-trading with Al-Nour in the new parliament, it might give the hardline party more say over Islamic finance in exchange for concessions in other areas of economic policy.

Policy issues are unlikely to be resolved until after a presidential election which starts in May, the climax of the shift to democracy. Afterwards, the distribution of power in the government should start to become clear, and agencies such as the EFSA may eventually be shaken up.

But even after the election, it may take months for Islamic finance to be addressed comprehensively. A major task for political parties is writing a new constitution, but the assembly charged with doing that has been suspended after liberals pulled out to protest against what they said was its excessive domination by the Islamists.


One key issue which regulators will need to clarify is whether banks can get involved in Islamic finance through in-house windows or whether they must establish separate subsidiaries. The decision will affect banks' accounting treatment of their operations.

Islamic windows, used by global institutions such as Standard Chartered and HSBC, let conventional banks offer products without setting up expensive standalone operations. The banks have internal controls to segregate conventional and Islamic funds.

By contrast, countries such as Qatar require the complete separation of Islamic from conventional banking operations. Qatar has been an important financial supporter of Egypt, giving it a $500 million grant last year, so it is possible that the Qatari model could carry some weight.

Another unresolved issue is the authority of the boards of sharia scholars which rule on the religious permissibility of banks' activities and products. Globally, some regulators establish a country-level board, while others leave it to each bank to set up its own board. Malaysia has a hybrid model; each bank develops products with the advice of its internal board but must then seek approval from the national board before marketing the products.

Egypt "will require substantive sharia board regulation, particularly for consumer-level offerings in banking, capital markets and takaful (Islamic insurance)," said Hdeel Abdelhady, a U.S.-based legal consultant. He cited the relatively litigious nature of Egypt's legal system.

"The Malaysian approach to sharia boards might be most suitable for the demographic make-up and temperament of the country," he added.

However, Mohammed Daud Bakar, chairman of Malaysia's national sharia board, said he believed the Indonesian model of regulation, which is lighter-touch than Malaysia's and does not involve so much intervention by central authorities, was more suitable for Egypt in the initial stage. "Malaysia is at a more advanced stage," he said.

The government will also have to decide how much of a role it wants to play in guiding expansion of the industry. If it launches a regular program of issuing sovereign sukuk, that could provide the pricing benchmarks needed to encourage development of a thriving market in corporate sukuk.

If the government does not promote sukuk actively, leaving growth of the industry in the hands of the private sector, development may initially focus on the launch of more Islamic funds, said another industry source familiar with the debate.
(Reuters / 22 April 2012)

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Libyans ‘hoarding $12bn’ pending Shariah banks

Ahmed Saeed, a Libyan poultry farmer, says he is waiting for his country to open Islamic banks to deposit money for the first time.

“I’m sure that Islamic banks are more in tune with my culture,” he said on Thursday. “I had a religious upbringing and I hear clerics ban dealing with current banks because of usury.” 
Once a law that allows the establishment of stand-alone Islamic banks gets approved later this month, Libya’s interim government may be able to attract cash from people like Saeed, deputy central bank governor Ali Mohammed Salem said.

“When the people see Islamic banks, they’ll put this money there,” Salem said in an interview in the capital Tripoli on April 17. “It’s a win-win situation. The money that’s now outside the system will be circulated in the economy and used in development.”

Islamic lenders in Libya, where some banks offer Shariah-compliant services, may attract some of the estimated 15bn dinars ($12bn) outside the banking industry, he said. Total commercial banking assets were about 71bn dinars at the end of 2011. The nation, where almost all the 6.7mn people are Muslim, saw its economy shrink 61% last year after an uprising that toppled its ruler of 42 years Muammar Gaddafi. 

Oil production dropped to virtually zero from 1.6mn bpd.

The holder of Africa’s biggest crude reserves is now pumping more than 1.3mn bpd, data compiled by Bloomberg show. Its economy is expected to surge 76% this year, the most since at least 1988, the International Monetary Fund estimates. While Libya doesn’t need financial assistance from the IMF, it needs guidance to lower unemployment and to improve the business environment, including increasing access to finance, the fund said on April 16.

“Islamic banks could be one of the tools of development,” the central bank’s Salem said. “We hope that Islamic banks will focus on real investments and not just consumer-linked products such as cars.” Transactions in Islamic finance are based on the exchange of assets rather than interest to comply with Shariah principles, as well as profit and loss-sharing agreements.

Mustafa Abdel Jalil, the chairman of the National Transitional Council in Libya, said in October the interim government plans to eradicate interest from the banking industry. 

Charging interest “brings about disease and creates hatred,” he said.

Interest-bearing accounts, such as savings and time deposits, fell 8% and 6.6% respectively last year compared with 2010, according to a report published on the central bank website. So-called demand deposits, which don’t pay interest, rose 9.5% last year.

Gumhouria-Bank, a state-owned lender, has three branches offering Islamic banking services and is unable to cope with requests from companies and civil servants, according to Jamal Ajaj, the director of the lender’s Islamic banking project. Demand for Shariah-compliant financial services helped establish “informal banks,” he said in an interview in Tripoli April 19.
“It’s proof that Islamic banks will support the economy and bring out the money stored in the homes and the excess liquidity at corporates,” Ajaj said.

The central bank said in October that it plans to allow lenders to sell Islamic bonds to help develop banking services. Egypt and Tunisia, which saw uprisings that led to the ouster of long-serving rulers, also plan to permit the sale of debt that comply with Islamic principles. Bahrain, Dubai and Ras Al Khaimah are the only sovereigns in the Arab world to sell global dollar-denominated sukuk.

The average yield on Islamic debt in the six-nation Gulf Cooperation Council, which includes Arab sovereign sukuk, fell 45 basis points so far this year to 3.86% on Friday, HSBC/Nasdaq Dubai GCC US Dollar Sukuk Index.

Global sales of sukuk more than doubled so far this year to $12bn from the year-earlier period, according to data compiled by Bloomberg.

While Libya’s central bank is keen to boost the nation’s economy with Islamic banking, the new government has struggled to rein in armed militias built around regional and tribal loyalties. The groups were instrumental in toppling Gaddafi and have largely refused to disarm before the central government provides more funding and services to their respective regions.

Until the political situation in Libya is restored, Noor Islamic Bank, a lender controlled by Dubai’s government, won’t consider expanding its services to the North African nation, chief executive officer Hussain al-Qemzi. “We still feel that it’s too soon for us,” he said in an interview on Wednesday. “It’s still unsettled.”

The central bank’s priority in the first three years is to develop domestic Islamic lenders before opening the door to international banks, Salem said. Libya will honour bank licenses issued before last year’s civil war, including one given to Qatar Islamic Bank, Central Bank governor Saddek Omar Elkaber said in November.

Demand for Islamic financial services is likely to appeal to a wide segment of the population, many of whom withdrew their money during the revolution because of concern that their cash was safer at home than in banks, said Essam al-Zleiteeni, an employee at the Ministry of Culture. He is waiting for an Islamic bank to open before he will return his savings.

“I’m more convinced with Islamic banks because they don’t deal with interest,” he said on Thursday. “I’ll put my money in an Islamic bank to have a clear conscience.”

(Gulf Times / 24 April 2012)

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