2021 was expected to witness the launch of new banking products and Takaful operators to reinforce the participative finance ecosystem in Morocco. Apart from Salam, participative banks have not launched any new offerings and the Takaful operators have not started their activities. Nevertheless, from a quantitative perspective, participative banks have made a substantial jump in terms of assets and financing.
Review of 2021
The diversification challenge of participative banks in Morocco
Based on a statistical report of the Central Bank of Morocco (issued in September 2021), the total assets of Islamic banks grew by 52% from September 2020 to September 2021. This indicator seems to be very encouraging for the whole industry. Nevertheless, it hides major challenges that the participative banking industry needs to face:
a) Real estate financing represented 85% of the total assets of the industry by the end of September 2021. This percentage has been decreasing very slowly since December 2019.
b) Equipment financing represented 6.7% of the total assets of the industry by the end of September 2021. This category of financing grew by 30.6% in one year.
c) The other categories represented 8.3% of the total assets including treasury financing and consumption financing.
Obviously, real estate and home financing assets represent the least risky assets on any bank balance sheet but at the same time, they generate less profit. In order to reach breakeven, participative banks need to move to short- and middle-term financing in responding to new financing needs. They should also target other segments of customers to serve, including high-net-worth individuals and businesses (especially small- and medium-sized businesses).
Moreover, they have to enrich their range of services to attract more customers and to be perceived as universal banks, not only as specialized financing organs. They have to provide products such as letters of credit, letters of guarantee, daily services, etc.)
Finally, participative banks should accelerate their digital transformation to reduce the gap in terms of geographical proximity and in terms of functional coverage compared with conventional banks.
Such strategic moves would help participative banks to enhance their profit rates and ensure higher rates of return to investment account holders and Sukukholders. This would help them attract more resources and reduce the liquidity gap, ensuring the sustainable development of their activities in terms of the size of assets and enhancing their financial performance.
The growth perspective of Salam products
As mentioned earlier, the only product launched in the Moroccan participative finance sector is Salam. Indeed, on the 7th March 2020, the Higher Council of Ulemas approved the model of contracts dedicated to Salam and this approval was officially notified to participative banks in June 2020.
In Morocco, Salam can be used with Wakalah, Murabahah or parallel Salam as exit options for banks depending on the requirements and needs of the customers. If the overall participative finance industry saw a significant development during 2021, this trend did not include Salam due to the following reasons:
1. There was only one bank that launched a Salam offering and it was dealt once using this formula. Nevertheless, due to the complexity of this product, it was not adopted by other banks.
2. Salam is still an unknown formula and huge literacy efforts need to be made.
It is worth noting that Salam is not a call product. It is just a complementary product to provide businesses with short-term cash financing.
From another perspective, in the Moroccan market, commodity Murabahah (Tawarruq) is not allowed which limits the cash financing product offerings. Therefore, Salam seems to be the most appropriate formula to accompany businesses with a liquidity gap.
The regulatory framework for the Takaful industry
2021 was not, as expected, the year of launching Takaful. Nevertheless, in the second semester, things accelerated with the approval of the regulatory framework composed of a circular, a ministerial decree and the new chart of accounts dedicated to Takaful and re-Takaful operators.
Based on the experts’ forecast, the size of the Takaful industry in Morocco would be limited at the beginning, and then, depending on the product development process and appetite, the Takaful industry would grow accordingly and so would the re-Takaful sector.
From another perspective, reinsurance companies play an important role in providing appropriate solutions to insurance operators in order to mitigate their risks. Their absence can be costly for the whole industry.
In the Takaful sector, most of the legal and Shariah frameworks allow operators to deal with reinsurance companies in the absence of a re-Takaful offering that can cover their risks in a suitable way. The Moroccan legislator also adopted the same approach; meanwhile, Law n° 87-18 recognizes the statute of re-Takaful activity.
Indeed, the law permits exclusive reinsurance operators to set up their re-Takaful window while fulfilling all the necessary segregation and accounting requirements. The Moroccan chart of accounts dedicated to the Takaful industry defines the financial statements for re-Takaful windows.
Finally, introducing both Takaful and re-Takaful operators would improve the Islamic finance ecosystem in Morocco and reinforce its competitiveness. Nevertheless, the main challenge for this industry is the availability of liquid and performance financial instruments.
Preview of 2022
In 2022, the pressure on participative banks would be even bigger to reach breakeven and return-on-equity improvement. The major challenge for them is how to balance between the product development efforts, the growth requirements and the financial equilibrium.
From another perspective, by the end of 2021, the first Takaful licenses would be granted and in the first quarter of 2022, there would be the launch of a Takaful offering that would have a positive impact on the whole industry in terms of product offerings and deposit collection.
As at the end of 2021, the Islamic finance industry is still relying on Islamic banking and home financing. It is important for banks to diversify their offerings and for regulators to reinforce the whole ecosystem by introducing Shariah compliant mutual funds and real estate investment trusts.
For other players who are having trouble in developing their activity, 2022 would be a decisive year.