Islamic finance: Cairo's missed opportunity

21 December 2007
Despite being home to 66 million Muslims, Egypt lags far behind the GCC in terms of Islamic banking, and foreign institutions are stepping in to fill the gap.

Despite being home to the first Islamic banking experiment in the Middle East in the early 1960s, political uncertainty over the industry has left Egypt’s Islamic finance sector lagging far behind the rest of the region.

Islamic finance only accounts for 5 per cent of the Egyptian banking market, compared with 15 per cent across the region. Yet Egypt is home to 66 million Muslims - far more than in the GCC.

In the GCC, listed Islamic banks represent 23 per cent of banks’ total assets. Globally, the Islamic finance industry is growing at 15 per cent a year, while in Egypt it appears to be stagnating.

Analysts say that unless official attitudes to Islamic finance change, the potential for Egyptian banks will remain untapped, and instead foreign institutions entering the market will make significant gains.

Passing fad

Egypt’s Islamic sector has been stunted by the collapse of Islamic money management companies in 1988, which led to claims that Islamic finance would be a passing fad. Millions of Egyptians lost their savings to unreg-ulated Islamic institutions, which promised to deliver profits far in excess of local interest rates.

While the public is still affected by these losses, promoting Islamic finance and ensuring adequate regulation of the sector has not been on the government’s agenda, particularly as it has continued its efforts to keep politics and religious beliefs separate.

However, Islamic finance now represents one of the fastest-growing sectors of the finance industry and has found favour not only in traditionally Muslim regions such as the Gulf and Malaysia, but also the UK and, to a lesser extent, the US.

By the end of 2007, it is expected that more than $50bn worth of sukuk (Islamic bonds) will have been issued, according to the American Journal of Islamic Finance. None of these issues will have come from Egypt. Egypt is still lacking the skills and experience to make a credible attempt at marketing sukuk.

This is a major opportunity missed, says one local banker, given the liquidity in the Gulf driven by the oil boom and the demands for investment in Egypt.

The main driver for Islamic banking is more likely to be retail, according to banking analysts in the country. The drive by the government to reform the financial sector and privatise several state-owned banks is expected to help drive competition and spur development. It will also increase the number of foreign institutions offering Islamic products.

Mohamed Damak, credit analyst at ratings agency Standard & Poor’s, says the huge problems in asset quality in Egyptian banks means competition for the most creditworthy customers will intensify as more banks enter the market. He says this could result in more banks specialising in specific services and products, such as Islamic finance, to create niche markets. However, retail banking and mortgage lending are likely to be the key engines for growth for all banks in the medium term.

Growth opportunities

Egypt is a particularly attractive market for banks to enter, especially if they come from the significantly overbanked GCC. In Egypt, only about 20 per cent of the population has a bank account, thereby offering major opportunities for growth in both conventional and Islamic products.

Abu Dhabi Islamic Bank recently entered the Egyptian market with the purchase of a 51 per cent stake in Egypt’s National Bank for Development for $28m. Bahrain Islamic Bank has also asked the Central Bank for permission to buy a majority stake in Arab Investment Bank, and National Bank of Kuwait (NBK) is taking control of Al-Watany Bank of Egypt, and plans to transform it into the country’s third-largest retail bank.

NBK also plans to leverage Al-Watany’s Islamic banking licence to expand the Egyptian lenders’ sharia-compliant portfolio beyond the single product it now offers.

Mashreqbank, after failing to enter the Egyptian market through the privatisation programme, is now planning to extend its own franchise to the country. It hopes to have up to 50 branches in Egypt in the next five years, according to Nabeel Malik, head of the retail banking group at Mashreqbank. While there is no clear timetable for launching the bank’s Islamic arm, Badr Al-Islami, in Egypt yet, it will be considered as the bank establishes itself there.

Malik says Mashreqbank is wary of overstretching itself by launching too many products too quickly in a new market. The concentration of Egypt’s population in two main cities means an organic expansion strategy offers a cheap and cost-effective approach to reach a large proportion of potential customers, according to Moody’s Investors Service.

Malik, however, says Egypt holds one other distinct attraction: the government’s attempts to position it as a back-office outsourcing hub make it even more attractive to banks considering entering the market. “Egypt represents a big opportunity for consolidating or outsourcing our back office functions,” says Malik. “It is something that we will look into once we are established there.”

Interbank liquidity

The potential for a resurgence of Islamic banking in Egypt has not been helped by comments made by Sheikh Mohammad Tantawi, a government-appointed religious cleric.

His ruling five years ago that depositors could place funds with banks and earn a predetermined profit was seen as essentially permitting interest. He also issued a fatwa in 1989 declaring that the government’s interest-bearing bonds were legal.

These rulings have caused some confusion among banks and been rejected by other Islamic scholars.

Another problem facing Islamic banks in Egypt is that with only two major institutions, Egyptian Saudi Finance Bank and Faisal Islamic Bank, there is no real interbank liquidity. The Central Bank, which sells conventional debt, does not offer an Islamic alternative.

These factors have helped to drive up the cost of funding for Egypt’s few Islamic banks, making it more difficult for them to compete with domestic conventional banks, and the growing number of international banks entering the market.

Although the Central Bank has shown some appetite for reforming the banking sector, thanks to the financial crisis in the 1980s, there remains some degree of political reticence about promoting anything that is too overtly Islamic.

Radwa al-Swaify, banking analyst at Beltone Financial in Cairo, says the Central Bank is not trying to hinder the development of Islamic finance, adding that the government’s policy of not granting banking licences is part of an effort to reduce the number of banks in the country.

A by-product of this is that it has prevented domestic Islamic banks from starting up from scratch, and instead forced foreign entrants to buy local companies that already have an Islamic licence.

Growing appetite

“If Abu Dhabi Islamic Bank can make a success of offering Islamic products, the whole market will open up,” says Al-Swaify. “We have already seen some of the local banks start to advertise their Islamic products in view of the competition for customers they see about to begin. There is a lot of appetite for Islamic products out there.”

As international companies bring their established product ranges into Egypt, it will also help to attract more customers. Currently, Egyptian banks offer only a limited range of products, and innovation to mimic conventional products, such as credit cards and retail loans, is lacking.

As foreign participants enter the market with more established product offerings, better access to cheap capital and greater ability to leverage economies of scale, domestic institutions will find it hard to compete. For this reason, the Central Bank is likely to fulfil its desire to reduce the number of banks operating in Egypt as more acquisitions occur and weaker institutions are picked off.

Banks such as Abu Dhabi Islamic Bank, Mashreqbank and National Bank of Kuwait are eager to capitalise on a huge population of underbanked Muslims. By maintaining its stance of not licensing new banks, Egypt risks the entire sector becoming dominated by foreign institutions.

Key fact

The contribution of financial services, including insurance, to Egypt's GDP in 2006 was $7.46bn.

Source: Standard & Poor's

TABLE: Egyptian Banks key indicators (£Em, as at June)






Total assets






% change






Total deposits






% change





Loans and discounts





348, 7.6581

% change





Capital and reserves






% change






*as at April. Source: Central Bank of Egypt

TABLE: Borrower loans

Private business sector66.2
Household sector16.4
Public business sector10.1
Government sector6.5
Foreign sector0.8

TABLE: Economic sector loans

Unclassified sectors17.3

Source: Central Bank of Egypt

Table: Loan value (£Ebn)

Total loans266,100284,721296,199308,195324,041

Source: Central Bank of Egypt

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