Islamic Banking in the Maghreb
Islamic financial instruments continue to attract consumer attention, with the central element of being interest-free products in compliance with Islamic Sharia law. According to financial sources, the value of funds involved in Islamic banking worldwide grew by an average of 15% annually over the past three years. Some analysts estimate Islamic banking to be worth some $500 billion, with the Middle East controlling a quarter of those assets. Kuwait is reportedly the biggest contributor, accounting for almost 29% of the sector’s value in the Gulf region. It is followed by Saudi Arabia with about 27%, and the UAE with 15.2%.
The growth in Islamic banking is largely attributed to the immense wealth accumulated in Gulf nations, generated by strong oil and gas sales, but also to the religious influence in Middle Eastern societies. These nations are said to have imposed Islamic banking practices on many global banking institutions. Without such instruments, international banks would risk the loss of an important source of funds and therefore they found ways to accommodate their Middle Eastern clients.These so-called “halal” banking products have not made significant inroads in North Africa yet, excluding Egypt. However, some financial institutions felt it was necessary to offer financial services that follow the Sharia law. We are seeing some growing interest in the region, in particular in Morocco where the Central Bank, Bank Al Maghrib (BAM) authorized the offering of Halal services as recently as 2007. In its authorization, BAM did not focus on the difficult tax and fiscal issues, but left it up to the tax authority, the Direction Générale des Impôts, affiliated to the finance ministry to figure out how to solve the tax problem. This includes the value-added tax (VAT) required for the commercialization of such instruments.
In Morocco, Islamic banking has introduced three products refer to as Ejara, Murabaha and Mucharaka. The first is essentially the equivalent of a leasing product, which typical is subject of a 20% VAT. But in the Ejara case, the financing does not originate from a bank per se, meaning that it is not considered a credit with the classic interest rates that apply to credit. Ejara is said to be financed by the own funds of the consumer credit company, that is its own resources and not what it labels as credit. What the financing firm gets is a sort of profit margin generated during the lease period through monthly installments, instead of an interest on financing. Nevertheless, the Moroccan tax authorities have decided to impose a 20% VAT on Ejara.
In contrast, Murabaha was defined by the tax authorities as bank loans and imposed a 10% VAT. They consider it as a form of credit, just as it is defined in mainstream banking. Where the difference occurs is in the way the transactions are defined. In mainstream banking, credits are subject to interest on the money loaned. In the Murabaha case, the creditor actually sells the “product” in question and earns a “legitimate” profit on that product. Even if the creditor never saw or took possession of the product, the money it gave its client means that implicitly it (the creditor) purchased that product and resold to its customers in exchange for a profit margin. The problem with the financing institution is that it will actually pay a 20% VAT to acquire the product upstream but then recoup only 10% when it sells it to its customer downstream.
This problem has affected the lease-with-purchase option offerings (location avec option d’achat) in similar ways back in 2007, which put some key players in difficult position regarding the recovery of the VAT tax. The 2008 finance law readjusted the discrepancy and balanced the two ends of the lease-with-purchase option offerings.
The fiscal and tax issues surrounding Islamic banking instruments are thorny problems for the credit sector in Morocco. Lobby groups in the sector have been putting pressure on the tax authorities to bring solutions to what they consider a source of loss in VAT imbalance. They threaten to delay the launch of such alternative financing options if a solution is not implemented.
An exception to this is credit financing firm Wafasalaf, which has made its own interpretation of the rules when it launched a Murabaha-based auto loan package called Taksit, involving VATs of 10% on both ends of the spectrum. Wafasalaf uses a VAT grid released by the central bank as a reference, as opposed to a directive from the fiscal authorities, which uses a different grid structure. Although Wafasalaf’s decision is seen as an important precedent, it also highlights how difficult the implementation of Islamic banking has been thus far. While Wafasalaf is moving ahead with its offerings, all other credit firms are taking a wait and see position, seeking clear signals from the authorities.