Performance of Islamic banking in Morocco is below expectations

Abdulsamad Issami, director of Umniah Bank - “Customer expectations far exceed the capabilities of the newly emerging Islamic banks in the country.”

Sunday 16/02/2020
A view of a branch of Assafa Bank. (Al Arab)
Competitive sector. A view of a branch of Assafa Bank. (Al Arab)

RABAT - Financial data indicate that, two years after being authorised in Morocco, Islamic banks have not met the objectives of the government for the very competitive banking sector, leading to a new plan for the banks’ operation.

Nabil Badr, deputy director of Banking Supervision at Morocco’s central bank, told parliamentarians that the total amount of financing for Islamic banks was approximately $258 million. He said that the issuance of sukuk — Islamic bonds — by the banks would have a role in enhancing their ability to affect financial matters but to what extent depends on regulations related to the sukuk.

Officials said Islamic banks’ returns in Morocco have been counterproductive, their activities minimal and they have not received much approval from Moroccans.

Islamic banking in Morocco began with Assafa Bank and Umniah Bank with branches in several Moroccan cities. They were joined by Al-Yusr Bank, the Finance and Development Bank and Al-Akhdar Bank, in addition to an Islamic bond window last year.

Since the start of the experiment, experts warned of shortcomings, including overlapping functions of Islamic banks in transactions that include “advance payments” in addition to the high price of Islamic banking services compared with traditional commercial banks.

Competing banks provide continuous facilities, which made them more popular and efficient among customers, in contrast to the limited incentives and poorer services in Islamic banks.

To cope with the competition, Islamic banks added employees, whose numbers have jumped from 30 at the start to 519. However, that was not enough to draw customers, presumably because not many Moroccans were familiar with Islamic financing mechanisms or participatory banking, as it is locally known.

Until last June, financing through the Islamic banks was estimated at about $620 million, an increase of about 25% over the previous year.

Badr acknowledged that the development of Islamic banks requires time, as well as greater public awareness of Islamic financial services and the banks offering a better range of products.

Despite the sector’s weak performance, Badr said he remained optimistic that Islamic banking in Morocco would eventually succeed, pointing out that similar banks in countries with a long experience in Islamic financing took decades to reap significant revenues, “which means that their development in Morocco is going to be gradual as well.”

“Customer expectations far exceed the capabilities of the newly emerging Islamic banks in the country due to several considerations,” said Abdulsamad Issami, director of Umniah Bank.

He listed obstacles Islamic banks have encountered, including “the French-inspired legislation in Morocco, plus the taxes and fees that Islamic banks in the Gulf countries do not face.” Also, traditional Moroccan banks tend to provide a sophisticated set of services that Islamic banks cannot offer.

Mohamed Karrat, professor of Islamic jurisprudence of financial transactions at the Faculty of Sharia in Fez, considered that Islamic banks need to step out of their traditional role and be more open to other services, such as financing educational institutions or financing health care such as surgeries or issuing sukuk as an alternative to conventional bonds.

Badr pointed out that it was not possible to compare Morocco’s experience in Islamic banking to that of other countries. He said some countries allowed Islamic banks to offer products not permitted in Morocco, such as tawarruq transactions, which consist in lending the funds needed for the purchase of an asset whose value is equivalent to the amount borrowed, then the customer resells the asset for a profit in exchange for paying back the value of the loan.

Badr insisted that Morocco’s experience regarding the compatibility of Islamic banking with Islamic principles was ahead of other experiences because Morocco has benefited from them and worked to avoid shortcomings.

Karrat pointed out that the Moroccan experience is characterised by its reliance on a gradual policy to better absorb Islamic finance because there are aspects that require years to implement.

He stressed the need to increase the size of the committee in charge of Islamic finance at the Bank Al-Maghrib, Morocco’s central bank, and relieve committee members of other duties so they can focus on the sector.

Despite its short life and small scope, the Moroccan experience in Islamic finance has become a reference for other countries, Badr said. Central Bank of Algeria officials have met with Moroccan central bank officials to get acquainted with the regulatory and legislative framework regulating Islamic banks even though Algeria adopted Islamic banking before Morocco.