Morocco opens an Islamic finance window

The introduction of Islamic banking is unlikely to change much in the already prosperous northwest African kingdom.


Looking out across the harbour in Casablanca, huge cranes laden with workers line the horizon, creating a dynamic landscape as the sun begins to set. 

In Morocco’s financial capital, construction goes on into the late hours of the day. While builders continue to toil, office workers spill out of high-rises to make the long commute home. Traffic at rush hour can still be an issue even in developed Casablanca.

Looking around the city it is clear that Morocco is open for business. “Morocco was somewhat of a safe haven following the Arab Spring,” says Simon Auquier, counsel at French law firm Gide. “Political and social stability continued while some of our neighbours struggled.”

Amid the uprisings that characterised the Arab Spring, which spread across the region from Tunisia in 2010, Morocco remained relatively unscathed. While there were protests throughout the country where some disgruntled citizens took to the streets, Morocco’s King Mohammed VI – whose dynasty has ruled Morocco since the 17th century – responded with reform not restriction.

“The introduction of real constitutional reform in Morocco following the Arab Spring did a lot to placate the population,” says Wacef Bentaibi, partner at Gide. “And our relative stability in the region has continued to draw in business and investment into the country.”

With preferential tax legislation, along with myriad other incentives in Casablanca Finance City – an economic hub modelled on similar centres in Dubai – international businesses have been flocking to Morocco to take advantage of its cheap labour, skilled work force and proximity to sub-Saharan Africa, which all provide huge untapped potential.

Geography is also on its side. A slither of land in northwest Africa, Morocco is Europe’s gateway to the rest of the continent, an alternative to South Africa as a stepping stone into African frontier markets.

“When we were looking at setting up shop in Morocco as early as 2006, we saw that there were real efforts made to make the environment friendly for business,” says Adil Hajjoubi, general director at AlShall Morocco, a consulting and investment firm based in Rabat.

“We opened up our office in Morocco in 2008 and following the Arab Spring the same time and effort has been put into creating a vibrant business environment that works. Legislation in Morocco isn’t applied just for cosmetic reasons but for real reasons.”

“We chose to open up offices in Morocco and South Africa at the same time,” says Patrick Dupoux, who heads the office of global consultants Boston Consulting Group in Casablanca. “We chose Morocco because of its political stability, its mature market and open economy. Since then, the Casablanca Finance City has further improved the ease of doing business in Africa, in particular on the recruiting process of African talents”

As a result, foreign direct investment into Morocco has surged over the last few years. According to data compiled by Santander, Morocco attracted €3.6bn ($3.9bn) in foreign direct investment in 2015. In the World Bank’s 2017 Doing Business report, Morocco is ranked 68 out of 190 countries.

“Morocco has made huge gains in the Doing Business ranking,” says Hajjoubi. “As recently as 2011, it was ranked at 115. It’s probably made some of the best progress in the world.”

Enter Islamic finance

Adding to Morocco’s allure is the introduction of formal Islamic financial products, officially labelled participatory finance in the country. “The label participatory finance is purposeful,” says Ismail Douiri, co-CEO at Attijariwafa Bank based in Casablanca.

“Certain banking and finance products in the country are by their nature sharia compliant, so to label something specifically as Islamic finance would drive a wedge between traditional and Islamic banking products and services. Using ‘participatory finance’ helps deal with some potential conflicts here.”

Morocco has taken its time to develop and introduce participatory finance products, with the formalisation of the sector arising in talks around five years ago. “As with everything Morocco’s authorities do, introducing Islamic finance into the country was slow and deliberate,” says Douiri.

“The authorities needed to ensure that Islamic finance was not only sharia compliant but was in line with the constitution.” A board was established within Morocco’s Supreme Council of Islamic Scholars to rule on the consistency of financial products in accordance with Islamic law. “The whole system will be transparent,” he says.

The slow and steady approach was also adopted to avoid any shocks to Morocco’s stable banking sector. Quickly opening up the banking sector to competitors and new products could have led to volatility and created an uneven banking landscape.

For the most part, banks in Morocco are relatively safe and quite profitable, despite the effects of slow global economic growth on local businesses. As of 2015, according to the World Bank, non-performing loan ratios were at 7.2% and return on equity was 10.6%, lower than previous years.

But bankers and economists on the ground suspect that these figures will improve in the coming years, as Morocco’s investment and banking landscape remains constant and predictable. However, this year the authorities sent a strong signal to the market when they issued five participatory banking licences to Moroccan banks and three to international banks.

