The happiness of Ritaj knew no bounds when she heard that the Central bank of Morocco approved requests to lay the foundation of Islamic Financial Institutions. Commuting a three-hour journey from Tangiers, a major city in Northwestern Morocco to open an account at Umnia Bank, the first Islamic Bank to welcome its customers, mother of three said, “As a Muslim, I am happy that we finally have Islamic banks in the country.” When Dr. Jarmo T Kotilaine, an Economist with Tamkeen based in Bahrain got to know about the recent decision, reacting positively he said, “Since Islamic Banking embraces risk-sharing instead of risk-transfer, it will arouse a sense of competitiveness in the banking arena. This, in turn, will lead to financial options working hard, thus improving the economy of Morocco.”
Termed as a progressive North African country with a higher percentage of the Muslim population, the decision to introduce Islamic Banking came into existence after discussions were in rounds since 2014. With the central bank having assigned duties to a body of Islamic scholars to manage the sector, there were umpteen reasons to reject as well as consider. 1991 marked the year where attempts to cement its foundation were commenced by Wafa bank that offered Islamic financial products. But due to legal issues, it underwent an abortion. Though it was again drawn into discussions in 2007 by a national level introduction of Sharia-compliant products, it failed to leave an impact. Political stability cited as the pillar of progress in Morocco, the emergence of Islamism as the major political force after the Arab uprising, left no room for second thought to pass the green signal for Islamic transactions. But, the drawback lay in the financial markets that lacked liquidity and its failure in attracting enough foreign investors. Taking inspiration from a list of countries that immensely benefitted from Islamic Banking, this proved a turning point to reconsider the application of cost-effective financing.
And, that’s how Umnia bank opened its doors five months after the decision was passed in favor of Islamic financing in May 2017. When the conventional type involves the inclusion of interest, Islamic Banking seals its hands tightly in the provision and collection of interest and monetary speculation in transactions. Principles in accordance with the Shariat, it’s ‘no interest banking’ indeed has attracted a large percentage of unbanked Muslim population. Despite its strict rules and regulations where any fee for renting of money (riba) is prohibited, it is today considered the best alternative to conventional banking. When no interest is involved in Islamic transactions, how can it be profitable? And, how did Islamic Banking become a significant aspect of the World Economy?
EVOLUTION OF ISLAMIC BANKING INDUSTRY
Clearly aimed at helping Muslims save for their expenses before they embark on Hajj (a pilgrim site), September 1963 sealed the date of establishment for Perbadanan Wang Simpanan Bakal-Bakal Haji (PWSBH) in Malaysia. Fast forwarding 55 years later, Malaysia today houses around 16 Islamic Banks that is regarded as the strength of its successful financial market and economy. Since Islamic transactions prohibited interest, it continued to be in huge demand especially, among the economically weaker section. With PWSBH coming into being, the number of depositors increased from 1,281 to 8,67,220 which resulted in the collection of deposits of over 1 million Malaysian ringgits. This successful experience led to the establishment of various Islamic banks especially in Egypt, that prioritized the needs of the rural areas. The fueling success led to the formation of Nasser bank in Cairo in 1972, which in turn led to the creation of Islamic Development bank that aimed for the development of Muslim community. With success shining in every corner, ‘interest-free’ banking has led to people of different religion across the globe prefer Islamic over conventional. Also, across the Middle East, Africa and Asia, Islamic Banking has emerged as the prominent means of managing finances.
BAHRAINI EXPERTS SAY ON ISLAMIC BANKING
On being questioned about the reason behind the preference of the crowd for Islamic over conventional, Dr. Jarmo added, “In Islamic countries, there is a significant amount of unbanked Muslim population who stay away from formal banking practices due to various reasons. From belonging to the economically weaker section to poor accession to conventional banking facilities, even disagreement with the principles of conventional banking is another attributed reason.” Though the documentation process is limited in conventional banking, he stated the desire for greater financial inclusion as the main reason which strengthened the foundation of modern Islamic Banking. Based on a survey that he conducted, he described that a significant amount of people loved Islamic Banking, but determined their choices based on which type of financing was more competitive. Overall, it was all about the prestige associated with the alternative that propelled success.
