Morocco has one of the most successful financial systems in the MENA region, a competitive and highly developed capital market, an insurance sector that is positioned as the second-largest in Africa, and a mature and highly developed banking sector that is proving its worth in several African countries. The Kingdom enjoys political stability and its geopolitical position makes the country an ideal link between Europe and Africa. However, when it comes to Islamic finance, Morocco has long been considered an exception in the Muslim world.
Since the late 80s, Moroccan academia has pushed to adopt Islamic finance into the country’s banking framework and has since formed the Moroccan Association for Islamic Economics (ASMECI). Hence, the debate on Islamic finance was a longstanding issue and a popular claim in Morocco, which explains most of the current enthusiasm and at the same time mistrust towards the recent adoption of Islamic finance in the Kingdom. This debate continued until 1990 when a conference on Islamic finance was held under the aegis of Bank Al-Maghrib, the central bank of Morocco, and the Islamic Development Bank. In 2006, Morocco applied for the membership of the International Financial Services Board (IFSB).
After the 2008 financial turmoil, the country felt the need to diversify and bring in new financial actors. The first endeavour to adopt Islamic finance products was introduced in 2009 when Bank Al-Maghrib (BAM) had authorized conventional local banks to market Shari’a-compliant products, namely Musharakah, Murabahah and ijarah products. The central bank issued an instruction N° RN 33/G/2007 that allowed the marketing of these “alternative products” without any general revision of the national banking law.
The introduction of Islamic finance at that time presented a real opportunity for the development of banking activities in Morocco given the strong demand for such Shari’a-compliant banking products. However, the reform ignored the adoption of a regulatory framework for deposits with a focus on financing only. According to the BAM Chief, since 53% of bank deposits in Morocco are in the form of current accounts that do not earn interests, it was deemed as unnecessary to introduce a new legal framework for Islamic deposits.
The relative failure of the first Moroccan experience was mainly due to the cost of these products, double taxation on Murabahah contracts along with the pressure from the banking lobby that feared for their market shares. The absence of the role of the Ulema in raising awareness and giving legitimacy to these new products also played a part in the failure of Islamic finance.
It was not until 2011 when the Moroccan Party of Justice and Development (PDJ) won the general elections that there was a major push towards the establishment of a complete framework for Islamic finance by introducing a new chapter in the current banking law. The government was ready to restructure the tax system and put in place a favourable legal and regulatory framework. In order to catch up and revitalize its economy, Morocco recently undertook an overhaul of its banking law N° 103.02 in which it introduced a chapter on the activities of banks officially named in the corpus of the bill as “participatory banks”.
The supervisory framework related to the Islamic finance industry was based on four major institutions: the Central Bank for the banking branch, the National Agency for Insurance (ACAPS) for the Takaful branch, the Capital Market Authority (AMMC) for Sukuk issuances and the high council of Ulema (CSO) for Shari’a supervision. On January 2, 2017; the central bank issued a press release announcing the approval of five banks to provide Shari’a- compliant products and services. Referred to as participatory banks, 4 of them were formed as joint-ventures between Moroccan conventional banks and GCC financial institutions except for Bank Assafa which was fully owned by Attijariwafa Bank. The central bank also had given approval for the subsidiaries of three leading French banks – Societe Generale, BNP Paribas and Credit Agricole’s Islamic Development Bank – to offer Shari’a-compliant products. It was expected that the Islamic finance industry would reach US$8 billion in assets in the first year.
The Moroccan experience in Islamic finance has developed a unique feature concerning Shari’a supervision institutions. The Dahir1 1-15-02 stipulates the creation of a Shari’a Committee on Participatory Finance consisting of 9 members and a coordinator. The commission can call on permanent experts and guests in an ad hoc manner. Indeed, all Shari’a rulings and central supervision regarding Shari’a rulings is put solely under the Highest Council of Ulema through its participatory finance committee. The opinions delivered by the Committee shall be binding on Islamic banks and any other financial institutions offering Shari’a-compliant products or services. Their rulings will prevail over any contrary interpretation. Participative banks will be required to submit an evaluation report on their compliance with Shari’a law, at the end of each fiscal year to the committee as well as to the central bank. The central bank will then draw up and publish an annual report highlighting the opinions pronounced during the past financial year as well as its assessment of the compliance of the Islamic banks under the Council’s rulings. Therefore, the institutionalization of control and supervision in the conformity of the products and operations constitutes a major stake for Bank Al-Maghrib to build up the confidence of operators, consumers and especially foreign investors.
Accordingly, the governance of Islamic banks in Morocco is jointly ensured by the Participatory Finance Committee of the CSO and “conformity authorities” playing the role of a Shari’a board. The missions of this committee within Islamic banks consists of setting up mechanisms for monitoring, detecting and measuring the risks of non-compliance with the opinions of the CSO as well as the risks of loss of reputation caused by non-compliance to the opinions of the CSO. Also, it aims to monitor and evaluate the operations, documents, contracts and content of advertising campaigns with respect to the opinions of the CSO.
Furthermore, the government was pushing towards creating a level playing field for Islamic finance by ensuring fair taxation for Shari’a-compliant products and making their prices closer to conventional ones as the former were subject to a higher value- added tax (VAT) of 20% versus 10% on conventional financing. Furthermore, Murabahah contracts were subject to double taxation on registration fees, with this tax being due upon the acquisition of property by the bank and upon the transfer of ownership to the customer.
However, the provisions of the Tax Circular relating to the 2010 Finance Law have significantly reduced the VAT on Murabahah, in addition to the introduction of the deductibility of the bank margin of the beneficiary’s taxable income. For a second time in 2016, the government amended the tax law to allow clients with ijarah contract solely for financing their house to deduct the rental margin from their taxable income. Nevertheless, professionals have voiced their concerns regarding the fiscal ambiguity surrounding other Shari’a-compliant contracts, which may impede their full application.
The second part of implementing an Islamic finance framework concerns the adoption of sukuk-based financing in the Moroccan capital market. The amendment of the law n°33-06 relating to the securitization allowed new actors to access the market, notably companies and Government. This step will enable the Treasury Department to strengthen its sources of financing by issuing, under its own needs, sovereign Sukuk to raise the funds necessary to finance major infrastructure projects. Accordingly, the Kingdom issued its first sovereign Sukuk valued at MAD1 billion, or $105 million, repayable over a period of five years. The ijarah certificates carrying a 2.66% annual coupon rate were exclusively offered to domestic investors (mainly participative and conventional banks, insurance companies and pension funds) and received overwhelming demand amounting to MAD3.6 billion (US$379 million). This issuance was long-awaited as liquidity risk was pressing Islamic banks to look for other solutions like Wakalah-bil-Istithmar contracts to secure their growth and extend their financing to growing demand.
Consistent with the country’s efforts to build a cohesive Islamic finance ecosystem, the Moroccan approved a new law governing takaful, on July 10, 2019. The move allows insurance companies to launch takaful subsidiaries. However, the current provision of Murabahah financing is accompanied by a very specific condition, requiring the client to purchase takaful insurance as soon as it becomes operational. The law requires local insurance companies to create subsidiaries dedicated to the takaful business and therefore does not offer them the possibility of participatory “windows” as is the case for banks.
The newly implemented Islamic finance in Morocco will certainly add a new perspective for banking growth and allow a new type of clientele to access the financial system. However, authorities lack speed in bringing in other types of contracts like Istisna, Musharakah and Mudarabah. Indeed, the global phenomena of preferring debt-based contracts against profit and loss-sharing contracts can be considered as an opportunity for Morocco to mark and consolidate its role as a major player in the global finance industry.
