CAIRO/DUBAI: AlexBank, one of Egypt’s biggest commercial banks, says it expects to launch Islamic financial services next April. But the country’s political divisions mean the regulatory environment in which the bank will operate is not clear.

Last year’s ouster of president Hosni Mubarak, whose regime neglected or discouraged Islamic finance for ideological reasons, has cleared the way for rapid growth of Islamic finance in Egypt, bankers believe.

But growth will require a regulatory framework, and a year after Mubarak left, basic decisions about regulation have not yet been made and may not be made for many more months, as Egypt’s transition to democracy distracts the government and political parties bicker over what form of Islamic jurisprudence the country should adopt.

The country of over 80 million people is potentially an attractive market for Islamic finance, which is based on religious principles such as a ban on interest payments. Over two decades ago Egypt was a pioneer in developing the industry, before a scandal erupted over money management firms that touted Islamic investments at returns above prevailing interest rates.

Egypt currently has 14 Islamic banking licences. Operators include three full-fledged Islamic banks, such as Faisal Islamic Bank of Egypt, and several which use Islamic windows, including National Bank of Egypt and Ahli United Bank, part of Bahrain’s Ahli United Bank group, according to Mohamed El-Beltagy, head of the Egyptian Society for Islamic Finance.

The industry’s roughly 200 branches and $19.9 billion of assets are dwarfed by Egypt’s conventional banking industry; total assets of the entire banking sector are about 1.3 trillion pounds, the latest central bank data show. By comparison, Islamic banks account for over a quarter of assets in the Gulf’s commercial banking market, according to an estimate by consultants Ernst & Young.

Some Islamic mutual funds were launched last year, by Al Watany Bank of Egypt, Naeem Financial and Banque du Caire, but only eight of 72 mutual fund products available in the market are Islamic.

AlexBank, majority owned by Italy’s Intesa Sanpaolo, intends to use 10 of its 200 branches to offer Islamic consumer banking products across the country, said Bassel Rahmy, head of retail banking.

United Bank, majority owned by the central bank, has announced its intention to convert to Islamic operations by the end of 2012.

Meanwhile the Egyptian government has been considering the possibility of raising about $2 billion by issuing its first sukuk, or Islamic bond, according to Sheikh Hussein Hamid Hassan, a prominent Dubai-based Islamic scholar who is familiar with its planning. A sovereign issue could ultimately encourage sukuk sales by private Egyptian companies.

REGULATION

But expansion of the industry will need a legal framework to attract investors and limit risks to the banking financial system, and here progress is slow.

AlexBank’s Rahmy said commercial bankers had been discussing the subject with the central bank governor, who had indicated regulations would be prepared this year. The Egyptian Financial Supervisory Authority (EFSA) has said it is drafting rules to facilitate corporate sukuk issues.

But there have been no clear public statements on the direction of policy. Senior EFSA officials did not appear at an Islamic finance seminar held in Cairo last month by Amanie, a global advisory firm in the industry. Although political parties have submitted proposals for regulations, economic officials from the parties decline to discuss them openly.

An industry source said proposals on regulation were split between a moderate, more laissez-faire view of the industry espoused by the EFSA, and more restrictive, conservative views promoted by Islamist parties.

For example the EFSA differs with the Muslim Brotherhood, which won the most seats in January’s parliamentary elections, and the Salafi Al-Nour Party, which came second, on how sukuk should be structured, the source said.

The source declined to elaborate on the disagreement, but it may be related to differences of opinion among Islamic scholars and bankers globally on the merits of asset-based products, which use real assets such as land as references for their value, versus asset-backed products, which actually give investors ownership in the assets. Many scholars view asset-backed products as closer to Islamic principles, but land transfer fees and other issues can make them more complex and expensive to arrange.

The Brotherhood is generally more moderate and pragmatic than the hardline Al-Nour Party, so it might be more willing to compromise on regulatory principles.—Reuters