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Cablegate: Morocco Cautiously Introduces Alternative Banking Products

VZCZCXRO9486
RR RUEHBC RUEHDE RUEHKUK RUEHROV
DE RUEHCL #0130/01 1921502
ZNR UUUUU ZZH
R 111502Z JUL 07
FM AMCONSUL CASABLANCA
TO RUEHC/SECSTATE WASHDC 7767
INFO RUEHRB/AMEMBASSY RABAT 8029
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHEE/ARAB LEAGUE COLLECTIVE
RUEHLO/AMEMBASSY LONDON 0286
RUEHFR/AMEMBASSY PARIS 0566
RUEHNK/AMEMBASSY NOUAKCHOTT 2267

UNCLAS SECTION 01 OF 02 CASABLANCA 000130

SIPDIS

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN KDEM MO
SUBJECT: MOROCCO CAUTIOUSLY INTRODUCES ALTERNATIVE BANKING PRODUCTS

REF: (A) CASABLANCA 00066; (B) LONDON 002596

1. (SBU) Summary. Morocco's Central Bank and the Professional Group
of Moroccan Banks (GPBM) have moved cautiously in recent months to
introduce shariah-compliant financial instruments in Morocco. Banks
have been authorized to issue a limited number of Islamic products,
but are only allowed to refer to them as "alternative financial
products." In addition, these alternative products will be
governed by standard contracts, and there will be no central shariah
oversight system, both departures from traditional Islamic banking
practice. The experiment with shariah-compliant products is
intended to increase the banking rate, reduce informal shariah
transactions, and attract investors from the Gulf. Morocco's
cautious approach in offering these products stems from a desire to
maintain its image as a moderate Islamic country. End Summary.

------------------------------------
CENTRAL BANK TAKES MEASURED APPROACH
------------------------------------

2. (U) In late March 2007, Morocco's Central Bank, the Bank Al
Maghrib (BAM), and the Professional Group of Moroccan Banks (GPBM)
agreed to authorize banks to offer Islamic or shariah-compliant
products. The decision came with several stipulations. First,
banks cannot make any reference to Islam or shariah in marketing
these new offerings, and must characterize them instead as
"alternative financial products." Second, banks are only authorized
to offer the following three services: (1) Murahaba, by which banks
sell assets (such as houses) to customers on a cost plus basis; (2)
Ijarah, a leasing mechanism which can also involve a commitment to
transfer the asset by sale at the end of the lease; and (3)
Moucharaka, a profit and loss-sharing mechanism between two parties
which both contribute money.

3. (U) Morocco's banking system has decided to wade into Islamic
banking waters slowly. While banks are authorized to market some
shariah-compliant products (albeit without referring to them as
such), there are no Islamic banks in Morocco. An early July article
in the Gulf Times claimed that a Doha-based bank "intended to obtain
a license to open an Islamic bank in Morocco." The Central Bank,
however, has never licensed an Islamic bank, and has no plans to do
so in the near future.

--------------------------------------------- -
UNIQUE FEATURES OF BANKS' ALTERNATIVE PRODUCTS
--------------------------------------------- -

4. (U) Reflecting the Bank Al Maghrib's cautious approach to
offering alternative financial products in Morocco, certain features
of the products are unique. Banks will use standard contracts for
all three services, something that typically has not been done in
the Middle East or elsewhere. The contracts will be based on rules
set out by the Accounting and Auditing Organization for Islamic
Institutions (AAOIFI), a Bahrain-based group that sets standards for
shariah-compliant financial products.

5. (SBU) The decision to rely on the AAOIFI is also a departure from
traditional practice in the Middle East, where each bank has its own
shariah board. In Morocco, there will be no shariah board or
centralized shariah oversight system, making it the only
jurisdiction to offer Islamic banking products without a shariah
certification process in place. According to a London-based Islamic
banking expert, this could cause problems since customers may
question whether products have been sufficiently vetted to ensure
they are truly shariah compliant. Indeed, most observers believe
that financial institutions entering the Islamic banking market need
a reputable shariah board to attract Muslim investors.

-----------------------------------------
WHY OFFER ISLAMIC FINANCIAL PRODUCTS NOW?
-----------------------------------------

6. (U) According to the Central Bank, the move to permit Islamic
banking products is intended to encourage more people to bank by
offering a broader range of products. (Currently, only about 20
percent of the population uses banks). There is also the hope that
offering official Islamic products will cut down on informal,
shariah-compliant transactions. On a larger scale, Morocco's
banking system seeks to attract investors from the Gulf, who show
strong interest in Morocco, but may consider Islamic financial
products essential.

7. (SBU) Given that Islamic banking has become increasingly popular
globally in recent years, some also perceived a need for Morocco,

CASABLANCA 00000130 002 OF 002


with its traditional and religious Muslim society, to jump on the
bandwagon. Khalid Oudghiri, former CEO of Attijariwafa Bank,
underscored this point in a meeting in March, saying that a lot of
people want to invest in Islamic financial products and that there
is significant pressure from the Middle East to offer them.

---------------------
IMPLEMENTATION ISSUES
---------------------

8. (SBU) In the wake of BAM's decision to offer alternative
financial products, banks are experiencing growing pains as they
figure out how the products will work. At a forum chaired by BAM
and GPBM representatives in late June, bankers discussed the issues
they face. Their discussion revealed that questions remain
regarding practical implementation of the new products. One banker,
for example, could see how to use Murahaba to buy land, but not how
to use it to finance the construction of a house. Others were
concerned about mixing Islamic sources of finance with conventional
ones in banks that offer both types of services. In response, both
BAM and the GPBM acknowledged that they need six or seven months to
observe the products in use before they can evaluate the market's
reaction to them.

9. (SBU) Comment: The Central Bank's cautious approach is prudent,
but will bring its own challenges. BAM will have to establish a
clear legal mechanism for handling complaints, given the program's
newness and the absence of a central shariah oversight system.
Whether the products will actually take off is another question.
Not all agree with Oudghiri that there is pent up demand for such
products, particularly as there are downsides for potential
customers. If you opt for a shariah-compliant home loan, for
example, you are not charged interest and therefore cannot benefit
from tax provisions that make interest payments for such loans
deductible. Such issues aside, Morocco's measured approach offers a
middle path that meets the desire of a segment of the population for
Islamic products in a carefully controlled way, thereby reinforcing
the country's moderate image. End Comment.

GREENE

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