Moroccan banking sector enhanced by Islamic financial services and regulatory reform

Morocco’s banking sector is already the most highly developed in North Africa in terms of penetration indicators and among the most advanced in the wider MENA region. The industry, which is in the midst of a recovery in lending growth rates, now stands on the verge of another substantial step forward in development, thanks to the imminent launch of both an Islamic banking sector – backed by the creation of a wider Islamic finance system – and a new system of non-bank payment institutions.

Plans are also under way to open up the microfinance segment to depositors and private operators, in addition to ongoing reforms to further bolster the financial system’s overall stability.

LENDING: The value of outstanding bank loans stood at Dh842.1m (€78m) in December 2017, according to Morocco’s central bank, Bank Al Maghrib (BAM), up from Dh818.2bn (€75.8bn) at the end of 2016. This followed bank lending growth of 2.1% in 2014, 2.8% in 2015 and 4.2% in 2016, pointing to a recovery in credit demand. Mamoun Tahri-Joutei, director of economic intelligence at BMCE Bank, cited retail credit growth and efforts by the authorities to encourage lending to smaller businesses as factors behind this. “There has been a recovery in lending,” he told OBG. “Small and medium-sized enterprises (SMEs) and the retail market will continue to drive credit growth, with mortgage lending acting as one of the main drivers in the latter.”

The average lending rate was 5.48% at the end of the first quarter of 2017, according to BAM data, up from 5.17% at the end of 2016 but little changed from the first quarter of 2016 (5.55%). Over the long term lending rates have been on a gradual downwards trend, in part because of slow lending growth and consequent strong competition on rates, falling from an overall average of 6.5% at the end of 2013.

DEPOSITS: The value of banking deposits in Morocco – excluding regulated and guarantee deposits – stood at Dh894.7bn (€82.8bn) in December 2017, up from Dh845.1bn (€78.3bn) at the end of May 2017. Dh533.5bn (€49.4bn) was in the form of demand deposits, while Dh155.8bn (€14.4bn) was in the form of time accounts and fixed-term bills.

COMPETITIVE LANDSCAPE: There were 19 licensed onshore banks operating in the country as of June 2016, according to BAM, in addition to six offshore banks. However, that number is set to rise as a result of the opening of several Islamic banks, five of which received operating licences from BAM in early 2017. The market is fairly concentrated, with the top-three banks accounting for just under two-thirds (65.6%) of total banking assets in June 2016, a figure that has remained broadly stable in recent years. With assets of Dh428.8bn (€39.7bn), Attijariwafa Bank is the largest institution in the market. Société Nationale d’Investissement, a holding firm controlled by the royal family, is the largest shareholder in the institution, with a 47.9% stake.

In second place is Groupe Banque Centrale Populaire (GBCP), with assets totalling Dh352bn (€32.6bn). The institution is a banking group consisting of a national bank called Banque Centrale Populaire (BCP) and 10 regionally based cooperative banks, known locally as banques populaires, which own a combined 52% stake in the group.

In third place is BMCE Bank of Africa, with 2016 assets of Dh305.9bn (€28.3bn). The largest shareholder in the institution is FinanceCom financial group, headed by Moroccan businessman Othman Benjelloun, which holds a 36.4% stake via various entities under its control, in particular group member insurance firm RMA Watanya, which has a 29.9% ownership share in BMCE Bank of Africa.

PROFITABILITY: With lending growth recovering and non-performing loan (NPL) growth slowing, returns are healthier. The sector as a whole recorded profits of Dh6.4bn (€592.6m) in the first half of 2016, according to BAM, for a return on assets (ROA) of 1.1% and a return on equity (ROE) of 11.7%. This was due in part to a rise in the average interest rate margin from 3.6% in the first half of 2015 to 3.8%.

Profits were up from Dh5.5bn (€509.3m) in the same period a year earlier, a jump of 16.1%; ROA and ROE both also rose, from 1% and 10.5%, respectively. Profits for 2015 as a whole were Dh9.4bn (€870.4m), compared to Dh10bn (€926m) in 2015, while ROA and ROE stood at 0.8% and 9.1%, down from 2014’s 0.9% and 10.2%, respectively.

