MOROCCO'S NON-EMERGING ALTERNATIVE: ISLAMIC FINANCE

C O N F I D E N T I A L CASABLANCA 000083

SIPDIS

STATE FOR NEA/MAG
COMMERCE FOR NATHANIEL MASON

E.O. 12958: DECL: 04/22/2019
TAGS: ECON EFIN SOCI KISL MO
SUBJECT: MOROCCO'S NON-EMERGING ALTERNATIVE: ISLAMIC FINANCE

REF: A. 07 CASABLANCA 130

B. CASABALNCA 63

Classified By: CG ELISABETH MILLARD FOR REASONS 1.4 (B),(D).


1. (C) Summary: In late 2007, Morocco's central bank
authorized Sharia-compliant products to be sold in the
country's leading commercial banks. To date, the products
have had limited success in penetrating the financial market
due to two major constraints: the country's fiscal policy and
a government imposed limitation on marketing. For some in
government the Sharia-complaint products represent a threat
to the country's moderate Islamic identity, while others see
the government's authorization of the products as a strategic
move to regulate Islamic financing and Islamists. To push
for reforms that would make Morocco's Sharia-compliant
products more attractive, the country's Islamist-oriented
Party of Justice and Development (PJD) has successfully
partnered with an unlikely ally, Morocco's largest bank,
Attijariwafa. End Summary.

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Constraints to Islamic Financing
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2. (SBU) In late 2007, Morocco's central bank authorized
Sharia-compliant products to be sold in the country's leading
commercial banks. Nevertheless, since their introduction,
the products have had limited success in penetrating the
financial market. "The government has been generally
unsupportive in developing Morocco's Sharia-compliant
products", said Belacim Boutayeb, one of Morocco's leading
authorities on Islamic financing. Discussion with members of
civic society, academia, and the banking community reveal two
specific impediments: the country's fiscal policy and a
government imposed limitation on marketing.


3. (SBU) Morocco's fiscal law makes Sharia-compliant
products 20 percent more expensive than traditional products
and consequently reduces their attractiveness, explained
Idriss Maghraoui of Attijariwafa, Morocco's largest bank.
The Bank's internal marketing studies indicate that devout
Islamic clients will only pay up to 10 percent markup for
Sharia-compliant products. While the Governor of Morocco's
central bank has publicly conceded that some of the country's
taxation policies may adversely impact Islamic products like
Murabaha (cost plus financing),little has been done to
remedy the problem. Another fiscal limitation is that
recipients of Sharia-compliant products like Ijara
(lease-to-own) do not benefit from the same tax deductions
enjoyed by those who utilize traditional loans.


4. (SBU) Restrictions on marketing of Sharia-compliant
products have also hindered growth. Pursuant to central bank
regulations Islamic products must be marketed as 'alternative
banking products'. "This designation has caused a lot of
confusion about the religious authenticity of the products",
said Maghraoui. For some, this requirement represents the
government's bias against Islamist groups. Saad Othmani, the
PJD's National Council President said, "We can't be locked
into a single financial method. If European nations and
European and American banks preceded us in authorizing
financial products such as these, why is the government
reluctant to act."

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A Delicate Balancing Act
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5. (SBU) Government regulations that try to balance
religious conformity with economic reality are hampering the
development of Sharia-compliant products. Morocco's central
bank initially permitted the use of Sharia-compliant products
with the intention to capture the niche market of high net
wealth from the Gulf, increase the number of Moroccans with a
bank account, and cut down on the informal use of Islamic
financing (Ref A). In fact, the products have had limited
success in all three areas. The Sharia products have failed
because the government wanted it to, says Boutayeb. For some
in the government, Sharia-compliant products represent a
threat to the country's moderate Islamic identity. A
well-placed source in Morocco's central bank argues that
Sharia-compliant products create unwanted conflict with
existing conventional banking systems and offer support to
the government's Islamist opposition.


6. (SBU) However, the government's concerns about Islamic
finance are not tenable, according to Younnes Benjelloun, the
director of Morocco's largest investment firm, CFG. The
reality is that Sharia-compliant products offer Islamists an
alternative, albeit more expensive, investment choice, but
not increased influence, he argues. In fact, for Williams
Fellows of the Financial Services Volunteer Corp, the
government's authorization of Islamic products was a tactical
move to reign in Morocco's Islamist-oriented PJD.

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The Odd Couple
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7. (C) In response to the government's ambivalence towards
Islamic financial products, the PJD has recently begun to
work closely with an unlikely ally, Morocco's largest bank,
Attijariwafa. Although ideologically opposed, Maghraoui
confided that the PJD approached the Bank half a dozen times
in the last year. The initial objective of their meetings
was to gain financial literacy on the technicalities of
Islamic financing. In subsequent meetings, however, the PJD
pressed Attijariwafa Bank to lobby the government for
regulatory changes that would benefit the Party and the Bank,
specifically, to permit non-interest bearing Islamic loans to
enjoy tax treatment similar to traditional loans.


8. (C) For Attijariwafa, its relationship with the PJD means
access to a segment of the population that the Bank has
historically overlooked. For the PJD, its relationship with
Attijariwafa has meant increased financial know-how. "During
the first meeting, I was absolutely flabbergasted at the
financial illiteracy of the PJD, but later on also surprised
at the rapidity at which they came to understand the issues",
observed Maghraoui. Even if the government delays
implementation of these regulatory changes, the PJD's reform
efforts will likely bear fruit with the lower echelons of
Morocco's middle class (Ref B),who stand to benefit the most
from fiscal modifications on Sharia-compliant products.

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Comment
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9. (C) Islamic financing has plenty of room for continued
growth, but current government regulations that try to
balance religious conformity with economic reality will
likely continue to hamper its development. Regardless, the
PJD's lobbying on this issue demonstrates its understanding
of the financial needs of potential constituencies, which
could help to expand their political base. End Comment.
MILLARD