Morocco Weighs Pursuing $1.7 Trillion Industry: Islamic Finance

Morocco plans this year to allow Islamic banking for the first time as the only North African nation with an investment-grade rating at Standard & Poor’s seeks to tap the $1.7 trillion industry.

The country’s cabinet approved a draft Islamic finance bill on Jan. 16, according to Abdeslam Ballaji, a lawmaker who worked on the proposed legislation and a member of the ruling party. The draft, which also regulates Islamic banks and allows for sukuk sales, is pending parliamentary approval and may be enacted within five months, he said last week.

Demand for financing that complies with Islam’s ban on interest is accelerating worldwide, with assets expected to climb to $3.4 trillion by 2018 from about $1.7 trillion last year, according to Ernst & Young LLP. More than 95 percent of Morocco’s population of 34 million back the introduction of banking that adheres to Shariah, according to Said Amaghdir, secretary general of the Moroccan Association of Participative Financiers, an Islamic finance business association.

“Given the choice, Muslim retail customers on the street generally prefer to bank Islamically, even if there are higher costs,” Khalid Howladar, a senior-credit officer at Moody’s Investors Service, said by phone from Dubai yesterday. “Islamic banks historically have tended to grow at twice the rate of conventional banks in Muslim countries, and as such they tend to take a market share from the conventional system.”

Billions Required

The Moroccan Association of Participative Financiers estimates total investment in Shariah-compliant products to reach $7 billion by 2018, provided the law comes into effect by the middle of the year, Amaghdir said by phone yesterday.

“Plans to expand solar and wind energy, tourism and industrial parks will require billions, and the Gulf Cooperation Council will be keener on putting money here when the law is enacted,” he said. The six-nation GCC, which includes Saudi Arabia and the United Arab Emirates, is predominantly Muslim.

Banks may also sell short-term sukuk to fund Islamic subsidiaries, Amaghdir said.

Morocco’s central bank allowed lenders and insurers to sell three Islamic products in 2007 to help develop the nation’s financial industry. The country is “almost” ready to sell its first sukuk, Prime Minister Abdelilah Benkirane said in October.

Regional Competition

“We can’t afford to drag our feet any longer because regional competition for the Islamic finance pool is heating up, not just from our Muslim neighbors,” Ballaji, the lawmaker, said in a phone interview Jan. 20.

The U.K. plans to sell debut Islamic bonds this year as Prime Minister David Cameron seeks to revive a blueprint that’s been stalled since at least 2007. The Hong Kong government this month gazetted legislation to allow the sale of Shariah-compliant notes.

Moroccans may be misinformed about the benefits of Islamic banking, Ismail Douiri, co-chief executive officer of Casablanca-based Attijariwafa Bank, said in May.

“Islamic finance is often portrayed as low-cost type of finance,” Douiri said. “Islamic finance is not charity. One should not expect financing costs to decline.”

Shariah-compliant products are typically more expensive when they’re first introduced, Howladar of Moody’s said.

“Islamic products tend to come at a premium, because the creation of the products requires substantive investment,” he said. “Orthodox customers are willing to pay more to bank Islamically. Eventually, in the face of competition, those costs fall and are comparable to conventional products.”

To contact the reporters on this story: Dana El Baltaji in Dubai at delbaltaji@bloomberg.net; Souhail Karam in Morocco at skaram5@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net

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