But, according to Shyam Krishnan, a chartered accountant with SICO bank, he stated that most of the corporate houses and customers preferred Islamic banking due to lesser risk exposure and in-depth clarity between counterparties. He also said, “Though religious requirements could be a part of constitutional requirements, one of the key factors is that every financial move is in accordance with Sharia approvals and involves detailed documentation, thus minimizing risk.” When no interest is involved in monetary transactions, the process of banking becomes tedious, which often results in switching over to favorable financial alternatives. But, Ahmed Mohammed Al Namrooti, a supervisor at Al Baraka Bank said, “Islamic Banking is transparent in its approach, that follows rules laid down by the Sharia. When compared to conventional, it refrains from hidden charges and floating interest rates, which may be a question of profitability to a few. But, with the provision of financial products like mortgages and loans to equity funds and bonds in accordance with Sharia, it compensates for interest-free transactions.”
Tasting its first success in Malaysia, the influence among the GCC countries was so tremendous that their economy breathed, ate, slept and lived only on ‘ISLAMIC FINANCING.’ According to a report published by the World Economic Forum in 2015, Saudi Arabia led with 31.70% of Islamic Banking assets. UAE stood at 14.60%, Kuwait at 10.50% and Qatar at 7.70%. According to a report by Economic Development Board on January 2018, Islamic financial assets of Bahrain grew from 7% globally to 2.2 trillion $ in 2016, and it is estimated that by 2022, it will touch the mark of 3.8 trillion $. “Though Malaysia ranks third as the global leader, I would also like to add Bahrain in the list as it is distinguished for its advanced level of Islamic transactions. Due to culture and behavior of customers considered the forte in this type, Bahrain ranks ahead for its profitable services by Islamic banks and Islamic windows,” added Ahmed. The best part is, there are not just Islamic banks, but also Islamic windows that have been opened in conventional banks, which creates a sense of awareness in every customer. According to a report by Thomson Reuters on September 4, 2014, Because of the success garnered in the usage of the financial instruments for profit generation: Mushakarah (partnership), Mudarabah (Islamic contract referring to the supply of money to other), Murabahah (sale term) and Ijarah (leasing), Bahrain has been ranked second after Malaysia globally and first in the MENA region.
“When Islamic banking was introduced, there were people who wondered whether it could survive in the banking sector or not. But, its prominence has proven that in the capitalized world, economic benefits outweigh religious principles,” added Dr. Gagan Kukreja, Associate Professor at Ahlia University. He attributed the success to a large part of the Muslim population who are driven by their religious beliefs and stated that Islamic financing will continue profiting its customers on a large scale.
POTENTIAL CHALLENGES OF ISLAMIC BANKING IN MOROCCO
Every banking initiative faces a certain amount of challenges. According to a report published in the Journal of Islamic Banking & Finance in June 2017, below listed are crucial limitations, if centralized and met, Morocco would be a pioneer in Islamic Banking.
- HUMAN RESOURCES: In Morocco, there is a presence of very few skilled people who understand the principles of Sharia and its modus operandi in banking. Again, it is not necessary every Muslim banker will have adequate knowledge about Islamic banking. So, how can this issue be addressed? Prioritizing the training of human resources as the most important, this attitude could fill loopholes in the area, one is not very clear about.
- CUSTOMER KNOWLEDGE: Unawareness about Sharia-compliant products is one reason which dampens the growth of initiatives. Education through impartment of knowledge, regular conversations about Islamic transactions with customers, and promotion of its products is one method, which will increase the value of Islamic banking in Morocco.
- SOCIO-CULTURAL BARRIERS: While one part of Muslims correlates their religious beliefs with financial decisions, there will be a certain section of Muslims who will refuse to link religion with commercial transactions. This may give birth to reluctance on the part of certain customers, who may prefer conventional over Islamic financing. If the promotion of Islamic banking literacy is done on a large scale, the gap that may arise during the preference of banking options can be addressed gracefully, thus stabilizing the economy.
Dr. Jarmo added, “Islamic finance has grown more diverse and competitive since the time of inception, where the profitable services provided to the clientele has resulted in the increase of customer base. Every positive step is a milestone achieved and it’s a surety that success in all aspects will follow the financial markets of Morocco.” Focusing on the recent actions taken in Morocco, according to Bloomberg, this year the first Islamic bonds, Sukuk’ will be launched, thus initiating steps in Islamic Banking. Inspired by the string of actions in Morocco, Tunisia and Algeria have begun discussions, and soon Islamic financing would tread the road of boosting their economy!