With almost 100% of its population that is Muslim and 439 Billions US$ of GDP in a year , the Maghreb region would seem as a dreamland for Islamic finance. However, the size of the industry is still limited and below all expectations with a small number of players and the absence of real connections between the financial systems in the Maghreb.
In fact, the Maghreb region has all the potentialities to become an international center for the Islamic finance industry.
Nevertheless, the region is facing many challenges which limit the development and growth of the industry. This article aims at synthesizing all the constraints and challenges of the industry in the Maghreb region based on the PEST analysis.
THE POLITICAL CHALLENGES
The political and legal aspects are one of the main challenges facing the Islamic finance industry in the Maghreb:
The Maghreb Arab spring countries (Tunisia & Lybia) are still suffering from political instability which has a deep impact on the Economic situation and on the development of a sound Islamic finance industry. Indeed, Lybia that declared its willingness to convert its whole financial system to be Shariah compliant still didn’t achieve this objective mainly because of the political conflicts. Moreover, due to the political instability and in spite of the presence of Islamic financial institutions in Tunisia, the Islamic finance industry is still without any regulatory framework which limits significantly its growth potential.
Preparing an adequate regulatory framework is one of the prerequisite to enhance the Islamic Finance industry and is considered as a way to facilitate its integration in the Economic system. If Tunisia, Algeria, Lybia and Mauritania have already Islamic Financial institutions in place and no regulatory framework, Morocco has prepared a legal framework while that the implementation process of Islamic Banks is still in progress.
RELIGIOUS POLICY AND SHARIAH And GOVERNANCE
In the absence of a regulatory framework, most of the Maghreb countries don’t have a centralized Shariah board to standardize the practices and to define the guidelines of the industry and its products. Nevertheless, the regulatory framework in Morocco has identified the Higher Council of Ulamas as the only entity authorized to issue fatwas for the whole Islamic financial sector.
THE ECONOMIC CHALLENGES
The Maghreb region is facing many economic challenges that may impact the development and the soundness of the Islamic finance industry.
The political instability in the Arab spring countries impacted negatively their Economic growth. Indeed, the Economic Growth rates in 2011 in both Lybia and Tunisia were negative and their economies are still suffering from the political instability. Moreover, the Political instability also had a negative impact on the size of foreign direct investments in all the Maghreb region countries (except Morocco and Mauritania).
ECONOMIC INTERCONNECTIONS BETWEEN MAGHREB COUNTRIES
The Maghreb region is one of the richest regions in the World in terms of Natural Resources (Oil, Phosphate, Iron, Agriculture potential, etc.) with a strategic geographical position linking Africa, Middle East and Europe. Therefore, in 1989, the Maghreb countries decided to found a union to ensure the political unity and the economic complementary in order to enhance the prosperity of the region. Nevertheless, the Political conflict between Algeria and Morocco and the political instability in Lybia and Tunisia slowed down the Maghreb Union and limit the interconnections between
the Maghreb countries. This situation limits the development opportunities of the Islamic Finance industry in the region. It is noted that most of the Islamic Banks in the region are subsidiaries of foreign international Islamic financial groups.
THE SOCIAL CHALLENGES
With almost 91 million of people, the Maghreb region is facing many demographic challenges such as illiteracy (more than 17%) which would limit the understanding of the Islamic finance concepts and principles and the digital transition of the banking practices and products.
ISLAMIC FINANCE CULTURE
The Islamic finance culture is still very weak in the Maghreb region; Most of the population doesn’t distinguish from a Shariah Standpoint the differences between a conventional loan and an Islamic financing. Thus, the comparison is based only on the financing costs between both offers (Islamic & Conventional).
THE TECHNOLOGICAL CHALLENGES INNOVATION AND R&D EFFORTS
In the absence of a clear willingness of the Maghreb governments to encourage the Islamic Finance industry (expect for Morocco that prepared a comprehensive regulatory framework), the innovation and R&D efforts are under all expectations. Nevertheless, many research centers in universities were founded but without an Islamic financial sector and a real will of the governments, all these efforts are meaningless.
In the Maghreb region, conventional banks have already established a wide network of branches which is a serious barrier to entry for Islamic banks that need more time to establish their networks. In this context, digital banking seems to be a convenient solution to replace the physical network. Nevertheless, it would require more investment and many cultural changes.
Except from Morocco that expressed its willingness to prepare a comprehensive regulatory framework that solves all the issues related to Islamic Finance such as liquidity management, prudential rules, etc., all the other countries have already authorized Islamic financial institutions and still don’t have regulatory frameworks. In the region, Challenges that are impacting the development of the Islamic finance industry are as follows: