The Islamic finance industry looks likely to benefit from the Arab Spring that saw the collapse of governments in Egypt, Tunisia and Libya, bringing sweeping change to how business is done in the region.
Islamist parties, such as Egypt’s Muslim Brotherhood and Tunisia’s Ennahda, emerged as the strongest in recent parliamentary elections. And, while it is still early days, the fact that Islamist politicians are now part of the political mainstream could prove favourable to the adoption of Islamic finance.
“The recent free elections in a number of the affected countries have shown a desire by the people to organise their financial affairs in a manner that reflects their religious beliefs,” argues Tariq Hameed, an expert on banking and Islamic finance at the law practice Simmons & Simmons, in a recent report.
Based on Sharia law, Islamic finance states that banking must follow religious principles. Charging interest, for example, is a forbidden practice; and the creditor is not allowed to gain a profit from an investment without first being exposed to the risk.
Shifting sands
Northern Africa has long been a bastion of secular finance – according to McKinsey, North Africa currently has less than a 1% share of global Islamic banking assets. But now conditions are favourable to the expansion of Islamic finance.
For example, interim government authorities in Libya are set to extend Sharia law to business and finance. “We as a Muslim nation have taken Islamic Sharia as the source of legislation, therefore any law that contradicts the principles of Islam is legally nullified," declared Mustafa Abdel Jalil, the Chief of the National Transitional Council, in late 2011.
Also, some financial systems, such as Libya’s, remain particularly underdeveloped. Islamic finance can therefore benefit from the inevitable rise in demand for financial services that comes with economic growth.
Elsewhere, the message of Islamic finance – that of a ‘fairer’ form of business – also taps into a populist strain of political Islam, and one that is likely to hit a spark with populations suffering from economic crises. As the African Development Bank argues, Islamic finance “can potentially contribute to a more inclusive type of development that brings social cohesion by supporting the equitable distribution of risk and returns between suppliers and users of funds.”
From a Western perspective, this potential for change makes North Africa an uncertain, but interesting destination for investment. Local politicians, however, stress that international companies will only be subject to Islamic law should they choose to delve into the Islamic finance industry.
If these promises prove true, the Islamic finance market could open up an opportunity for Western financial institutions. The political environment is still tense; but the unrest is likely to prove short-term as political power in these countries is transferred to democratic governments held accountable to electorates. Financial institutions should therefore think long-term. Islamic finance is a market with a strong future. A foothold established now could lead to a sizable market share in years to come.
And for those corporates considering the benefits of Islamic finance, having knowledgeable staff, with local market experience in Sharia compliance will be invaluable.