When a nation has an upheaval such as Egypt has just had, it certainly changes the dynamics and growth prospects for many areas, including Islamic finance.
Despite being the birthplace of Islamic finance, having strong economic fundamentals and latent demand, Islamic finance has not gained traction in Egypt. Why? Perhaps a more appropriate question may be: is the removal of President Hosni Mubarak a renaissance for Islamic finance in Egypt?
There is a saying, "addition by subtraction," meaning that the removal of Mr Mubarak may be the necessary spark to ignite demand for real Islamic finance without the fear of "Islamists".
During a presentation in Cairo last year to lawyers, bankers and professionals, there was a cynicism and aggression against the commercial applications of Islam. It was as if teachings against those who partake in usury were not sufficient to convince these educated "Muslim" professionals that it is something they should avoid or at least be wary of, whatever form it comes in, whether it be bank interest or mortgage finance.
When the Egyptian Financial Services Authority decided to finally establish laws and regulations for sukuk, primarily to attract Gulf petro-liquidity, it even decided to avoid any terms that indicated any Islamic affiliation for the regulation.
Why is Egypt an example of the rapidly changing dynamics for the region and, more importantly, the dynamics of Islamic finance?
The growth of Islamic finance is attributable to primary drivers of surplus risk capital, doctrinal religiosity (as found in the Middle East and increasingly in minority communities in the West), comparative efficiencies with conventional finance, and enabling regulatory environment for both banking and Islamic finance.
With the upcoming independent elections, it is likely that Islamist-leaning voices such as the Muslim Brotherhood may regain their place in Egyptian politics. But the will of Tahrir Square is not about turning Egypt from one hardline "secular" country into another hardline Islamist state. It is about openness to ideas, secular and spiritual.
The relevance for Islamic finance with this history-making event, is not so much the overt Islamist leanings of the Muslim Brotherhood, but, rather, that a key impediment for the take-off of Islamic finance in Egypt has been removed. And, much like a political party in democratic states, Islamic finance is largely a function of the "invisible hand" of demand from the voters, concurrently, acting as depositors and investors.
Anecdotally, a number of bankers have stated that demand for Islamic finance is so strong that their multinational bank has been receiving daily requests from the local office to open Islamic branches in Egypt.
Thus, for Islamic finance to prosper in Egypt, it is not an Islamist government, but rather an "open door and level playing field," the same door open to the conventional banking sector [the same door that has been closed for the past 30 years].
The Egyptian lessons for Islamic finance have application for Tunisia, and challenging situation in Yemen and Libya.
But, this is not to say that upheavals are always a good thing for Islamic finance. The events that took place over the past couple of weeks in Bahrain have done little to dampen investor sentiment for Bahrain as an economic destination, as demonstrated by the very minor dip in bond prices.
However, the growth prospects of Islamic finance and, in general, the financial services industry in Bahrain will largely rest on the upcoming decisions of the crown prince and the support of the royal family. If he provides the right concessions and moves the country towards representative government, Bahrain as an investment and financial hub, may survive with its reputation intact.
Let us wait and see.
ARushdi Siddiqui is the global head of Islamic Finance & Organisation of the Islamic Conference countries at Thomson Reuters
