Casablanca: Morocco inches towards Islamic finance

Morocco is on the cusp of a legislative breakthrough that will pave the way for a fully fledged Islamic finance system in the country. But with a history of failed Islamic banking experiments, on top of the usual problems associated with establishing a new market in a country, Morocco's Islamic banking sector is unlikely to take an instant hold.

Morocco’s parliament is currently discussing a bill to regulate Islamic finance in the country. The bill, which was initial tabled in January 2014, is the final step before the introduction of a fully fledged Islamic banking industry in Morocco. If it is passed into law, Islamic banks will be permitted to operate in the country for the initial time.

Conventional banks will as well be able to offer Islamic banking and investment finance products, inclunding murabaha, a sharia-compliant type of credit sale, musharaka, a joint enterprise or partnership agreement used commonly in Islamic finance, and ijara, the provision of a service or product based on an Islamic rental or lease arrangement.

There will not be any formal restrictions on what type of institutions can apply for a licence to provide them. Meanwhile, Morocco’s central bank is negotiating with a group of Islamic scholars to launch a new central sharia board, which will regulate the industry to ensure the authenticity of Islamic products on the market. The evolution follows the introduction of law number 119-12 in September 2013, which allows sovereign and corporate bodies to issue sukuk.

Farrukh Raza, managing director at Islamic Finance Advisory and Assurance Services (IFAAS), a UK-based consultancy specialising in Islamic finance, predicts that the law, which is currently in the upper home of Morocco’s parliament, looks set to be adopted in the third quarter of 2014, “just next Ramadan and Eid in early September, perhaps. The majority of the work on this legislation has been done and the rest is mainly a formality.”

Mr Raza argues that the bill is significant. “For the initial time in Morocco, Islamic banking is legally recognised and being put on an equal footing to conventional banking, and this as well includes the taxation of Islamic financial products,” he says.

Islamic agenda

There are by presently signs that Morocco’s biggest banks are preparing to take chance of the legal changes. Banque Populaire has revealed its plans to establish an Islamic subsidiary bank next the bill is written into law. The bank claims that it has a potential partner with technical experience in the realm of Islamic finance, a name and brand for its new subsidiary, inclunding a distribution channel. Its Islamic bank is to open 60 large branches over the space of four to five years and will concentrate on pushing Islamic products for individuals rather than corporates or small and medium-sized enterprises.

Attijariwafa Bank, which is the biggest bank in Morocco and the third major in Africa, has as well said that it plans to create an Islamic bank next the bill is passed. In an interview with news agency Reuters in March, the bank's managing director, Ismail Douiri, said that his bank will need to increase the capital of its existing Islamic finance product line, Dar Assafaa, by Dh150m ($18.1m) to turn it into a fully fledged bank.

Reuters reported in March that two additional of the country's large banks, BMCE and BCP, intend to launch Islamic subsidiaries, citing anonymous sources from both institutions.

“As two of Morocco's biggest banks, both BMCE and BCP have shown genuine interest in tapping the Islamic finance market,” says Sayd Farook, world chief of Islamic capital markets at media agency Thomson Reuters. “Market players in Morocco realise the high potential that the country holds for Islamic financial products, and are strategically positioning themselves to capture the request should the law be finalised,” he says.

Second time around

Recent developments follow lukewarm experimentation with Islamic banking products by some Moroccan institutions next parliament passed the Participative Banking Act in 2007. As a result, a small handful of conventional banks and institutions in the country launched ijara, musharaka and murabaha Islamic banking products. The trend failed to gain proper momentum and, by 2011, the sector was worth little additional than Dh1bn.

The unfavourable regulatory environment was half to blame, with double taxation of Islamic products proving to be a huge obstacle, and restrictions on marketing hampering increase. Attijariwafa is the only bank currently offering murabaha products, and even these charge higher fees, are limited to individual finance, and are operating subject to conventional regulation.

A number of shifts have prompted Morocco to look at Islamic banking again, however, according to experts.

