The Mit Ghamr Savings Bank was established in a small town of the same name in Egypt’s Nile Delta in 1963. One of the modern world’s first Sharia-compliant financial institutions,
it developed 53 branches in five years, and focused on profit-sharing investment by
local depositors.

Despite stealing a march on the rest of the Muslim world, four-and-a-half decades on,
the Egyptian Islamic banking sector is one of the least developed in the Middle East.

Egypt has rising investment needs and a large consumer middle class, most of whom are Muslim, but Islamic banking has not taken off in Egypt to the extent it has in the Gulf.

Egypt has only a few financial institutions dedicated to the provision of Sharia-compliant services. Islamic finance is also offered as a sideline by some of the country’s larger banks
– for example, all four state banks offer Islamic banking services.

Investment network

The Mit Ghamr Savings Bank evolved as more of an investment network than an Islamic finance-focused retail bank.

When the economist Dr Ahmad El-Najjar set up the bank, he took care to avoid giving it a declared Islamic name, for fear that this would be regarded by the authorities as indicating
a fundamentalist identity.

The Egyptian government is wary of encouraging the development of financial services under a specifically Islamic identity – a stance that was perhaps reflective of its reluctance to tolerate a formalised role for religion in politics.

This is exemplified by the ban on the Muslim Brotherhood’s overt participation in elections, as it is recognised only as a movement rather than a political party.

Following the Mit Ghamr success, the Nasser Social Bank was founded in 1971, and employed a similarly cautious approach to making public its Islamic banking aspirations.

The bank’s charter made no reference to religion or Sharia law – a clear sign of the sensitivities at play.

It avoided the assumption of any religious labelling, describing itself as an “interest-free commercial bank” – essentially an Islamic bank in all but name.

But it was not until Anwar El Sadat’s economic changes in the mid-1970s that a group of investors, led by Saudi Arabia’s Prince Mohammed al-Faisal al-Saud, decided to set up a local bank that would openly commit itself to operate in compliance with the tenets of Sharia law.

The Faisal Islamic Bank of Egypt opened its doors in 1979. It was followed in 1988 by the Egyptian Saudi Finance Bank (ESFB), a subsidiary of the Saudi banking group Al-Baraka.

But these were rare exceptions to the broader picture, in which the Egyptian banking scene has continued to be dominated by conventional banking institutions offering Islamic finance products as a corollary to their mainstream banking activities.

This was a pattern encouraged by the authorities, after so-called Islamic investment companies ran into trouble in the 1980s.

The handful of Islamic investment companies that were operating at the time were impressing the market with returns of 20 per cent on investments made, but the government accused the companies of trading on the black market and establishing fictitious corporate vehicles to hide risky practices.

The result was a government crackdown in 1988, curtailing the growth of dedicated Sharia-compliant institutions.

Government wariness

This experience served only to reinforce government wariness about the licensing of free-standing Islamic financial institutions.

The Islamic International Bank for Investment and Development (IIBID), founded in 1980, became a casualty of the government’s drive to consolidate and strengthen the financial sector.

In June 2006, the Central Bank of Egypt decided to merge it with two conventional institutions, United Bank of Egypt and the Nile Bank, to become United Bank, which was then placed under state ownership.

Today, 130 of Egypt’s estimated 7,000 bank branches are Islamic. However, this may be changing. In June 2005, at a meeting of the Islamic Development Bank, a multilateral development financing institution based in Jeddah, Egypt’s representative voted in favour of a string of resolutions to strengthen and promote Sharia-compliant banking.

In diplomatic terms, Cairo’s delegation may have judged that to withhold support for the resolutions would create a poor impression among other Muslim countries.

But in February this year, a further sign that views really have changed came when Investment Minister Mahmoud Mohieldin revealed the government was interested in promoting the sukuk market, to help Egyptian businesses raise development capital.

Having seen the success of sukuk in raising finance in the UAE, where $4,000m of bonds have been issued this year to date, Egypt’s government is finally coming around to the idea of promoting Islamic finance in the country.

