Thomas White Global Investing
Egypt
Egypt Stamp
March 12, 2010
A Postcard from Africa
Egypt: Islamic Finance on the Rise

Riba, meaning interest

The charging of interest or Riba is forbidden or haram under the Islamic Shariah.

Recently, Egypt’s National Bank for Development (NBD) announced that it was offering two new Islamic-banking oriented products – Islamic bonds or sukuk, and yusr murabaha, a personal finance product. Add these to the bank’s platter of other products, like Islamic checking and savings accounts as well as car murabaha or cost-plus financing for cars, and you will observe an increasing trend in the Egyptian banking world – the emergence of Islamic banking.

But just what exactly is Islamic banking? Simply put, the finance system operates on the principles laid down by the Islamic Shariah or Law. Hence, Riba or interest is strictly forbidden, contracts based on future uncertain events like hedging or derivatives are not allowed, and investing in any business that offers goods or services considered contrary to Islamic principles is prohibited.

Barely three years ago, Islamic banking was struggling to create a ripple in Egypt. Although widely popular in the Gulf as well as in Asia, Egyptian Islamic banking was mainly met by cynicism and doubt. Part of that skepticism could be equated with fear. In the 1980s, a number of Islamic financial institutions ached under the burden of trying to offer returns above prevailing local interest rates, and their eventual collapse wiped out the savings of many an Egyptian. It is a scar that conservative Egyptians are taking a long time to recover from. That, though, is not deterring banks from offering Islamic finance.

In fact, the NBD itself is morphing into an Islamic bank after the National Bank of Abu Dhabi acquired a majority stake. Apart from the NBD, the Faisal Islamic Bank of Egypt and Egyptian Saudi Finance have been long-standing operators in the Islamic financing sector.

There is a reason why Egyptian banks are turning to Islamic banking. CIMB Group Holdings estimates that Islamic finance is one of the fastest-growing segments in the world financial system, and anticipates sales of Islamic bonds to rise by as much as 24% to $25 billion this year. What has made Islamic banks more attractive to the ordinary investor is that they emerged virtually unscathed during the recent financial crisis.

From Malaysia to Indonesia to Jordan, most sharia-banks displayed a prudence that enabled them to weather the crisis better than most. The Western world is not wholly unfamiliar with Islamic banking either – in the U.S. alone there are around 250 mutual funds that try to operate under the Islamic finance law. That law forbids ‘interest,’ but does not prohibit all gains from capital, while expressly barring any form of gambling. It is this adherence to the sharia which attracts Egypt’s 66 million Muslims. After all, it was in the Egypt of the 1960s that Islamic banking enjoyed its heyday with the establishment of the Mit Ghamr Savings Bank. This eventually led to the mushrooming of Islamic institutions in Malaysia, Pakistan, Iran and even countries in Europe. It’s taken a while for Egypt to catch up since then, but given the litmus test of the recent financial crisis, this time it seems that the trend is here to stay.

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