Attijariwafa, state-owned Banque Centrale Populaire, privately owned BMCE, CIH Bank and Crédit Agricole du Maroc were the local beneficiaries.  Subsidiaries Société Générale, BNP Paribas and Crédit Agricole were also issued with the relevant licenses to carry out Islamic banking. The newly created Islamic windows are joint ventures with various international banks.

“We already had in place an Islamic finance subsidiary called Dar Assafaa,” says Douiri. “With the new licence, and as part of our agreement with the authorities, we will be liquidating this bank and absorbing our clients within our new operation. The process will be gradual and we will be informing all of our customers of our exact intentions along the way.”

New customers

While banking penetration in Morocco is high – around 65% – it is believed that the introduction of Islamic financial products will bring more of the population into the formal banking sector. “Morocco is pretty well developed in comparison to other African countries, but there is a large part of the population that has been excluded from the banking sector because of their beliefs,” says Hajjoubi.

This is the part of the population that still relies on family loans, hiding money under the mattress and using cash for small and large transactions. Bringing them into the formal banking sector will increase deposits, bank liquidity, could potentially raise taxes and could stimulate further economic growth.

As for those that choose to move from existing banking services to sharia-compliant routes, bankers on the ground don’t believe there will be much change. “Banks may lose around 5% of depositors – if that,” says Mohamed Essakalli, executive director at CFG Bank based in Casablanca. There won’t exactly be a run on the banks.

“Moreover, Islamic, or participatory banking will actually be much more expensive in Morocco than conventional banking. We have seen that it takes time and money to set Islamic finance up. It’s a niche sector. Some people might be put off by the cost; some will pay the price for their religion,” says Essakalli.

Mohamed Fakhreddine, head of finance and investment bank at Crédit Agricole says that the numbers could be slightly higher: “New participatory banking could mean that around 15% of existing banking customers make the switch to sharia-compliant banking services.”

In terms of cost, Fakhreddine agrees with Essakalli: “The costs of funding will be higher and conceiving new products will be more expensive because it’s a niche product.”

As Douiri says: “The vast majority of the population is banked and didn’t see contradictions between their accounts and religion then, so I’m not sure they will see any now.”

Sukuk on the radar

But for international investors based in the Middle East, the Gulf region and Asia, will the introduction of Islamic finance increase portfolio flows into Morocco? Will Muslim investors attracted to sharia-complaint products and services flood Morocco with new capital?

Sukuk, or sharia-complaint international bonds are already on the radar for Morocco’s ministry of finance. Rumours abound that the sovereign will be looking to issue sukuk as early as the first half of this year. As is usually the case with international capital market activity, banks and corporates could follow suit.

But most of those that African Banker spoke to in Morocco were sceptical that much would change. “In terms of sukuk, I’m not sure this will bring in more international investment,” says Douiri.

Institutional investment in Morocco is widespread. Following the Arab Spring, Morocco’s king approached many of the Gulf countries – flush with cash – for support. The outcome was Wessal Capital, an investment fund focusing on Morocco. According to Institutional Investor, the fund worth around $2.6bn has deployed around half of the cash in development, including upgrading Casablanca’s port.

“Local capital markets are quite liquid and Morocco has an active investor base. There are enough savings in Morocco to finance the needs of issuers in dirhams and at the same time, local corporates and banks are unlikely to take on dollar-denominated debt. So, will new international investors be keen to pick up sukuk issued in dirhams? I’m not all that sure,” says Douiri.

For some, increased capital flows into the region are not necessary in any case. As Bentaibi at Gide says: “Despite recent developments, Morocco has a long history in terms of attracting investment into the country. For instance, development financial institutions have been present in Morocco for the last 30 or 40 years and private investment is quite strong into the country. For the longest time, traditional finance has been enough to fulfil Morocco’s investment needs.”

As Morocco continues to roll out participatory financial products and services slowly and cautiously, the sector will remain a niche. Islamic finance may not be much more than another string to its bow in terms of what the country can offer potential partners.

“Islamic finance might bring something into Morocco, but I doubt that there will be any dramatic change to investment flows,” says Bentaibi. “But then again, I could be proven wrong.”

Kanika Saigal

Subscribe for full access

You've reached the maximum number of free articles for this month.

Digital Monthly

£8.00 / month

Receive full unlimited access to our articles, opinions, podcasts and more.

Digital Yearly

£70.00 / year

Receive full unlimited access to our articles, opinions, podcasts and more.