Despite Morocco’s attempts to grow the Islamic finance industry and develop an Islamic finance infrastructure, the country still faces growth challenges in the sector, according to a new report from the ratings agency Fitch Ratings.
The report comes after Morocco approved a new law governing Sharia-compliant insurance, known as takaful, on July 10, 2019. The move allows insurance companies to launch takaful subsidiaries as part of Morocco’s attempts to develop its Islamic finance sector, known locally as participation banks.
The agency highlighted two challenges constraining the Islamic finance industry in Morocco.
The Fitch report argues that funding is a major challenge for Islamic finance institutions in Morocco, with competition for deposits remaining strong. Banks are likely to continue to rely on parent funding and deposits from conventional peers in the form of Sharia-compliant deposits. These products are more expensive for Islamic finance providers, but will provide the industry with the much needed liquidity for growth.
Despite banks having a limited source of funding and a lack of access to the domestic capital market or funding from the Moroccan central bank, Fitch applauded Morocco’s progress. The Associate Director of Financial Institutions - Banks at Fitch Ratings Jamal El Mellali, said, “Recent developments in Morocco are consistent with the country’s efforts to build a cohesive Islamic finance ecosystem, which saw the kingdom issuing its first sukuk [a Sharia-compliant bond] in October 2018, representing a major milestone in this endeavor.” However, the framework for banking institutions to issue sukuk has not yet been developed.
The report also claims that achieving public awareness and trust will take time. The agency noted that when Islamic banking was introduced in other countries, such as Turkey and Indonesia, the industry saw strong growth from a low base until stalling around five to six percent of total lending.
Global Head of Islamic Finance at Fitch Ratings Bashar Al-Natoor told Al Arabiya English that, “Each country has its own agenda in developing Islamic finance. Some have a strong bottom-up demand. For instance, the customers and corporates are high on the Islamic finance agenda, such as in Saudi Arabia where the sector represents more than two thirds of financing via Islamic banks and Islamic windows. Other countries have a top-down approach. For example, Malaysia has clear Islamic finance development objectives, strategies, and milestones. Sukuk now represents 60 percent of issuance in the local market.”
Al-Natoor also outlined the top benefits for instituting an Islamic finance framework in Morocco.
“First, it supports the city of Casablanca’s ambition to become a leading financial hub in Africa; second, it unlocks investment from the Gulf Cooperation Council (GCC) and attracts a wider investors pool to tap the significant pools of liquidity held by Islamic investors based in the GCC countries; third, it enhances further financial inclusion. Although the Moroccan banking sector has one of the highest levels of penetration in Africa, Islamic finance could help to build on this growth,” added Al-Natoor.
Moroccan institutions will be able to increase their pool of potential customers if they can offer further Islamic finance products. Islamic banking could be appealing to Moroccans who have shied away from the traditional banking system because of their faith, said El Mellali. “Banking penetration in Morocco is already relatively high - around 70 percent of Moroccans hold a bank account, but private sector credit to GDP is moderate at 62 percent. We believe that the development of Islamic finance could build on this over the medium to long term,” he added.
Morocco’s first Islamic banking licenses were issued in 2017. As of the end of 2018, the industry still only accounts for less than one percent of the banking sector’s total loans, despite rapid initial growth. Most Islamic banking has taken the form of mortgage and auto financing to retail customers as murabahah contracts, or Sharia-compliant financing.
Takaful legislation introduced last month will allow institutions to move into the corporate sector as takaful products can be used to insure banks and banking transactions, broadening bank offerings and increasing industry liquidity.