“The Justice and Development Party is a driving force behind Islamic finance,” says Amir Ahmad, who heads the United Arab Emirates practice at international law firm Pinsent Masons. With north Africa in turmoil due to the Arab Spring uprisings, Morocco’s constitutional monarchy called for elections in 2011, enabling the moderate Islamist-led Justice and Development Party approaching to power. Islamic banking is part of their schedule. IFAAS's Mr Raza says: “Before, the political belief in Morocco has not been Islamic, in that politics has not sought to promote an Islamic schedule."

He as well adds that “with just 40% to 45% banking penetration, there is a large market in Morocco that remains untapped. Part other reasons, there are people who are not taking out loans or opening savings accounts for religious reasons, so there is clearly a gap in the market that Islamic banking can fill.”

The long game

Some analysts further argue that Morocco, which is currently grappling with a struggling economy and government deficit, is keen to attract investment from the Gulf by issuing sukuk. "There is a significant need for infrastructure investment in Morocco and sukuk offer a potential way forward on this front,” says Mohamed Damak, a Paris-based analyst at ratings agency Standard & Poor’s.

Recent research has as well strengthened evidence that there is a healthy request for Islamic banking in Morocco. In April, Thomson Reuters published its Morocco Islamic finance country statement, which was half based on a survey by IFAAS of 813 Moroccans from a range of socio-economic backgrounds. Interest in Islamic banking services was expressed by 98% of respondents, while 88% of retail consumers expressed interest in Islamic banking and 87% said they would switch to Islamic banking within two years.

Nonetheless, some experts warn not to expect an Islamic banking revolution in Morocco overnight. “We think that the optimal penetration will take between five to seven years at the very least, and financial institutions shouldn’t be hoping for quick wins right out of the block,” says Mr Farook at Thomson Reuters.

Mr Ahmad from Pinsent Masons as well argues that leading banks such as BMCE and BCP are still smarting from previous failed experiments with Islamic banking dating back to 2007, and will likely proceed with caution.

Expert opinions

Poor knowledge of Islamic finance part the general people as well presents an interesting paradox. “While there is a significant request part Moroccans, our survey as well reveals a low level of awareness and considerate of Islamic financial products,” says Mr Farook from Thomson Reuters. “If financial institutions and other stakeholders are to successfully harness this high level of request, they will have to put in a lot of effort to educate Moroccans and promote Islamic finance to the public,” he adds.

A lack of individuals trained in Islamic banking in the country is as well a sticking point. “Despite the fact that the banking sector in Morocco is part the best in the region, Morocco is late in [coming to] Islamic banking, and it is evident that converting existing banking talent and training new resources will need time and money,” says Amine Rossafi, the managing director of Morocco-based human resources company Alar Conseil and reseller in Morocco for the Ethica Institute of Islamic Finance, a company that provides training in Islamic finance.

“Islamic finance experts in Morocco are rare and most of them have academic knowledge only, with little to no field experience in Islamic banks. Starting last year, there are up to presently three masters in Islamic finance in place, and other certification programmes and of course Ethica,” says Mr Rossafi. “We have no idea of the price of the Islamic finance masters in practice, and banks will have to tailor their training needs with the help of outsourced experts."

Experts further argue that Morocco should seek to avoid some of the common pitfalls that other nations that have fallen into at the same time as attempting to establish an Islamic banking industry. Failure to establish a level playing field and prevent double taxation is one, which nations such as Azerbaijan have struggled with. "Islamic financial products will need to be competitive compared with conventional products if they are to succeed,” says Mr Damak at Standard & Poor’s. "Increase will depend on the ability of Islamic finance to add price to the country, and the ability of the country to attract a new class of investors through sukuk," he adds.

An extra risk is that Islamic products will be diluted, so that they are similar to conventional products. “Compromising sharia principles for the sake of elimination of risks in Islamic banking and mimicking the conventional banking products has put the credibility of this industry to huge risk,” says Abdulazeem Abozaid, a sharia manager at Oman Arab Bank and an Islamic finance scholar.

Mr Raza at IFAAS is confident that Morocco can work through such difficulties, however. “This work is not specific to Morocco. These are challenges for each new market and it usually bottoms out within the initial few years. The world will therefore potentially see an extra Islamic banking sector success story – this time in north Africa,” he says.