Morocco's BMCE Bank is preparing to launch an Islamic subsidiary as a joint venture with a major Islamic financial institution from the Middle East, the bank's managing director said.

 

The plan illustrates how the international expansion of Islamic finance may help to strengthen business ties between the wealthy Gulf and other Arab countries.

 

In the past, many Arab governments outside the Gulf neglected or even discouraged Islamic finance, partly for ideological reasons. That has changed in many countries since the Arab Spring uprisings of 2011 pushed governments to seek new sources of economic growth.

 

The Moroccan parliament is now discussing a bill that would regulate Islamic banks and sukuk issues; approval is expected before the end of this year. Tunisia is gearing up for its first sovereign sukuk issue, and in July, regulators in Jordan introduced rules for sukuk.

 

For countries running large budget and current account deficits, like Morocco, the economic advantage of sukuk markets is that they can tap into huge pools of sharia-compliant money in the Gulf.

 

Banks from Kuwait, Qatar, Bahrain and the United Arab Emirates have expressed interest in entering Morocco when its Islamic finance bill comes into force.

 

Moroccan authorities are expected to guide the foreign banks toward partnering with local banks rather than establishing fully owned Islamic subsidiaries, local bankers believe.

 

“Our subsidiary will take our partner's name,” BMCE managing director Brahim Benjelloun-Touimi said in an interview at the Reuters Middle East Investment Summit. He declined to reveal the partner's identity, saying that could only happen after the bill was passed and the central bank approved the deal.

 

Other major Moroccan banks, including Banque Centrale Populaire (BCP.CS) and Attijariwafa Bank (ATW.CS), have discussed launching Islamic offshoots with foreign Islamic banks, industry sources said.

 

BAD LOANS

 

BMCE posted a 51 percent rise in first-half net profit attributable to shareholders to 902 million dirhams ($103.3 million), but like other Moroccan banks, it still faces a rise in bad loans in its domestic market and in sub-Saharan Africa, where it is a big investor.

 

The bank had 6.8 billion dirhams in bad debt at the end of June, up from 6.3 billion dirhams at end-2013, and declared over 1 billion dirhams of additional provisions. However, it also wrote back 509 million dirhams of provisions set aside in recent years, so its provisions now total 3.6 billion dirhams.

 

Benjelloun-Touimi said the bank had launched a structural plan to counter risks and improve controls.

 

“Around 15 percent of our bad loans came from shipping and sea transport, and real estate development. Without those two sectors, we would have seen a drop in the non-performing loan ratio to 4.75 percent from 6.3 percent in the first half of 2014.”

 

The textile sector has also suffered from the euro zone's economic slump, and is still harming the banking sector.

 

Morocco's money market has been facing a sustained and structural liquidity shortage, partly the result of heavy borrowing by the government to fund its budget deficit.

 

The central bank cut its benchmark interest rate by 25 basis points to 2.75 percent last month in an effort to ease money market conditions and boost economic growth, which has been hit by a drop in agricultural output.

 

“The impact of the central bank's decision to lower the interest rate can be felt only gradually,” Benjelloun-Touimi said, adding that funds obtained by Moroccan banks in the central bank’s money market operations were only 10 percent of their total funding.

 

“So the real impact on credit costs will be less important than we had expected. But it will affect other factors linked to margins, including the risk costs.”

 

BMCE last year raised $300 million in an international bond sale to fund its expansion in sub-Saharan Africa through its Bank of Africa Group and other subsidiaries such as la Congolaise de Banque. BOA Group is operating in 17 African countries and plans to open a Cameroon unit before the end of this year, Benjelloun-Toumi said.

 

“We are also targeting the Anglophone countries, where there is promising economic growth."