However, major banks saw an increase in profits. Net income at Attijariwafa Bank rose 6.7% to Dh5.7bn (€527.8m), for ROA and ROE of 1.3% and 13.5%, respectively – though the latter was down from 14.8% in 2015; ROA was unchanged. At BCP the figure stood at Dh3.04bn (€281.5m), up from Dh3.02bn (€279.7m) the previous year. Profits at BMCE Bank of Africa were up 16% year-on-year (y-oy) to just under Dh4bn (€370.4m).

BAD LOANS: The value of NPLs stood at Dh63bn (€5.8bn) at the end of May 2017, up 2.7% y-o-y. The rise was driven by a 0.4% increase in the value of bad loans to non-financial private sector companies and a 10.1% rise in the NPL rates of household debt. At the end of 2016 NPLs were worth Dh61.5bn (€5.7bn), a 7.1% jump on the previous year and equivalent to 7.5% of total sector lending.

In its February 2017 Article IV Consultation report for Morocco, the IMF described the increasing NPL rate as a concern, and it cited a number of other factors, including credit concentration risks. However, in a press release in December 2017 the IMF stated that banks in Morocco are currently “well capitalised, and the risks to financial stability are limited. [NPLs] remain relatively high but they are closely monitored and are well provisioned. Regulatory limits to reduce credit concentration as well as collaboration with cross-border supervisory bodies to contain risks related to Moroccan banks’ expansion in Africa are being strengthened.”

Tahri-Joutei said that the rising NPL rate was, among other factors, related to widespread payment delays, which were exacerbated by the delay in forming the current government following the 2016 elections. However, he said that the situation should improve now that the administration is in place.

Although levels of bad debt have risen significantly, their growth rate appears to be slowing; for example, NPL levels grew by 13.3% in the year to March 2016. The slowdown appeared likely to continue in 2017. “Projections for economic growth for 2017 are much better than in 2016, so the rate at which NPLs expand should be slower than in 2016,” Hiba Zahoui, deputy director of the Banking Supervision Directorate at BAM, told OBG in mid-2017.

Tahri-Joutei said that the risk profile of some major categories of debt was also improving. “There has been a lot of discussion recently of banks’ exposure to the real estate sector, but large real estate groups are now improving their profitability and reducing debts,” he told OBG. Another potential threat facing the sector was interest rate risk. “There has been strong competition within the sector, particularly given the fairly low demand for credit in recent years, which has led to increased exposure to interest rate risks,” Zahoui told OBG. He added that BAM had alerted banks to the necessity of correctly pricing loans, especially regarding mortgages and lending to large enterprises.

NEW LAWS: In 2015 a wide-ranging new banking law adopted by Parliament the previous year was published in the kingdom’s Official Gazette. Headline changes under the law include the creation of a new form of non-bank payment institutions, the establishment of an Islamic banking segment, and a requirement for banks to appoint independent administrators to their boards.

Nouaman Al Aissami, assistant to the director of the Department of Treasury and External Finance at the Ministry of Economy and Finance (Ministère de l’Economie et des Finances, MEF), said in May 2017 that most of the regulations applying the law’s provisions were in place. Application regulations still waiting to be adopted in mid-2017 included new rules on microcredit, the functioning of state-owned Deposit and Management Fund (Caisse de Dépôt et de Gestion, CDG) – these are new prudential rules to be applied to its non-banking activities – and external audits. In July a government council agreed to adopt Bill No. 40-17 granting BAM autonomous status. The measure, suggested by MEF, aims to give BAM more independence. Al Aissami told OBG that the authorities did not plan to make any major legislative changes to this law in the near future.

INTERNATIONAL REVIEW: In 2015 the IMF and World Bank conducted a review of the banking sector, known as the Financial Sector Assessment Programme, the recommendations of which the banking authorities continue to implement.

One reform emanating from the process that the authorities are working on is a change to the regime covering classification of debt and provisioning, and in particular the identification of at-risk debt – that is, loans that are still classified as healthy but showing signs of vulnerability. Previously, banks were asked to identify such loans using their own internal criteria, but BAM is now working to harmonise the process using a set of universal standards.

Another reform arising from the process currently under way is to harmonise the criteria under which borrowers are classified as defaulting with international norms. Previous criteria governing defaults did not include certain elements, in particular related to clients who repeatedly exceed their credit lines. BAM has conducted an impact study on the new rules, with the results being shared with banks. The institution is also working on new regulations regarding how banks should treat collateral that they acquire from clients in difficulty, in particular real estate. New rules on these matters are due to be drafted soon, with the central bank also conducting an impact study on the topic – to be completed in 2018 – before implementing them.

