DUBAI/CAIRO: Egypt is likely to remain an Islamic finance laggard, hit by bad press from corruption scandals and a government keen to buttress its secular credentials and stymie Islamists ahead of elections next year.
The birthplace of Islamic finance, Egypt is the sixth-biggest Muslim nation with 80 million people, but only 3 to 4 percent of its $193 billion banking industry is Islamic, said a 2009 report by consulting firm McKinsey.
UAE Islamic assets, by comparison, account for 46 percent of the market, while even in Turkey, with its highly secular political and social structure, Islamic assets account for 42 percent of total banking assets.
This disparity is politically induced, said Ashraf Mohamed Talaat, manager Islamic Banking unit-treasury at National Bank of Egypt.
"We can catch up to other regional markets in the (Gulf) areas and Malaysia if there is political will in Egypt for Islamic finance. Experts need a green light from the political side," he added.
That political will — ahead of long-awaited presidential elections in 2011 to pick President Hosni Mubarak’s successor — and consumer demand, is lukewarm, however.
Once bitten
Engaging consumers will be hard, especially as millions of Egyptians were stung by ponzi schemes in the mid-1980s, when a number of money management companies touted Islamic investments at returns above local interest rates.
"The firms involved in the scandal weren’t technically Islamic banks but the fact that they used the Islamic label was consequential," said Ibrahim Warde, adjunct professor at The Fletcher School of Diplomacy at Tufts University.
While there is grassroots interest in Islamic finance, even among practicing Muslims there is a lot of suspicion, he added, a situation the government has done little to dispel as it fights rising conservative Islamic sentiment.
Following the exposure of the ponzi schemes, Egypt’s foremost Muslim cleric, Sheikh Mohamed Sayed Tantawi, issued a fatwa stating simple bank interest was permissible, as long as it was not excessive.
The move effectively sidelined the need for Islamic finance by giving a religious stamp of approval to conventional banking, although with elections looming, the government is in two minds about how to handle the sector, said Warde.
"There is fear that the Muslim Brotherhood and other groups could use the promotion of Islamic finance for political gain but at the same time, there is a view that the government could attract some Islamic groups by doing more to embrace Islamic finance. But it’s a risky strategy."
The Muslim Brotherhood is the main challenger to the ruling National Democratic Party (NDP) in parliament, where its members have a fifth of the seats, far more than any other opposition group, although analysts expect the group’s presence to shrink as the government works to undermine the Brotherhood’s position.
Muslim Brotherhood members, who are often held in security sweeps, campaigned in 2007 for local council elections in 2008 that saw 5000 Brotherhood candidates rejected, and earlier this month, none of its candidates were elected to the Shoura council — seen by some analysts as a dress rehearsal for parliamentary elections.
Political fear
On a practical level, Islamists are unlikely to invest in official financial structures, for fear the government would confiscate their funds, said experts, and there is "no sufficient evidence" it has been used to support their political position, said Kurian Thomas, managing director Middle East and Africa at Grail Research.
However, "I think there’s significant political fear" ahead of the elections, he added.
That reticence is evident in the Egyptian government’s tentative moves to expand the fixed income market by formulating rules for the issuance of sukuk, or Islamic bonds.
The head of the Egyptian Financial Supervisory Authority (EFSA) said in April that Egypt plans to issue its first regulations governing sukuk in the second half of 2010, but remained cautious on its potential.
The reluctance to support Islamic Finance is also enshrined in the tax code.
"On the government side there is no effort to address any tax obstacles," said Reinald Klarmann, partner at Cairo-based Sarwat A. Shadid Law Firm. "(Islamic) transactions have tax implications that simply make it commercially unviable."
Klarmann said Islamic financing involves additional transactions like the passing of property title, which leads to additional tax on capital gains absent in a conventional deal.
Gcc banks ready to move
While bad press and political intrigues have capped the market in recent years, Islamic finance peers in nearby states remain keen to tap the country’s huge growth prospects.
Grail Research’s Thomas said a government-backed market could grow between by 40-50 percent in the first 3 to 5 years, driven largely by Gulf-based banks with cash and expertise.
Lenders such as Abu Dhabi Islamic Bank and Bahrain’s Al Baraka banking Group have already bought large stakes in Egyptian banks. ADIB’s stake in National Development Bank underpinned the conventional lender’s plan to convert to an Islamic bank by the end of the year.
However, the absence of a secondary market for short-term investors to sell Islamic products, could deter some institutional investors, Klarmann added.
That lack of infrastructure is also evident in manpower, said Angus Blair at Cairo-based Beltone Financial, highlighting the lack of trained financial advisors able to deliver Islamic finance to consumers "efficiently."
All of which underlines the need for sustained political and social demand, said a Gulf-based Islamic banker. "The interest is definitely there among Islamic financial institutions to expand further into Egypt, but until the government makes it easier and we see the population actively demanding it, it doesn’t make business sense."
