The use of Islamic finance products in North Africa is set to increase and will play a key role in financing infrastructure projects, according to a new report.

Conventional foreign investors have reduced their exposure to the region due to continued political instability. This has left governments with a large current account deficits and a lack of financing sources.

Shariah-compliant products such as sukuk could be a way of filling this funding gap, says US-based ratings agency Standard & Poor’s.

There are only a limited number of Islamic finance providers in the region, representing between 1 per cent and 5 per cent of their respective country’s banking sector.

Awareness of the product is growing, says Standard & Poor’s credit analyst Mohamed Damak.

“Sharia-compliant banking previously presented an attractiveness that was at best exotic for regulators and banks active in these markets. Now, the perception is changing,” he says.  

Some countries are already beginning to take steps to develop the Islamic finance market. Tunisia is planning to issue a $500m sukuk this year, while Egypt has introduced a regulatory framework to issue Islamic bonds at the end of 2013.

Morocco is also developing a legal framework from the establishment of Islamic banks.

S&P says that Islamic finance would be a good means of raising infrastructure and project finance as conventional banks are reluctant to, or lack the capacity, to provide long-term funding to infrastructure developments.

Raising sukuk could tap different types of investors and raise much-needed additional cash.