“Egypt was the first country to introduce Islamic finance. But now we are not really in the lead anymore. We can see more activity in Malaysia and in the Gulf States. Now we are exploring opportunities under the sukuk business,” said Mohieldin, announcing talks with the Cairo and Alexandria stock exchanges about ways to encourage trade in sukuk paper.

Potential benefits

The government appears to have been reassured by the manner in which Islamic finance has evolved in Bahrain, Kuwait, Qatar, Saudi Arabia and the UAE – with no fundamentalist connotations that lie at the root of Egypt’s fear of promoting Islamic finance.

It may also have come to appreciate the potential benefits that the development of Islamic finance could bring to Egypt – satisfying an appetite for Sharia-compliance finance to fund home ownership among the country’s growing middle class.

United Bank, created in the 2006 merger, is one of the banks leading the way in the second wave of development of Egypt’s Islamic finance market.

Since the merger, it has grouped the Sharia-compliant business lines of the old conventional outfits together with those of the former Islamic bank to create a single cohesive Islamic business unit, under the brand name Rakhaa, which translated means prosperity.

It has announced the development of four new Islamic branches taking the total number of Sharia-compliant branches to 11 out of a total of 34 branches in total.

“The bank has paid more attention to Islamic banking services based on the latest technologies available and updated its Islamic transactions sector,” says Mohamed Ashmawi, president of United Bank.

Banks such as United could also help Egypt tap into reserves of private capital in the Gulf region, as a source of financing for projects and business development.

Because Islamic finance houses seek to generate returns through risk participation, rather than the charge of a percentage fee for lending money, they are sometimes more ready to fund sectors, such as new technology or small enterprises, which create wealth but carry a higher risk of failure.

Some advocates of Islamic finance therefore argue that the sector could contribute to employment growth in Egypt – where 44 per cent live on $2 or less a day, and where employment opportunities for the poor are limited.

Meanwhile, the potential of the Islamic finance sector in Egypt is attracting international investment.

In October 2007, the Dubai-based Islamic real estate financier Amlak launched operations in Egypt. A year into its Cairo operations, Amlak is aiming to boost its Egyptian Islamic mortgage book from E£380m ($68m) to E£1bn by the end of next year.

Amlak was followed in August by another Sharia-compliant Emirati mortgage house, Tamweel, with the establishment of an Egyptian subsidiary.

“As the Arab world’s most populous nation, with the economy growing at around 7 per cent annually, there is tremendous potential for real estate financing,” said Ahmad Abouzeid, chief executive officer of the offshoot, Tamweel Emirates.

As it builds its portfolio, Tamweel is expected to provide finance for consumers buying property in Egypt from Emirati real estate companies, such as Emaar and Damac.

Takaful – Sharia-compliant insurance – is also developing as a sub-sector within Islamic finance in Egypt. The first company to start this activity locally, the Egyptian Saudi Insurance House, founded in 2002, has seen annual premium flows rise to E£15m, from E£1m a year since its launch.

This has tempted others to follow suit. In December last year, Egypt Kuwait Holding (EKH) and Tokio Marine & Nichido Fire Insurance, which has takaful offshoots in Saudi Arabia and south-east Asia, announced plans to set up a joint venture takaful company in Egypt.

Nasser al-Kharafi, chairman of EKH, says that by offering an Islamic service, they might help to overcome a traditional consumer resistance to insurance. Less than 1 per cent of Egypt’s population currently use insurance.

“EKH sees great opportunities for profitable growth in Egypt, where insurance products have not yet reached expected levels,” says al-Kharafi.

And he is not alone in reaching this view, judging by the number of new investors the sector has attracted. In May this year, an Emirati consortium of Amlak, Arab Orient Insurance Company and Abu Dhabi Islamic Bank, announced plans to set up a takaful company in Egypt.

In August, Solidarity Group, part of the Bahrain-based banking group Ithmaar, set up a company in Cairo specialising in family takaful services for retail customers, aiming to start commercial operations before the end of this year.

With the Gulf’s track record in developing new Islamic finance products, Egypt’s consumers will soon be feeling the benefits of tried-and-tested Sharia products.