2020 was expected to witness new advancements in the Islamic finance sector in Morocco to implement a comprehensive ecosystem that would contribute in enhancing the competitiveness of the existing players. Nevertheless, COVID-19 had a negative impact on the different streams related to Islamic finance.
Review of 2020
Central Guarantee Fund launches Shariah compliant window
To accompany the financing activities of participative banks, the Central Guarantee Fund (Caisse Centrale de Garantie or CCG) launched its window, Sanad Tamwil, an entity that is exclusively dedicated to participative finance. Indeed, the window will contribute to achieving financial inclusion through facilitating access to financing granted by participative banks and windows to individuals and businesses through special guarantee mechanisms.
Therefore, the CCG added the following four new products to its current offerings:
• Damane Moubachir (a guarantee instrument dedicated to very small and medium-sized businesses covering participative financing instruments)
• Damane Dayn (a guarantee instrument dedicated to businesses with a turnover not exceeding MAD10 million (US$1.08 million))
• Fogarim Iskane (a guarantee instrument dedicated to people with very low income or volatile income to get access to housing or to land for construction), and
• Fogaloge Iskane (a guarantee instrument dedicated to the middle class and to Moroccans living abroad for the acquisition of a house or land).
The Higher Council of Ulemas approved all these products and instruments.
Reaction of participative banks
The COVID-19 crisis imposed a lockdown and generated an important economic impact on the activity of businesses and on the income of households. Moreover, in this context, people are less likely to invest and prefer to hold cash. As such, participative banks took the necessary measures to be in line with Shariah principles and to be beyond the expectations of their customers:
• Most participative banks gave the possibility to people impacted significantly by the COVID-19 crisis to postpone or reschedule their commitments without any fees. The eligibility criteria are clear. Those who have the necessary resources to fulfill their commitments are not concerned by this measure.
• Some participative banks allowed their customers to break their investment accounts before the term without any penalties or fees. This is to be considered as a sign of trust and compassion with customers in this period.
• All participative banks prepared their branches to receive customers safely and contributed in the efforts of serving governmental aids to people through their branches and ATMs.
It is worth noting that conventional banks in Morocco are granting loans with the support of the government (guarantee schemes) and are billing interests and fees for rescheduling current loans. In these hard times, the challenges are very intense but participative banks have proved their commitment to Shariah principles and values.
Product development issues
During 2019, the Higher Council of Ulemas approved four products — investment accounts, Salam, Ijarah Muntahiya Bil Tamleek and Istisnah — but participative banks have implemented only some of these products.
The gap between product development efforts and the implementation process can be justified as follows:
• Participative banks have many other ongoing projects (mobile banking, onboarding processes and such) with limited resources. Therefore, launching new formulas requires more time than expected.
• The Higher Council of Ulemas can amend the contracts. Thus, participative banks will redefine the risk profile of each product before deciding whether it is interesting to be implemented or not. In some cases, the new amendments can adjust the risk profile of the product and the governance committees can decide to postpone its implementation.
• The amendments of the Higher Council of Ulemas can modify the operating model of the product compared to other markets and since most of the information technology systems running in the Moroccan participative banks are more adapted to the GCC and the Middle East, any modifications to adapt them to the Moroccan Shariah requirements can take more time than expected.
The breakeven issue
The semi-annual financial publications of participative banks and windows in Morocco raised the issue of reaching breakeven and converting these institutions to profitable ones as a way to sustain their activities. Indeed, there are three trends observed in the market:
• Entities that have already reached their breakeven: in this category, there are two participative windows — Dar Al Amane and BMCI Najmah.
• Entities that have improved their financial results and decreased their losses compared with the previous year — Bank Assafa, BTI Bank and Al Akhdar Bank and Arreda (window).
• Entities that saw their losses increased — Umnia Bank and Bank Al Yousr.
Overall, these trends would be confirmed by the end of the year and participative banks and windows are making reaching breakeven a priority in order to ensure their sustainability and continuity. In addition to this, implementing solutions that can serve businesses and private banking customers is necessary to have new sources of growth for banks and windows in the mid-term. Once breakeven is reached, the participative banks and windows would have a new target: to reach at least the local return-on-equity (ROE) levels.
Preview of 2021
In 2021, participative banks would be under pressure in terms of breakeven and ROE improvement. They will be required to diversify their product offerings, target various segments and achieve a better performance. Meanwhile, the first Takaful licenses are expected by the first quarter of 2021. The launch of these new Islamic finance players would have a positive impact on the whole industry in terms of product offerings and deposit collection. Nevertheless, in the COVID-19 context, all the plans and expectations could be reviewed.
Conclusion
The Islamic finance industry in Morocco moved forward at a pace lower than that expected. Moreover, COVID-19 showed that Islamic banking brings a real added value to customers in times of crisis. Next year would be decisive to the existing players to reach breakeven to ensure their continuity and sustainability.
Dr Ahmed Tahiri Jouti is co-CEO of Al Maali Consulting Group. He can be contacted at [email protected]