Sharia-friendly banking boost
Despite a growing interest in Islamic banking, several obstacles lie in the path of its development, writes Ahmed Kotb
With President Mohamed Mursi, a former member of the Muslim Brotherhood, in office, Islamic banking is expected to grow rapidly and acquire a larger market share, competing with its conventional counterpart.
Islamic banking refers to a financial system that is consistent with the principles of Islamic Sharia law, which prohibits interest through lending, gambling and investing in businesses that are related to goods or services considered against Islamic principles, like alcohol and tobacco.
However, experts believe that there is a number of obstacles that might stand in the way of expanding an Islamic-law compliant financial system.
Among these obstacles, according to Rashad Abdu, a financial expert, is a conflict between Sharia law and the Egyptian law under which banks operate based on interest. "This is not compliant with Sharia which is based on profit sharing," he explained.
Another problem Islamic banks face, according to Abdu, is that they follow the rules and regulations of the Central Bank of Egypt (CBE), which forces banks to issue treasury bonds with interest. Besides, he added, present banking law, issued in 2003, doesn't have any provisions to regulate the work of Islamic banking.
Islamic finance offers an alternative to interest: sukuk, an Islamic bond that is not interest bearing. Sukuk gives the investor a share of an asset and commensurate cash flow and risk.
A further challenge is that there are no professional certificates in Islamic finance. "The problem here is the lack of the proper specialty. These managers have to know everything about Islamic economy."
Islamic finance, Abdu added, suffers from the absence of a model Islamic bank. "Some banks claim they are Islamic, but they don't apply some of the principles of Sharia," he noted, adding that some just make interest rates lower than in conventional counterparts, claiming that this is Islamic.
"There should be an awareness campaign for the public to inform them about the Islamic finance system," Abdu said, adding that conventional banks that have Islamic finance branches might use the money deposited in activities and investments that are not consistent with Sharia law.
Former director of research at Abu Dhabi Bank, Ahmed Adam, identified another problem that faces Islamic banks. "These banks find difficulties in dealing with the private sector as a client because companies have to do an annual estimated budget that cannot be done if they are not sure of the interest rate of their deposit in Islamic banks," he said, adding that commercial banks offer additional interest rates to companies, unlike Islamic ones.
However, Adam pointed out that an Islamist presidency and an expected Islamist majority in the coming parliament means that the Islamic banking sector is set for a boost, because many people are interested in dealing with Islamic banks.
The recently dissolved parliament, led by the Freedom and Justice Party of the Muslim Brotherhood, was planning to introduce new legislation especially drafted for Islamic finance. The legislation had not been approved before the parliament was dissolved.
Realising the potential of the Islamic finance sector, many conventional banks have applied to the Central Bank of Egypt (CBE) for licences to open Islamic finance branches. According to the CBE, about 15 licences have been issued. The current number of such branches across the country is 211, out of a total of 2,360 branches practising conventional banking. There are only three fully-fledged Islamic banks operating in Egypt. Although the first Islamic bank was established in 1963, the Islamic banking trend remained on the sidelines.
Islamic banking has started to receive a positive reputation worldwide after the economic recession of 2008, when the world discovered that economies that survived the crisis -- like Malaysia -- applied the principles of Islamic finance.
The Egyptian Association for Islamic Finance issued a report recently showing that Islamic finance, by the end of March 2012, represents 7.3 per cent of the total volume of the banking market, with LE94 billion compared to LE1.3 trillion.
According to the report, Islamic banking transactions are expected to grow from 10 to 15 per cent annually due to increasing demand for Islamic finance.