Islamic banking fails to make a dent in Egypt

Cairo: Islamic banking has taken off in the Gulf and is spreading in Europe and Asia, but in Egypt, the most populous Arab country, it has hardly made a dent.
The growing religious sentiment among Muslims that has propelled Islamic finance, estimated to have assets of $500 billion, has not lifted the industry in Egypt, where Islamic banks have a market share of only about five per cent.
Islamic bankers in Egypt say the Egyptian government, which is facing a political challenge from the Islamist Muslim Brotherhood, has not been as keen to promote the industry as Gulf countries, or even Britain.
"There is a cynicism toward Islamic finance in Egypt, and the bureaucracy may look at it as part of religious fundamentalism," said Mushtak Parker, editor of the Islamic Banker magazine, a London-based monthly.
"It's a massive disappointment for the Islamic finance market."
Even Islamic religious authorities in Egypt have not promoted Islamic finance, which bans interest and investing in alcohol or gambling.
Shaikh Mohammad Tantawi, a top government-appointed Sunni religious authority, ruled five years ago that bank customers could deposit funds for predetermined profits, in essence allowing interest and thus challenging the basis of Islamic finance.
"Shaikh Tantawi's fatwa on [interest] has caused some confusion in the market and has been rejected by the majority of Islamic law scholars," Parker said.
Elsewhere, the industry is estimated to be growing 15 per cent a year, and large Western banks such as HSBC and Barclays have set up Islamic banking arms. Even Japan, where about one person in 2,000 is Muslim, has said it is planning to sell Islamic bonds.
In Egypt, where the first modern experiments in Islamic banking took place in the 1960s, Islamic banks say it is difficult to compete in a market that has been dominated by large state-owned lenders.
With only two major players, Egyptian-Saudi Finance Bank and Faisal Islamic Bank, Islamic banks have no real market among themselves to place short-term funds, pushing up the cost of financing. The Egyptian central bank does not provide an Islamic alternative to the treasury bills it sells to conventional banks to absorb liquidity.
"Islamic banks in Egypt can get stuck and they can exercise losses," said Pacinthe Fahmy, a consultant at Egyptian-Saudi Finance Bank. "The cost of finance is too high due to the high level of liquidity."
Despite the popularity of Islamist movements such as the Muslim Brotherhood, high-profile scandals at Islamic financial institutions in the 1980s damaged the image of Islamic banking.
Islamic investment companies promising returns far above local interest rates collapsed at that time, causing millions of Egyptians to lose their savings.
"It was a social crisis, and the image of Islamic banks still is not great," said Radwa Al Swaify, banking analyst at Beltone Financial in Cairo.
Unless more Gulf lenders such as Abu Dhabi Islamic Bank can enter Egypt through acquisitions, analysts say Egypt's potential for Islamic banking will remain largely untapped unless official attitudes change.
Abu Dhabi Islamic Bank, seeking a toe in the market, paid 159 million pounds ($28 million) in July for 51 per cent of Egypt's National Bank for Development.
Without Gulf banks, the industry could grow more modestly, as more of Egypt's conventional banks open Islamic windows to serve some of the country's 66 million Muslims.