Islamic finance in Morocco: Right tool to meet economic challenges?
While no one is claiming that Islamic finance will change the business face of Morocco, experience elsewhere indicates that it can generate important vehicles for improving access to financing resources. To the uninitiated, Islamic finance is based on two key principles, the prohibition of interest (riba) on the use of money, and conformity with other principles of Sharia law that regulate profit and loss. Islamic finance has had its fits and starts over the past two decades due to its weak competitive position vis-à-vis traditional modes of financing. The global financial crisis of the last decade has focused attention on Islamic financial instruments since they prohibit the speculation inherent in derivatives and other instruments that led to the collapse of banks and financial sectors worldwide.
In 2012, it is estimated that more than a trillion dollars is circulating in Islamic financial instruments. Yet there is no international authority that governs how these products are generated and regulated. In order to provide a “Sharia compliant” product, the originator must have a religious ruling (fatwa) by recognized Islamic authorities that approves the product. Although the roots of Islamic finance are in the Levant, the first significant growth occurred in Malaysia and was copied a decade later by Bahrain, Qatar and the Emirates of Dubai and Ras Al-Khaimah. Many international banks have set up sukuk (Islamic bonds) departments to tap into this quickly growing market.
Morocco is a good case study in why Islamic finance is growing at a time when the global financial system is struggling. Soon after the Moroccan government coalition led by an Islamic party was installed in 2012, Prime Minister Abdelilah Benkirane played host to the leader of Qatar International Islamic Bank (QIIB) who proposed both an Islamic bank and insurance company. Since that time, the government has been busy preparing the necessary laws to submit to parliament but the date has not yet been set. It is not simply a matter of setting up guidelines. While the licensing process is the first step, the challenges of getting products approved by Islamic authorities and getting the appropriate regulations vary from market to market. Moroccan officials have to decide which practices are best suited to their economy. The process then moves on to ensuring proper training of staff to sell and manage sukuk offerings. In the meantime, if European markets start to recover, there will be increased competition for investment dollars/euros that might otherwise be invested in sukuk.Islamic instruments are financially and psychologically attractive. Risk is controlled by limiting products to those tied to assets so that there is virtually no secondary or derivative market for speculators. In general, assets must be held for the duration of the contract/bond at a fixed value guaranteed by the asset holder so that there is greater stability in the transaction. In high risk environments, such as today’s, Islamic bonds have a higher valuation due to the controlled risk factor. Psychologically, Muslims have a higher confidence level in Sharia-compliant financial instruments and believe that the investments are reliable, conservative, aligned with their religious beliefs, and support the financial health of the community. So how would this help Morocco?
As Elhassan Eddez, deputy director of the Treasury at the Financial Ministry said, selling Islamic bonds helps issuers “reach conventional debt investors and sukuk investors at the same time…The sukuk market has a wider investor base.” It is also an international base, which means that Morocco could be attracting funds from throughout the Muslim world, including the Gulf States, Africa, and Asia. Hakim Azaiez, who heads investment at GCA Asset Management, noted, “A Moroccan sukuk bond will allow the government to potentially reduce its borrowing cost and tap new frontier markets…The demand is there for sovereign sukuk issues.” Given the large amount of capital intensive projects needed in Morocco, from social housing and education and health services facilities to transportation infrastructure, lower borrowing costs means more gets done with fewer dirhams – no surprise why this is attractive to a non-energy driven economy.
The key, as in any market, is to have a level competitive field between traditional and Islamic banks so that the country benefits from the choices it makes that best serve the Moroccan people. If Islamic finance can encourage a higher rate of personal savings, increase capital available in the market at reasonable rates, and promote greater transparency in government financial transactions, then it can have a significant impact on how Morocco does business and its support from the Moroccan people.