Mohamed Morsy’s rise to the presidency could reintroduce Islamic banking reform and transform the industryFor months following parliamentary elections, the Muslim Brotherhood’s Freedom and Justice Party (FJP) has been working hard to draft and introduce new legislation that would dramatically transform Egypt’s Islamic banking industry, ending its decades-long role on the sidelines of the Egyptian economy.
A few months after the revolution, a small informal group of Islamic banking enthusiasts emerged to promote Islamic finance in Egypt and to pursue policies that would have been taboo under the Mubarak regime. “We decided to formalize this group and turn it into an NGO to promote a healthy Islamic finance industry, which would differentiate itself from its conventional counterpart and would offer something to society that conventional [banking] is not able to do,” says Walid Hegazy of Hegazy & Associates. “After the revolution, there was a lot more excitement in the air. Now we know the government is not going to be an obstacle — we could talk to the government,” Hegazy recalls.
An informal group turned into a formal organization known as the Islamic Banking Association, and began to participate in workshops and parliamentary sessions and advise new parliamentarians on the ramifications of different historical precedents. One group, the FJP, was particularly active. It encouraged Hegazy and other Islamic banking experts to participate in legal reform efforts. “When [the FJP] wanted to [achieve] legal reform, they realized they [could not] do it alone; they invited banking sector experts,” he says, noting the party is not aiming to transform the entire banking industry into an Islamic one. “Their view is, ‘Let everyone show us how they can contribute to the economy’.”
Nonetheless, the FJP remained bullish on its outlook for growth for the Islamic finance sector, now estimated at 5–9% of the total banking sector. Mohamed Gouda, a member of the FJP economic committee and an active proponent of Islamic finance, estimated Islamic banking could grow to 35% within the next five years. Gouda did not return a request for comment, stating only that his party was in a state of emergency at the time of presidential runoffs.
Poised for growth
In fact, all the necessary conditions are in place in Egypt for the Islamic banking sector to take off as it has in many markets in the MENA region and globally.
Currently Egypt has issued 14 Islamic banking licenses, but only has three full-fledged Islamic banks. Of these, Faisal Islamic Bank of Egypt is the most prominent, established in 1979 through a special decree.
Despite being the birthplace of Islamic banking, Egypt’s Islamic banking industry remains largely underdeveloped at LE 120 billion, compared to its commercial equivalent valued at LE 1.3 trillion according to central bank data. By comparison, Islamic banking comprises about 90% of the banking industry in Saudi Arabia.
Yet Egypt could become a potential powerhouse for dynamic Islamic banking growth, given a set of legal and political incentives because of a large Muslim population and built-in demand. Many retail banking customers and investors find refuge and security in Islamic financial instruments whether for religious reasons or to complement their portfolio rattled by the European debt crisis and the ongoing global recession.
“After the financial crisis, many banks suffered losses. We did not because the concept of Islamic banking is secure,” says Abdel Halim Ahmed, general manger of public relations at Faisal Islamic Bank. The bank follows Islamic principles whereby the bank is a trader that buys and sells. While the bank doesn’t give loans with interest, it makes a profit on the difference between the purchase and the sale price. Faisal Islamic Bank has been growing its branch network since it started operations in Egypt in 1979 and now has 29 branches nationwide.
In 2011, the Faisal Islamic Bank posted a 12.28% increase in total revenues, largely driven by an increase in its retail sector. “We concentrate on guaranteed investments,” says Ahmed.
Faisal officials reached were not aware of and did not have any comment on the proposed legislation: the new chapter being added to the central bank law as well as the EFSA’s Capital Markets Law governing sukuk issue. The proposed banking law includes raising the minimum capital for banks to LE 2 billion from LE 500 million. It also revises Shariah board regulations and limits the governor to two four-year terms in office, according to media reports and experts familiar with negotiations.
For Faisal, it was business as usual with the same laws being applied to both commercial and Islamic banks.
Associated Press
Green light ahead
After the hotly contested presidential elections and an effective dissolution of parliament by a court order on June 14, the proposed legislation appeared to be hanging in the air, depending on whether the Muslim Brotherhood-backed Mohamed Morsy or Mubarak’s last Prime Minister Ahmed Shafik had secured the presidency.
“If [Mohamed Morsy] wins the election, then they will try to continue to increase the number of Islamic banks,” Hegazy said ahead of the presidential runoff. “If [Ahmed Shafik] wins the election, then he’ll still encourage Islamic banking but there will be a lot of other agendas.”
When the presidential elections results were finally announced on June 24, Morsy’s historic win did not only represent the first civilian president-elect or the first elected president after the revolution, it also gave a second chance for Islamic banking reform as well as the banking industry as whole — if the Morsy administration chooses to advocate the same agenda and policies the FJP pioneered in parliament prior to its dissolution.
It represents a chance to shape the development of the banking sector and potential reform of the banking sector as a whole , which they have been mulling for months. Leaders of the group, including Hassan Malek and Khairat El Shater offer experience in managing corporations and following Shariah principles.
As president, Morsy could offer a more daring and sweeping approach to the banking reform than a Shafik presidency could, according to analysts.
It would also mean that once the parliament is elected again, the party in power would have to reach out to those segments of the population who do not embrace a growing role for Islamic banking in Egypt. One of the main criticisms of Islamic banking are its variations from country to country as well as at times conflicting definitions of what constitutes as a Shariah-compliant product or company.
Rushdi Siddiqui, who is a Global Head of Islamic Finance at Thomson Reuters, has said that the global sector does not excel at educating people and explaining how it differs from conventional finance.
“Certain prejudices and bigotry exist in many countries that still do not understand Islamic finance,” he said on Al Arabiya.com. “It’s a process that requires a lot of education. Christian Evangelists have said that Islamic finance is related to terrorism finance, while in parts of the US [some] think the same.”
Nonetheless he estimates the $1 trillion (LE 6.04 trillion) global sector will reach $2 trillion (LE 12.08 trillion) within five years.
In Egypt, the potential for growth remains extensive for the Islamic banking sector despite the drawbacks, but the exact outcome and direction of its development in Egypt is elusive. On many counts, the future of Islamic finance in Egypt would depend on how daring the Morsy administration will choose to be on banking reform, the makeup of the new parliament when the new parliamentary elections are held, as well as the emerging balance of power between the two.
