MOROCCO CAUTIOUSLY INTRODUCES ALTERNATIVE BANKING PRODUCTS

UNCLAS SECTION 01 OF 02 CASABLANCA 000130 SIPDIS SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EFIN KDEM MO SUBJECT: MOROCCO CAUTIOUSLY INTRODUCES ALTERNATIVE BANKING PRODUCTS REF: (A) CASABLANCA 00066; (B) LONDON 002596 ¶1. (SBU) Summary. Morocco's Central Bank and the Professional Group of Moroccan Banks (GPBM) have moved cautiously in recent months to introduce shariah-compliant financial instruments in Morocco. Banks have been authorized to issue a limited number of Islamic products, but are only allowed to refer to them as "alternative financial products." In addition, these alternative products will be governed by standard contracts, and there will be no central shariah oversight system, both departures from traditional Islamic banking practice. The experiment with shariah-compliant products is intended to increase the banking rate, reduce informal shariah transactions, and attract investors from the Gulf. Morocco's cautious approach in offering these products stems from a desire to maintain its image as a moderate Islamic country. End Summary. -------------- CENTRAL BANK TAKES MEASURED APPROACH -------------- ¶2. (U) In late March 2007, Morocco's Central Bank, the Bank Al Maghrib (BAM),and the Professional Group of Moroccan Banks (GPBM) agreed to authorize banks to offer Islamic or shariah-compliant products. The decision came with several stipulations. First, banks cannot make any reference to Islam or shariah in marketing these new offerings, and must characterize them instead as "alternative financial products." Second, banks are only authorized to offer the following three services: (1) Murahaba, by which banks sell assets (such as houses) to customers on a cost plus basis; (2) Ijarah, a leasing mechanism which can also involve a commitment to transfer the asset by sale at the end of the lease; and (3) Moucharaka, a profit and loss-sharing mechanism between two parties which both contribute money. ¶3. (U) Morocco's banking system has decided to wade into Islamic banking waters slowly. While banks are authorized to market some shariah-compliant products (albeit without referring to them as such),there are no Islamic banks in Morocco. An early July article in the Gulf Times claimed that a Doha-based bank "intended to obtain a license to open an Islamic bank in Morocco." The Central Bank, however, has never licensed an Islamic bank, and has no plans to do so in the near future. -------------- - UNIQUE FEATURES OF BANKS' ALTERNATIVE PRODUCTS -------------- - ¶4. (U) Reflecting the Bank Al Maghrib's cautious approach to offering alternative financial products in Morocco, certain features of the products are unique. Banks will use standard contracts for all three services, something that typically has not been done in the Middle East or elsewhere. The contracts will be based on rules set out by the Accounting and Auditing Organization for Islamic Institutions (AAOIFI),a Bahrain-based group that sets standards for shariah-compliant financial products. ¶5. (SBU) The decision to rely on the AAOIFI is also a departure from traditional practice in the Middle East, where each bank has its own shariah board. In Morocco, there will be no shariah board or centralized shariah oversight system, making it the only jurisdiction to offer Islamic banking products without a shariah certification process in place. According to a London-based Islamic banking expert, this could cause problems since customers may question whether products have been sufficiently vetted to ensure they are truly shariah compliant. Indeed, most observers believe that financial institutions entering the Islamic banking market need a reputable shariah board to attract Muslim investors. -------------- WHY OFFER ISLAMIC FINANCIAL PRODUCTS NOW? -------------- ¶6. (U) According to the Central Bank, the move to permit Islamic banking products is intended to encourage more people to bank by offering a broader range of products. (Currently, only about 20 percent of the population uses banks). There is also the hope that offering official Islamic products will cut down on informal, shariah-compliant transactions. On a larger scale, Morocco's banking system seeks to attract investors from the Gulf, who show strong interest in Morocco, but may consider Islamic financial products essential. ¶7. (SBU) Given that Islamic banking has become increasingly popular globally in recent years, some also perceived a need for Morocco, CASABLANCA 00000130 002 OF 002 with its traditional and religious Muslim society, to jump on the bandwagon. Khalid Oudghiri, former CEO of Attijariwafa Bank, underscored this point in a meeting in March, saying that a lot of people want to invest in Islamic financial products and that there is significant pressure from the Middle East to offer them. -------------- IMPLEMENTATION ISSUES -------------- ¶8. (SBU) In the wake of BAM's decision to offer alternative financial products, banks are experiencing growing pains as they figure out how the products will work. At a forum chaired by BAM and GPBM representatives in late June, bankers discussed the issues they face. Their discussion revealed that questions remain regarding practical implementation of the new products. One banker, for example, could see how to use Murahaba to buy land, but not how to use it to finance the construction of a house. Others were concerned about mixing Islamic sources of finance with conventional ones in banks that offer both types of services. In response, both BAM and the GPBM acknowledged that they need six or seven months to observe the products in use before they can evaluate the market's reaction to them. ¶9. (SBU) Comment: The Central Bank's cautious approach is prudent, but will bring its own challenges. BAM will have to establish a clear legal mechanism for handling complaints, given the program's newness and the absence of a central shariah oversight system. Whether the products will actually take off is another question. Not all agree with Oudghiri that there is pent up demand for such products, particularly as there are downsides for potential customers. If you opt for a shariah-compliant home loan, for example, you are not charged interest and therefore cannot benefit from tax provisions that make interest payments for such loans deductible. Such issues aside, Morocco's measured approach offers a middle path that meets the desire of a segment of the population for Islamic products in a carefully controlled way, thereby reinforcing the country's moderate image. End Comment. GREENE