Islamic finance in the region remains underdeveloped but regulatory changes are now creating an “enabling environment for its growth”, said S&P.
“After tremendous global success over the past decade, with total assets estimated at about $1.4 trillion, Islamic finance could make inroads in North Africa," said the report. "Large current account deficits and declining conventional financing sources are prompting governments from Arab spring countries to consider opportunities offered by Islamic finance.”
S&P’s Rating Services said in the report, published on 18 February, that it has observed this development in North African countries where it rates banks – Egypt, Tunisia, and Morocco.
Both Tunisia and Egypt implemented new regulatory frameworks for sukuk issuance, or Islamic bonds, in late 2013. In January 2014, the Moroccan cabinet approved the legal terms organising the activities and the development of Islamic finance, which had been authorised by the country’s central bank in 2007. However, S&P said the bill has yet to be endorsed by Morocco’s parliament.
The report notes that “traditional financiers, such as bilateral financiers and multilateral development institutions”, have been very active in infrastructure financing in North Africa. S&P says their total commitments exceeded $4.9 billion in 2012.
However, the report says the “capacity of these institutions to satisfy the full demand for infrastructure financing is limited...we think that North African countries will need to attract additional financing sources.”
According to the report, 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”.
Islamic financial products have been historically more expensive than their conventional counterparts due to their structured nature or lower liquidity, particularly in Gulf countries, sayid the report. “We think it may not be the case in North African countries, where price competition is already stiff because banks compete for a relatively narrow band of clients.”
Islamic finance expert Amir Ahmad of Pinsent Masons, the law firm behind Out-Law.com, said: “The Standard & Poor’s report sets out the natural course of development of Islamic finance in the rest of the Islamic world. The demand for infrastructure in North Africa could be the ideal catalyst for this development and North Africa is likely to be an attractive market.”
Last month, the president of the Islamic Development Bank (IDB) Ahmad Mohamed Ali told an IDB forum for sub-Saharan Africa: “It is time to take advantage of the growth of sub-Saharan Africa in order to maximise the development impact in IDB member countries and Muslim communities in non-member countries.”
The IDB’s annual report for 2012 said that, together with the Arab Bank for Economic Development in Africa, it was cumulatively co-financing 59 operations for $4.8 billion in African countries – focusing mainly on transport, agriculture and rural development.
Last week, the IDB said it had signed a financing agreement with Burkina Faso to provide a US$ 59 million contribution for the construction of the 91-kilometre Dedougou-Tougan road, in north-western Burkina Faso. IDB said that, once operational, the road will boost trade opportunities and play a “significant role in enhancing regional integration” between Burkina Faso and Mali, both IDB member countries.