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Wednesday, 10 July 2013

Future for Islamic Finance Strong in Tunisia

Prime Minister Ali Laarayedh visited Saudi Arabia earlier this week, where he met with the president of the Islamic Development Bank, from whom Tunisia recently secured $1.2 billion in funding.

A major task for the Tunisian government during the post-revolutionary transition is the development of the financial sector, which rating companies such as Moody’s still consider to be undercapitalized and fragile.

As the government and consumers adapt to troubled financial conditions, there is growing support for financial products and institutions in Tunisia that correspond to principles of traditional Islamic law. Tunisia’s government has even discussed plans to issue a sukuk, a kind of Islamic bond, to raise $700 million this year.

Islamic financial products are constructed to conform to interpretations of Sharia (Islamic law) that prohibit charging interest or the financing (or gaining revenues from) financial transactions. Islamic finance products are built around concrete financial transactions and the idea of profit and loss sharing, rather than derivatives and interest-bearing loans.

Instead of applying for a traditional loan, for example, a customer would instead make an agreement with an Islamic bank in which the bank buys the item the customer wishes, and the customer then purchases it from the bank for a fixed charge. 

Proponents of Islamic finance say the industry is still underdeveloped in North Africa. In Tunisia, it represents only 2.5 percent of the country’s financial sector. There is significant potential for growth in the region, however, particularly in Tunisia.

Only two “Sharia-compliant” banks currently operating in Tunisia. One is the Bahraini-based bank Al Baraka, founded in 1983. Its services, however, are not available to residents of Tunisia. Rather, it is primarily used by foreign companies for offshore oparations. The Zitouna bank, founded in 2010, is the only locally-operated Islamic bank available to Tunisians.

In June, Thomson Reuters released a report on the Islamic finance industry in the country called  ”Cautiously Optimistic Tunisia.” The report’s findings are based on a survey of the use and perception, at the national level, of retail financial services with a particular focus on Islamic finance.

The report highlights “a strong demand for Islamic finance in the country with a potential of up to 40 percent of total financial assets in the next five years.” This number was echoed by Tunisian Central Bank Governor Chedly Ayari in a recent press conference.

Another important facet of Islamic finance is sukuk, a type of bond constructed to comply with Islamic principles.

Moncef Cheikhrouhou, a Tunisian economist and an independent member of the National Constituent Assembly, told Tunisia Live that the financial sector and government policy in Tunisia needs to be developed to adapt to such instruments as sukuk.

“The Tunisian financial market isn’t adapted to the special instruments that Islamic finance needs, especially regarding profit loss and risk estimates. Sukuk needs to be used as a stock market instrument and a monetary policy controlled by the Central Bank,” he said. 


The report identifies favorable aspects of the Tunisian economic environment for Islamic finance, such as the existence of Islamic retail banking and the political will to support the industry. This was underscored by the announcement of the issuance of a sukuk in 2013 and the development of new Sharia-compliant funds in 2013.

Other factors that could promote the development of Islamic finance in Tunisia include the significant population of Tunisians that currently do not have bank accounts, an interest of conventional banks in offering Islamic financial products, and existing opportunities for financing small and medium enterprises which may been amenable to funding through Sharia-compliant financial products.

“The retail banking offers many opportunities due to a low level of satisfaction among consumers, a strong savings culture among Tunisians and the existence of a sizeable unbanked [population],” according to the Thomson Reuters report. Seven percent of those surveyed did not have bank accounts.

However, the report warns that delay in adopting a regulatory framework for Sharia-compliant regulations will have a negative impact on investor confidence.

The report surveyed Tunisians in Tunis, Sfax, and Sousse and found that much of the population is inclined to follow Islamic banking principles.

It also found, however, that factors like the availability of ATM service at a reasonable cost and the location of bank branches were ultimately more important than religious factors in deciding which financial services to use. Only twelve percent of those surveyed cited Sharia as being very important in making such decisions.

Cheikhrouhou believes that the function of Islamic financial products, however, goes beyond purely religious importance. He asserts that they keep a country’s economy more rooted to ractical initiatives and policies that create employment and offer a “participatory” kind of finance.
“It can be used for any country that wants to get rid of debt and make the system healthier. It is a tool used to treat the cancer of debt, especially in emerging countries like ours,” he told Tunisia Live.

Cheikhrouhou prefers to emphasize these factors over the religious foundations of Islamic finance products.

“I am afraid of the religious affiliation of such a term because some people use it commit fraud, like what happened with Adel Dridi and the Ponzi scheme,” Cheikhrouhou added, referring to the alleged leader of a large investment fraud operation who was arrested last month.

The Islamic banking industry is currently booming, with an international growth rate of 15 to 20 percent per year, according to Global Islamic Finance Magazine. No bankruptcy of an Islamic bank has been recorded, even in the wake of the international financial crisis, according to Cheikhrouhou.

The Tunisian Ministry of Higher Education announced in June that a masters degree in Islamic finance will be offered in the Higher School of Economics and Commercial Sciences of Tunis (ESSEC).

(TunisiaLive / 09 Live 2013)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

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