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Morocco's Islamic banks show sluggishness despite high demand

Such banks were introduced in Morocco in 2017 with the aim of meeting the growing demand from Moroccans eager to comply with Islamic precepts
The Central Bank of Morocco

REUTERS/YOUSSEF BOUDLAL  -   The Central Bank of Morocco

Islamic banks, which prohibit usury or investment in gambling or alcohol, are showing a sluggishness in their activity in Morocco after four years of existence, attributable according to observers to the effects of the pandemic and a demand that exceeds three times the funds managed by these entities.

This type of banking institution emerged in the 1970s in Asia and the Gulf and was introduced in Morocco in 2017 in order to meet the growing demand from Moroccans eager to comply with the precepts of Islam in their finances and banking operations as well.

Officially called participatory banks in Morocco follow the precepts of Sharia (Islamic law) which prohibits usury or charging an interest rate for lending, investment in religiously illicit businesses such as gambling and alcohol, as well as demanding greater involvement of capital in the real economy, shying away from speculative transactions.

Dinero Marruecos
PHOTO/REUTERS - Image of banknotes
Many mortgages, but few deposits

The governor of Morocco's central bank, Bank al-Maghrib (BAM), Abdelatif Jouahri, recently noted a sluggishness in the activity of these banks, the causes of which his institution is studying.

Despite the sustainable increase in the loans they offer, which exceeded 17.5 billion dirhams (1.6 billion euros) last August (an increase of 50% compared to the same period in 2020), the demand deposits managed by these banks only reach 4.5 billion dirhams (428 million euros), according to BAM's monetary statistics.

More than 90% of these credits are made up of the so-called "mourabaha" (intermediation) real estate", a product that replaces the traditional mortgage and which consists of the bank buying the house and then reselling it to the client with a fixed profit margin. The customer pays the total amount in instalments, which is the sum of the cost of the property plus the margin added by the bank.

"The problem of participatory banks lies in the continuous increase in demand, because the funds they manage only satisfy a third of the demand," Abdeslam Balaji, president of the Moroccan Association of Islamic Finance, told EFE news agency Abdeslam Balaji.

Balaji stressed that in the first year of its activity, this bank managed to corner 10% of the real estate financing market, but the lack of deposits and the coronavirus health crisis disrupted its boom.

This lack of liquidity also has to do with clients: many ask for loans, but few are encouraged to open an account with these banks or deposit their salaries there due to the lack of incentives, high costs and their limited geographical presence, according to several testimonies gathered by the EFE news agency.

This is the case of a couple from Rabat, who bought a plot of land through the "mourabaha" with the Assafa participatory bank but continue to keep their account open with another conventional bank.

"We bought the land through the 'mourabaha' to avoid usury and to have a clear conscience but opening an account with Assafa is not practical for us. At the Chaabi (People's Bank) where we have an account, you find branches everywhere," the wife told EFE.

Islamic banks have 166 branches throughout the country, while traditional banks have more than 6,300 branches.

Clientes de entidad bancaria
REUTERS/ELOISA LOPEZ - Bank customers
Possible solutions: mergers and capital increases

To refinance their activities, Morocco's participatory banks rely mainly on their own funds or on contributions made by traditional banks to Islamic banks through the "wakala bil istitmar" (investment contract) formula, in exchange for profit sharing or through interest-free loans.

In Morocco, there are five participatory banks (the result of a partnership between a local bank and a leading Islamic banking institution, present in countries such as Qatar and Malaysia), in addition to three so-called banking windows opened within Moroccan banks. These banks now only offer the "mourabaha" to buy a house, a car or to finance the purchase of professional equipment.

To complete their ecosystem, the Moroccan monetary authorities launched - with the approval of the High Council of Ulemas - the "sukuk" or Islamic bonds and just last month issued three licences for the Islamic insurance "takaful".

The central bank governor also favoured bank concentration with mergers of some of these entities and capital raising as solutions that can revive the funds of the joint stock banks.

Balaji believes that these solutions will help to revive the activity of these banks but insists on the need to diversify their activity to include other products such as "mucharaka" and "mudaraba" (which make the customer an associate of a company), "salam" (sales contract with deferred payment) or "istisna" (manufacturing contract).

"Islamic banks must also improve their communication and commercial policy in order to be able to compete with the traditional banks that have been present in the country for almost 100 years," concludes the Moroccan expert.