Comparison between Islamic finance and conventional finance. (1) differences
The Islamic banking system differs from the conventional banking system in several ways: (1) while conventional banks operate on the basis of loans and loans at predetermined interest rates, Islamic banks are financed by current (non-interest bearing) accounts or by profits from participating investment accounts (the account holder receives a return determined ex post by the profitability banks); (2) Any sale or rental based banking activity is backed by an underlying asset.
In conventional finance, the asset is managed as collateral; (3) The operations of Islamic banks give rise to two types of risk: (i) traditional banking risks (credit, market, liquidity, operational and legal risks); and (ii) specific risks (Sharia compliance, business risk and investment risk).
Consequently, these differences raise specific issues in terms of regulation and supervision, consumer protection, monetary policy and liquidity management and fiscal policy. To address some of these issues, jurisdictions have collaborated to create specialized institutions for the development of regulatory standards (Islamic Financial Supervisory Board), governance, auditing and accounting standards (Organization of Accounting and Auditing for Islamic Financial Institutions), tools financial market (International Islamic financial markets) and short-term liquidity infrastructure (International Islamic Liquidity Management Corporation).
As regards sukuk, which are suitable for infrastructure financing, their issuance has important implications for financial stability and also presents specific problems in terms of consumer protection. Ultimately, sukuk can be assimilated to a public-private partnership in which investors finance assets, then own them, which leads to a real securitization and, finally, transfers them to public authorities at maturity; and (2) the monetary policy framework: the transmission channels of monetary policy are identical: interest rate (participation), asset prices, exchange rate and credit. It is up to public monetary institutions to initiate and promote the development of primary, secondary and monetary markets. This is a major obstacle in Islamic finance.
The weaknesses of Islamic finance funds
Despite past development and favorable prospects, Islamic finance faces four main obstacles: (1) the absence of true holding arrangements between borrowers and lenders which would keep the costs of business transactions at reasonable levels and eliminate the problem of gambling moral as the borrower and the investor could possibly have diverging information on the profitability of the investment.
In this context, Islamic banks do not hesitate to increase the cost of the commercial transaction or to focus on leasing and / or concentrate loans on assets backed by short-term commercial transactions; (2) the absence of short-term financial instruments and the non-existence of an interbank market in which banks could place overnight funds or borrow to meet temporary liquidity needs; (3) the absence of “financial engineering” experts capable of developing instruments that meet the liquidity requirements according to the rules of Islamic finance; (4) the absence of a mechanism for financing state deficits, which must therefore turn to the creation of money, a factor of macroeconomic destabilization; (5) the absence of an organizational framework for relations with foreign banks and, more generally, of rules for the conduct of international transactions. The solution would be to create financial instruments consistent with Islamic principles and acceptable to interest-based financial institutions, including foreign banks; and (6) the absence of an adequate regulatory framework at the national level that combines Islamic finance and conventional finance.
Perspectives in terms of Islamic finance and reforms
The oil and health shocks of March 2020 weakened Islamic finance, especially as it was heavily exposed to the real estate sector and trade. However, given the strong demand for participatory financing by non-bank populations and public policies in support of Islamic banks, bonds and insurance in many countries, experts predict that Islamic finance will continue to grow in 2021 and beyond, maintaining the trend. long overdue growth. These same experts estimate that the value of Islamic banking is expected to reach $ 3 trillion by 2025.
Islamic finance in Algeria: a nascent sector of activity
Its characteristics are as follows: (1) it is made up of 5 banks, the first of which entered the Algerian banking market in 1991 and the last in 2021, as well as an insurance company. Other banks may follow up once their approval file has been accepted; (2) with the exception of one financial institution, all others conduct Islamic and conventional finance operations simultaneously. Their share on the Algerian financial market is very low despite the rapid growth of recent years; (3) The assets of Islamic financial banks are approximately $ 3.4 billion and represent less than 1% of total credit; (4) Until 2017, Islamic finance operated outside any legal framework and its activities obeyed a regulatory framework designed for conventional finance. A first draft of reconfiguration of the legal framework took place in November 2018 with the adoption of a regulation that referred to participatory products but remained insufficient to legalize and stimulate true Islamic finance.
A new step was to be taken in March 2020 with a new regulation supplemented by an instruction dated 2 April 2020 from the Bank of Algeria which now explicitly referred to Islamic finance, specified the conditions for exercising this activity, determined the products to be marketed (mourabaha, moucharaka, moudaraba, ijara, istisna’a, salam and deposits in investment accounts) and establish two bodies to monitor compliance with Sharia standards at the establishment level (comité Sharia under the general assembly) and at the national level ( National Sharia Commission responsible for the development of fatwas for the Islamic financial industry). Another element to note is the concern for transparency by establishing a separation between conventional financial branches and conventional financial branches within the same institution. This foreshadows the possibility for all banks to enter the Islamic financial market. Regarding non-banking activities and in the field of Islamic (takaful) insurance, they are now supported by article 103 of the budget law for 2020. The establishment of a basic legal framework is a welcome measure that could facilitate the the opening of new Islamic branches and the expansion of the banking network in this area. It remains to conquer the market.
Growth potential to explore. The outlook for Islamic finance is subject to two conditions
(1) the implementation of measures to adapt the business framework to make it compatible with the Islamic banking system (civil law, accounting, tax law, liquidity management, financial instruments, etc.) and articulate it with macroeconomic policies; and (2) the ability of Islamic finance to capture some of the liquidity that is accumulated and finance the informal economy. The weight of the latter is about 30% of GDP (ie 53 billion dollars), based on the new estimation method called the method of statistical deviations from national accounts. A part of the resources at the level of this economic sector is accumulated. Assuming this share is around 5%, this offers an attractive potential market that can be mobilized in the long term by Islamic finance. File to follow.
Of Abdelrahmi Bessaha
Macroeconomist, specialist in fragile and post-war countries