Islamic Finance on the Rise in North Africa

The estimated $1.4 trillion global Islamic finance sector could be on the rise in North Africa where governments have been introducing new regulation as they seek shariah-compliant alternatives for decreasing conventional funding sources and try to plug current account deficits.Bermuda is one of the giants of international insurance and reinsurance.

Tunisia and Egypt implemented new laws allowing for the issuance of Islamic bonds in late 2013, while Morocco last month put in place a legal framework for Islamic institutions, according to Standard & Poor’s.

Islamic finance activity is currently still very much concentrated in Southeast Asia and the Arab Gulf, so adding North Africa could broaden its geographical reach. North Africa’s contribution to global Islamic banking assets currently stands at a meager 1%, S&P said.

The ratings agency and Islamic finance bankers cite two major factors on why North-African countries have been actively developing Islamic finance: the Arab Spring upheaval resulted into the ascendancy of more conservative leaders who are keen on establishing their Islamic credentials by developing shariah-type financing while they also increasingly rely on Gulf Arab countries for financial help where Islamic finance is at a much more advanced stage.

In addition, the twin burden of political instability in the past few years and a shaky global economic environment exacerbated the governments’ financial headaches so that they have to search for other funding means.

Establishing a more shariah-friendly environment in new countries could spark interest in issuing Islamic bonds there, bankers say. For example, Tunisia is considering issuing a $500 million sukuk in 2014, S&P noted.

“Developing and issuing such [legal] frameworks will definitely be seen positively by the market and we expect to see issuances and an increase in investor participation in the years to come,” said Salah Jaidah, head of Islamic finance at Deutsche Bank.

Islamic finance could especially come in handy to serve the countries’ infrastructure and project finance needs in the coming years as the capacity of conventional financiers appears limited.

“Several projects in renewable energy, transport infrastructure, and communication are ongoing or expected to be launched in the future in North African countries. Using sukuk to finance some of these projects could help diversify investors’ base and tap an additional pool of resources,” said S&P.

Still, investors may need to adopt a long-term view as progress is likely to take time in North Africa, where people will need to be convinced of the possible advantages shariah finance can deliver.

“We expect the process to be very gradual, however, because local banks and corporates are slowly familiarizing themselves with Islamic finance and the sukuk markets as a credible financing alternative,” said S&P.