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. -------------- Constraints to Islamic Financing -------------- ¶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 �A;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." -------------- A Delicate Balancing Act -------------- ¶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. -------------- The Odd Couple -------------- ¶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. -------------- Comment -------------- ¶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