Islamic Banking in North Africa: Emergence, Growth, and Prospects

Introduction

Since its inception, Islamic finance has steadily developed in the Muslim and non-Muslim globe. Therefore, its principles, the respective values of Islam, can have a universal vocation. Particularly Muslims customers need financial solutions that are in accordance with Shari’ah. After the subprime crisis, the Islamic finance industry has experienced a period of evolution and progress. Several factors positively affect the growth of Islamic finance, which can have a significant effect on a continent's economic trajectory, such as population growth, raised consumer spending power, and the prevailing place of Islam in a continent’s demographic.

To date, the Islamic banking continues to be the important sector in the finance industry (Thomson Reuters, 2016b). So including traditional banks with Islamic windows, total Islamic banking represents approximately 75% of total Islamic financial assets.

Islamic finance is based on five pillars: three prohibitions and two injunctions.

Briefly, the prohibitions are as follows: (i) Riba (interest or usury); (ii) Gharar and Mayssir, meaning undue uncertainty which refers to excessive risk-taking or hazard (due to asymmetric information); (iii) The banning of funding and trading in transactions and products considered as illegal or impure (such as alcohol, gambling and pork). However, the injunctions (or obligations) included Sharing profits and losses (PLS) between all economic parties and the “Asset-backing” principle according to which financial operation should be associated with real economic operation.

The Islamic financial system operates in ways that are different from the logic of conventional finance and require respect for the ethical principles of Shari’ah, which result an Islamic banking intermediation different from conventional ones.

According to Rafik Al Masri (1995): “Islamic banks must not only condemn usury (Riba) but must apply Islam in all its orders and prohibitions, in its fields of activity”.

The liability and asset structure of an Islamic bank based on different functions and services provides an overview of its activities and intermediation capacities.

Islamic financing instruments are generally structured in two categories: equity techniques founded on the principle of profit and loss sharing (PLS) (Musharakah and Mudarabah) and trade finance techniques (Murabahah, Istisna, Salam and Ijara). Banking activity presents specific risks as a result of the specific structure of banking assets and liabilities (Khan & Ahmed, 2001; Sundarararajan & Errico, 2002; Iqbal & Mirakhor, 2011).

The traditional methods of Islamic finance, namely the Mudarabah and Musharakah, are similar to the principal-agent model. According to Chapra (2007), financial intermediation based on the PLS principle is a different model from traditional intermediation. According to this structure, Islamic banks act as agents when they collect deposits (investment accounts) and play the role of principal when they lend on a PLS basis.

The Islamic Shari’ah does not prevent the existence of intermediaries who collect funds from savers and then place them with the entities that need them. Islamic banks must fully and effectively perform the specific functions assigned to them and maintain the specific characteristics of the Islamic financial system. It is widely perceived as a competing form of financial intermediation.