Banks must offer Islamic finance

21 December 2007
In the past two years, 16 banks have disappeared from the Egyptian market, more than a quarter of the total, leaving 41.

While Cairo has been happy to see fewer, stronger local banks, the market could soon be dominated by international firms unless those that remain adapt quickly.

The government also needs to change its attitude to one of the fastest-growing sectors of the market and encourage local banks to engage with Islamic banking.

Egypt, with a population of more than 80 million, 90 per cent of whom are Muslims, suffers from an underdeveloped banking sector. Cairo has been reforming the sector by selling off state-owned banks and encouraging competition and market consolidation.

Only 20 per cent of its people have bank accounts. International institutions have been buying into local banks to tap into the enormous growth potential that the market holds.

If local banks are also to capitalise on the opportunity, they must ensure their products are as diverse and sophisticated as those of their international rivals.

Local banks are particularly weak in Islamic finance. The crash of Islamic investment vehicles in the 1980s wiped out demand and led to political resistance to their return.

As a result, most Egyptian institutions lack experience in this area, which means they find it tough competing in one of the fastest-growing sectors of the market. Egypt issued no sukuk (Islamic bond) in 2007.

Public attitudes are changing as the viability of sharia-compliant investments has been proven in the Gulf and elsewhere. Government attitudes now need to catch up with the mood of consumers and the market, and offer more encouragement to banks to offer sharia-compliant products.

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