Retail and investment banks that offer sharia-compliant services are savouring the opportunities emerging in post-revolutionary countries such as Tunisia, Egypt and Libya.
The prospect of providing budgetary support for governments and the increased power of moderate Islamist parties bode well for the development of sharia-compliant finance, bankers say. In all three countries, Islamist groups were suppressed for decades and Islamic finance struggled to gain traction.
“There is pent-up demand” for sharia-compliant banking in these countries, says Afaq Khan, chief executive of Islamic banking at Standard Chartered in Dubai. But he adds: “You need a stable government, stable laws, before people will go [and] start something.”
Last month, Mustafa Abdul Jalil, chairman of Libya’s National Transitional Council, said in a speech announcing the country’s liberation from the rule of Colonel Muammer Gaddafi, that sharia would be the basic source of future legislation.
“We are working to establish Islamic banks that are far from interest,” Mr Abdul Jalil said. “There is a righteous intention to purify all of the financial laws. Perhaps in the future, all financial interest will be cancelled in accordance with Islamic law.”
Bankers are also keen to tap into the $65bn of assets held by the Libyan Investment Authority, although there has been some confusion over who will head the fund and other investment vehicles of the Gaddafi era.
In Tunisia, Nahda, the moderate Islamist party that has emerged as the largest party in the constituent assembly, has said it will encourage Islamic finance to help diversify the banking sector. However, it has been quick to reject suggestions that it will turn the whole banking sector Islamic.
In July, Jalloul Ayed, the finance minister, told a conference that the government wanted to make the country a hub for Islamic finance.
Mr Ayed says he intends that a finance law due next year will include measures to align the tax treatment of Islamic banking products to those offered by traditional banks and put them on an equal competitive footing. The finance ministry is also working on setting up the regulatory and fiscal frameworks to launch a sukuk (Islamic bond) market, Mr Ayed says.
“We believe that there is tremendous investment potential to be tapped both in Tunisia and in the region,” he says.
That potential is unlikely to be fulfilled if violence persists. In Libya, rival militia groups have clashed since Col Gaddafi was killed last month. Meanwhile in Egypt, labour strikes and violent sectarian clashes have marred the period since former president Hosni Mubarak was deposed.
“Islamic finance is a natural fit” because of the grassroots demand in those countries and budgetary needs, says Yavar Moini, a director at Morgan Stanley in Dubai. However, “it’s best to let things stabilise”.
For Egypt, considered the birthplace of Islamic finance, particular challenges still remain for the industry where in the mid-1980s millions of Egyptians were caught up in fraudulent schemes that promoted themselves as Islamically acceptable. Last year, Ahmed Abdel-Fatah al-Gabry, a businessman known as Ahmed al-Rayan, was released after 22 years in prison for his role in the fraud, according to local media reports.
For some bankers, those schemes are ancient history. Al Baraka Banking Group, a Bahrain-based Islamic lender, wants to add 20 more branches in Egypt to the 30 it operates there by 2015, says Adnan Yousif, chief executive. “Now they [the new authorities] are addressing Islamic banking,” says Mr Yousif.
The bank also plans to open 10 more branches in Tunisia by 2015 to tap into a wealth of unserved customers. It is also seeking a full licence from the Libyan central bank to expand its representative office in the country.
Aside from retail banks, investment banks hope to secure mandates for the sales of Islamic debt from governments for whom sukuk financing may provide an effective way of targeting Gulf and Asian liquidity. It may also prove to be a politically popular means of raising funds.
As the countries’ balance sheets have deteriorated, those funds will be much needed. HSBC estimates Egypt will need to raise nearly $25bn in the current fiscal year. The country will also need to refinance more than $50bn in treasury bills that mature before the end of the fiscal year, according to the bank. And in Tunisia, it says the revolution has led to a budget shortfall of about 7 per cent of gross domestic product.
Although the bankers are waiting on the sidelines for now, the potential for the Islamic finance industry in these countries is clear. “It’s early days; everybody is going to present their credentials,” says Standard Chartered’s Mr Khan.
source: Financial Times