Flirting with Islamic finance

April 11th, 2012

Published on Al-Ahram weekly online, by Sherine Abdel-Razek, 5 – 11 April 2012. /ec1.htm

With Egypt’s politics dominated by Islamists, the financial market has developed a love for Sharia-compliant products. With Egyptian newspaper headlines signalling Islamists’ increasing hold on politics, the economy pages are regularly filled with information on all kinds of investment products that adhere to Islamic principles. Sharia law bans both interest and speculative trading.  

The Egyptian media echoes the social transformation that is currently underway. Ikram El-Sayed, a 62-year-old housewife, said she is transferring all her savings to Islamic banks, after spending the past 15 years unwillingly investing her money in interest-bearing investment certificates. She feels good making this change, and blames recent life failures on having made investments she considered religiously prohibited. “The certificates’ yield that I get every six months is never blessed, as most of it was spent over the years on my late husband’s treatment for cancer, as well as on a failed private business for my only son.”

El-Sayed said she hates usury. But as her relatives had told her that even Islamic banks in Egypt did not apply Sharia law completely, she and her husband had decided to invest the savings they had made from working in the Gulf in conventional banks. But now, “with Islamists rising to power, banks will strictly abide by Sharia, and I will be sure that my money is 100 per cent halal,” or Sharia-compliant.

Banks and other financial institutions have already started to feel the new market beat. Egypt currently has two fully-fledged Islamic banks — namely Faisal Islamic Bank and El-Baraka Bank. Another handful of banks are applying for licences to open branches for Islamic transactions. They include Ahli United Bank, Audi Bank and the Bank of Alexandria. Moreover, the Central Bank of Egypt (CBE) is planning on setting up a new unit specialised in monitoring Islamic banks.

Participants in a recent conference on Islamic finance in Egypt expected the market share of Islamic banks to increase from the current four to 20 per cent of overall banking … //

… For many years, Egyptians have had reservations against Islamic finance, after firms like Al-Rayan and Al-Saad stripped thousands of Egyptians of millions of pounds in Ponzi schemes in the mid-1980s.

That is one reason why Islamic finance witnessed very slow growth in Egypt, despite the fact that this was among the first countries that embraced Islamic finance. Islamic banking has yet to become a real success here. No new licences are being given out to set up new banks, while there are no incentives whatsoever to encourage banks to open branches for Islamic transactions. They even used to operate under the same regulations that traditional banks are governed with, according to May El-Haggar, deputy head of research and banking analyst at Al-Naeem Brokerage. She also pointed out that demand on Islamic banking products is so far limited. “On the corporate level, what really matters is getting the best terms for credit finance, be it Sharia-compliant or not.”

This leaves us with individual bank customers, whose main aim would be to get interest-free loans to buy a car or a house, or obtain a halal credit card. They are likely to be disappointed by the limited available options on these retail services. In fact, retail services in Egyptian banks, Islamic or not, are still very underdeveloped.

El-Haggar added that she talked to senior officials in several top banks, who said they are not considering applying for a licence to offer Sharia-compliant products. Their economic feasibility in Egypt today, they say, is not particularly high. (full text).

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