Bloomberg News

Egypt’s Savings Vacuum Shows Struggle for Banks: Islamic Finance

October 24, 2012

Egyptian President Mohamed Mursi

Mohamed Mursi, president of Egypt. Photographer: Jin Lee/Bloomberg

Murad Hassan, who owns a stationary shop in Cairo, doesn’t keep his money in a bank, and says expanding Shariah-compliant finance under Egypt’s new Islamic government won’t change his mind.

The 43-year-old father of three rarely has more than $500 in excess cash, which he uses to stock up on school supplies for his store on a street lined with small family businesses in Matariya, a low- to medium-income neighborhood in northeast Cairo. “It’s never a large enough sum to consider doing more with it,” he said in an phone interview Oct. 21.

Hassan isn’t the exception. Nine out of 10 adult Egyptians don’t have a bank account, the Middle East’s lowest ratio apart from Yemen, according to the World Bank. The lack of clients underscores the struggle Islamists face to promote Shariah- compliant financing after last year’s revolt propelled them to power. For Islamic banking to flourish in the majority Muslim nation, President Mohamed Mursi must lift economic growth from 2011’s 19-year low of 1.8 percent, Capital Economics Ltd. said.

Mursi, who became Egypt’s first democratically elected leader in June, is preparing laws to increase the share of Shariah-compliant deposits from 6 percent now, and enable borrowers to sell bonds complying with Islam’s ban on interest.

The plans haven’t yet jolted banks into action. Commercial International Bank Egypt SAE (COMI), the biggest publicly traded lender, is still “testing the waters” on whether to tap Islamic finance, Mohamed El Toukhy, chief executive officer of consumer banking, said in an Oct. 9 interview in Dubai. Only 1 percent of Egyptians with bank accounts have saved money in the past year, the World Bank said in an April report.

Little Savings

“The fact that saving ratios are low and that many Egyptians are poor bodes ill for both Islamic and conventional banks,” Said Hirsh, London-based economist at Capital Economics Ltd., said in an e-mailed response to questions Oct. 22. “This could change if the Egyptian economy were to grow at a faster rate in the future, around 7 percent a year, with more citizens sharing in this growth.”

The last time the economy expanded that fast was in 2008, the same year foreign direct investments rose to more than $13 billion. It will take until 2016 for growth to reach 6.5 percent, according to International Monetary Fund estimates.

The fall of autocratic rulers who long oppressed Islamists has fueled speculation that governments and consumers will turn to Shariah-compliant finance. The ultra-orthodox Nour Party, Egypt’s second-biggest Islamist group after the Muslim Brotherhood, seeks to eventually phase out the current banking system, replacing it with one that bans interest. Global Islamic financial assets will double by 2015 to as much as $3 trillion, Standard and Poor’s said last month.

‘Exaggerated’ Potential

“Let’s not give too much weight to the ravings about Islamic banking in Egypt,” Abdul Hameed Abu Musa, governor of Cairo-based Faisal Islamic Bank of Egypt, said in a phone interview Oct. 22. He dismissed as “exaggerated” estimates by groups such as the Muslim Brotherhood’s Freedom and Justice Party that Islamic deposits and lending may expand six-fold in the next five years.

Only three of the 39 banks operating in the most-populous Arab country are fully Shariah compliant. Real credit growth to private businesses and consumers may shrink 5.9 percent this year and 5.4 percent in 2013, according to HSBC Holdings Plc estimates. That compares with 4.3 percent 2012 growth in Tunisia, where a popular uprising broke out in December 2010 that set off a wave of political unrest across the Middle East.

Deposits Growing

Still, Islamic deposits could almost double to 10 percent of the total by 2017 if the economy recovers, Abu Musa, 70, said. Funds managed by Faisal Islamic soared 16 percent, or about 4 billion Egyptian pounds ($656 million), in the first nine months. Sixty percent of deposits range between 500 pounds to 30,000 pounds in size, he said.

The government is also confident a debut sukuk sale will be well received once a law is passed and the nation secures a $4.8 billion loan from the IMF. Foreign banks have expressed interest to buy as much as $1 billion of the debt, Finance Ministry head of debt management, Samy Khallaf, said by e-mail Oct. 17. Global sukuk sales have surged almost 80 percent to a record $39 billion this year as borrowers benefit from record-low yields.

In the Arab world, only Qatar, Bahrain, as well as Dubai and Ras Al Khaimah in the United Arab Emirates, have sold sovereign dollar-denominated Islamic debt, data compiled by Bloomberg show.

Tapping the Unbanked

The yield on Dubai’s 6.396 percent sukuk due November 2014 plunged 295 basis points, or 2.95 percentage points, to 2.63 percent today, according to data compiled by Bloomberg. The premium investors demand to hold the sukuk over Malaysia’s investment-grade 3.928 percent notes maturing in June 2015 plunged 165 basis points to 122.

Regional banks want to expand into Egypt to tap consumer demand in the most-populous Arab country. Qatar National Bank (QNBK) is conducting due diligence for a potential acquisition of Societe Generale SA (GLE)’s 77.2 percent stake in a local unit.

“The retail is a chance for everyone not just Islamic banks,” Emad Mostaque, London-based strategist at Religare Hichens Harrison, said Oct. 15 by phone. “But now that you have an Islamic leadership, it’s probably going to have a better chance than it would have otherwise.”

Traditional Methods

It may be difficult to coax Egyptians to abandon traditional savings methods in favor of banks. Wael Amin, a 37 year-old primary school Arabic teacher, keeps his extra cash at home or buys gold with it, turned off by some Islamic scholars who contend that banking involves reba, the Arabic term for usury, which is banned by the religion.

“Islamic banks aren’t much different in my opinion because they are based on the same traditional banking models, so I stay away,” he said in an interview Oct. 21 in Cairo.

Many Egyptians, including Amin and Hassan, use the informal interest-free saving method known as a gama’iya, under which a small group of people agree to contribute a fixed amount to a collective pot at defined intervals, such as monthly. Each time, one member collects the entire sum, which can be used to pay for purchases like furniture, cars or wedding jewelry.

This method of borrowing is useful for Egyptians who would otherwise be unable to secure a loan from a bank. The economic crisis has forced the unemployment rate up to 12.6 percent in the first quarter, the highest since Bloomberg started tracking the data in 2003. “I keep waiting for the market to pick up,” Hassan said.

Faisal Islamic only lends to consumers as part of agreements with companies or trade unions because it is concerned customers’ won’t be able to repay, said Abu Musa, a former central bank board member. The bank has 30 branches in Egypt, compared with Commercial International Bank’s 153 branches and HSBC’s 100.

“Next year, we will add between three to four branches,” Abu Musa said. “We work in a society where for a long time it was hard to operate as an Islamic bank. This has changed dramatically, but we have to be cautious.”

To contact the reporters on this story: Alaa Shahine in Dubai at asalha@bloomberg.net; Ahmed A. Namatalla in Cairo at anamatalla@bloomberg.net; Sherine El Madany in Dubai at selmadany@bloomberg.net

To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net


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