Islamic Finance Industry in Morocco Faces Key Challenges
The Islamic finance industry in Morocco is nascent and faces structural challenges, which could hinder its full growth potential, Fitch Ratings says. The global rating agency however added that the rising demand for Islamic mortgage financing could be a key pocket of growth and could accelerate the industry’s trajectory.
The challenges faced by the industry include an underdeveloped Islamic finance ecosystem and regulations, it said, noting that there is a downside due to limited Islamic product offering, a small capital base of Islamic banks.
Fitch also stated that there is a lack of public awareness and understanding of Islamic finance plus a lack of confidence in the sharia-compliance of these products.
The long-term growth potential for Morocco’s Islamic finance industry is sizeable, supported by the country’s predominantly Muslim population. Islamic finance could also help boost financial inclusion as about 56% of Morocco’s adult population did not have a bank account in 2021, according to the World Bank, with about 19% of the unbanked population citing religious reasons as a barrier (among the highest globally).
The Islamic finance industry was worth USD2.7 billion at end-2022, primarily dominated by Islamic banks. The Islamic banking sector – known as participation banks in Morocco – has only a 2% domestic market share by total assets; the authorities are targeting a 5% market share by 2024.
It was below other North African countries like Tunisia (5.1%), Egypt (4%), and Algeria (2.4%), according to the Islamic Financial Services Board, mainly due to the recent inception of the industry in 2017.
However, Islamic banks’ assets increased by 20% in 2022 – off a small base – a faster pace than conventional banks’ asset growth of 7.6%.
Currently, Islamic banking is done through Islamic windows or Islamic subsidiaries of conventional banks, according to Fitch Ratings.
Recall that a Sharia Committee for Finance was set up within the High Council of Ulemas in 2015, mandated to ensure compliance with sharia of products offered by Islamic finance entities.
From 2022 onwards, the central bank mandated Islamic banks to be subjected to an external sharia audit, Fitch stated.
In 2022, the government expanded the types of sukuk allowed to be issued to include murabaha, salam, istisna, wakala, mudaraba and musharaka; previously only ijara sukuk were allowed. In 2021, the regulatory framework for takaful was finalised.
The product offering of Islamic banks is highly concentrated in murabaha mortgages (83% of total financings at end-2022). However, Islamic banks’ share of total housing loans was 7.9% at end-2022, up by 19.6% yoy, and up from almost nil in 2018.
By comparison, conventional housing loans fell by 1.5% during the same period. Product constraints are posed by the ban on tawarruq products, which, in other markets, are typically used for personal financing, interbank funding and Islamic derivatives.
Investment options available to Islamic banks are limited, partly due to lack of government sukuk, of which only one was issued in 2018.
Islamic banks face liquidity challenges. The sector’s financing-to-deposit ratio was 238% at end-2022 vs 93% for conventional banks.
Deposit gathering at Islamic banks is constrained by strong competition for deposits and a high proportion of unremunerated accounts (71% of total sector deposits at end-2022), which limits customers’ interest in placing deposits with Islamic banks. This is while credit demand for Islamic financing, especially on the retail side, remains notable. Long-term fixed residential mortgages are funded by short-term customer deposits.
In 2020, the central bank introduced the Wakala Bil Istithmar deposit product, which enables Islamic banks to access liquidity from conventional banks (including their conventional parents) and other entities, such as public sector entities and corporates.
These deposits are more expensive, but provide a much-needed additional source of liquidity. Islamic banks also offer investment deposits to customers.
However, these are not guaranteed under the deposit insurance fund of participatory banks, similar to Malaysia, but unlike most other core Islamic finance markets. This could affect consumer demand for such products. #Islamic Finance Industry in Morocco Faces Key Challenges Nigerian Banks Give Fresh Update on Naira Swap