Political divisions slow Islamic Finance in Egypt
As one of Egypt’s biggest commercial banks, AlexBank prepares to launch Islamic financial services next April, the country’s political divisions have left the regulatory environment unclear and unsettled.
Last year’s ousting of president Hosni Mubarak, whose regime neglected and discouraged Islamic finance, has cleared the way for rapid growth of Islamic finance in Egypt. But growth requires a regulatory framework, one that is far from being in place. As Egypt’s transition to democracy distracts the government and political parties bicker over what form of Islamic jurisprudence the country should adopt, basic decisions trail behind.
The country of over 80 million people is a potentially attractive market for Islamic finance; over two decades ago, Egypt was a pioneer in developing the industry, before a scandal erupted over money management firms that touted Islamic investments at returns above prevailing interest rates.
Egypt currently has 14 Islamic banking licenses. Operators include three full-fledged Islamic banks such as Faisal Islamic Bank of Egypt, and several which use Islamic windows, including National Bank of Egypt and Ahli United Bank. Some Islamic mutual funds were launched last year by Al Watany Bank of Egypt, Naeem Financial and Banque du Caire, but only eight of 72 mutual fund products available in the market are Islamic. AlexBank intends to use ten of its 200 branches to offer Islamic consumer banking products across the country, says Bassel Rahmy, head of retail banking. United Bank, majority owned by the central bank, has announced its intention to convert to Islamic operations by the end of 2012.
But, the industry’s roughly 200 branches and 120 billion Egyptian pounds ($19.9 billion) of assets are dwarfed by Egypt’s conventional banking industry; total assets of the entire banking sector are about 1.3 trillion pounds, the latest central bank data show. In comparison, Islamic banks account for over a quarter of assets in the Gulf’s commercial banking market, according to an estimate by consultants Ernst & Young.
Expansion of the industry will need a legal framework to attract investors and limit risks to the banking financial system – but progress is slow. AlexBank’s Rahmy says that commercial bankers had been discussing the subject with the central bank governor, who has indicated regulations would be prepared this year. But there have been no clear public statements on the direction of policy, and senior EFSA officials did not appear at an Islamic finance seminar held in Cairo last month. Although political parties have submitted proposals for regulations, officials from the parties decline to discuss them openly.
One key issue that regulators will need to clarify is whether banks can get involved in Islamic finance through in-house windows or whether they must establish separate subsidiaries. The decision will affect banks’ accounting treatment of their operations. Islamic windows, used by global institutions such as Standard Chartered and HSBC, let conventional banks offer products without setting up expensive standalone operations. The banks have internal controls to segregate conventional and Islamic funds.
In contrast, countries such as Qatar require the complete separation of Islamic from conventional banking operations. Qatar has been an important financial supporter of Egypt, giving it a $500 million grant last year, so it is possible that the Qatari model could carry some weight.
Policy issues are unlikely to be resolved until after a presidential election which starts in May. Afterwards, the distribution of power in the government should start to become clear, and agencies such as the EFSA may eventually be shaken up.