Egypt is likely to remain an Islamic finance laggard. The birthplace of Islamic finance, Egypt is the sixth-biggest Muslim nation with 80 million people, but only 3 to 4 percent of its $193 billion banking industry is Islamic, said a 2009 report by consulting firm McKinsey. UAE Islamic assets, by comparison, account for 46 percent of the market, while even in Turkey, with its highly secular political and social structure, Islamic assets account for 42 percent of total banking assets. This disparity is politically induced, said Ashraf Mohamed Talaat, manager Islamic Banking unit-treasury at National Bank of Egypt. “We can catch up to other regional markets in the (Gulf) areas and Malaysia if there is political will in Egypt for Islamic finance. Experts need a green light from the political side,” he added. That political will - ahead of long-awaited presidential elections in 2011 to pick President Hosni Mubarak's successor - and consumer demand, is lukewarm, however. Engaging consumers will be hard, especially as millions of Egyptians were stung by Ponzi schemes in the mid-1980s. “The firms involved in the scandal weren't technically Islamic banks but the fact that they used the Islamic label was consequential,” said Ibrahim Warde, adjunct professor at The Fletcher School of Diplomacy at Tufts University. The head of the Egyptian Financial Supervisory Authority (EFSA) said in April that Egypt plans to issue its first regulations governing Sukuk in the second half of 2010, but remained cautious on its potential. The reluctance to support Islamic Finance is also enshrined in the tax code. “On the government side there is no effort to address any tax obstacles,” said Reinald Klarmann, partner at Cairo-based Sarwat A. Shadid Law Firm. “(Islamic) transactions have tax implications that simply make it commercially unviable.” Klarmann said Islamic financing involves additional transactions like the passing of property title, which leads to additional tax on capital gains absent in a conventional deal. However, Islamic finance peers in nearby states remain keen to tap the country's huge growth prospects. Grail Research's Thomas said a government-backed market could grow between by 40-50 percent in the first 3 to 5 years, driven largely by Gulf-based banks with cash and expertise. Lenders such as Abu Dhabi Islamic Bank and Bahrain's Al Baraka banking Group have already bought large stakes in Egyptian banks. ADIB's stake in National Development Bank underpinned the conventional lender's plan to convert to an Islamic bank by the end of the year. However, the absence of a secondary market for short-term investors to sell Islamic products, could deter some institutional investors, Klarmann added. That lack of infrastructure is also evident in manpower, said Angus Blair at Cairo-based Beltone Financial, highlighting the lack of trained financial advisors able to deliver Islamic finance to consumers “efficiently”.
