AlexBank, one of Egypt's biggest commercial banks, says it expects to launch Islamic financial services next April. But the country's political divisions mean the regulatory environment in which the bank will operate is not clear.
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 licences. 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 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 programme 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.