PLANNING FOR CHALLENGES: BAM is also working on reforms related to the handling of banks in difficulty. On the preventative side, it is drawing up a new circular that will oblige banks to create an internal crisis management plan showing how they would address a shock that threatened their stability, which they will be required to submit to the central bank for review. BAM is also putting in place a new regime to deal with failed institutions. “We want to identify the tools needed to deal with banking failures in a rapid and structured manner, and with limited recourse to public funds,” Zahoui told OBG. She added that the bank had begun work on several studies related to the planned reforms.

ISLAMIC BANKING: The banking sector is about to undergo a major change, in the form of the launch of Islamic banks – commonly referred to as participatory banks in Morocco – under changes brought in by the 2015 banking law; banks had been allowed to offer some Islamic products since 2007, but the segment had failed to take off.

In January 2017 BAM issued Islamic banking licences for five standalone sharia-compliant banks in the country. These include: Dar Assafaa, an Islamic bank to be established by Attijariwafa Bank, which has launched 23 agencies and is the only one of the five that does not involve a foreign partner; an Islamic banking joint venture (JV) between Crédit Immobilier et Hôtelier Bank, which is part of the state-owned CDG, and Qatar International Islamic Bank, known as Umnia Bank; Bank Al Tamwil wal Inmaa, a JV between BMCE Bank of Africa and Saudi-Bahraini conglomerate Dallah Albaraka; a JV between BCP and Saudi non-bank lender Guidance Financial Group; and Al Bank Al Akhdar, a 51:49 JV between Crédit Agricole du Maroc and a unit of the Islamic Development Bank – the Islamic Corporation for the Development of the Private Sector.

In January the central bank also licensed three conventional institutions to operate dedicated Islamic windows; these are Banque Marocaine pour le Commerce et de l’Industrie, Crédit du Maroc and Société Générale Maroc. The sector took a further step towards its launch in March 2017 when BAM published three circulars implementing aspects of the 2015 law, outlining the types of Islamic products Moroccan banks will be able to sell, conditions for customer deposits and the operation of sharia-compliant windows at conventional banks.

Umnia Bank opened three branches in Casablanca and Rabat in May 2017, becoming the first of the five new Islamic institutions in the kingdom to open its doors. “BAM prepared well for the advent of Islamic finance in Morocco,” Abdessamad Issami, CEO of Umnia Bank, told OBG. “It granted operating licences to eight banking players at the same time, and included the Islamic banking segment in the existing legal framework, which will enable it to benefit from the same regulatory advantages.” In July 2017 the government’s Sharia Committee approved the operation of Islamic banks, with BAM issuing a permit for banks wishing to open Islamic channels. This opened the way for Islamic banking institutions to begin marketing their services. Umnia had been waiting for the committee’s approval as well as clarification on procedural matters.

BROADER EXPANSION: The creation of an Islamic banking sector is part of a wider national move to establish a sharia-compliant financial ecosystem. These include the scheduled launch of takaful (Islamic insurance) companies under a new insurance law passed in 2016, as well as plans for the kingdom’s first sovereign sukuk (Islamic bond). In December 2016 the government announced that this would be issued in the first half of the following year, but in June 2017 pushed the launch back to the following September. This too was delayed but the issue is expected to take place in 2018.

When it takes place the sukuk issue will provide Islamic banks and other financial institutions with investment opportunities, while also setting a benchmark rate for the issue of corporate sukuk, allowing sharia-compliant institutions to raise financing on Islamic debt markets. “Islamic banks still face the challenge of the absence of an Islamic banking ecosystem that would include sukuk, takaful, waqf (charitable trusts) or zakat (donations),” Issami told OBG. “Despite BAM having already granted licences to various Islamic banks, installation of the complete ecosystem will take another three years.”

Some players felt it was difficult to predict how popular Islamic banking would prove in Morocco. Asmaa Bennani, director of payment systems and financial inclusion at BAM, said that religious belief was unlikely by itself to fuel very widespread uptake. “When we undertook surveys on demand, we saw that religious convictions had an impact, in particular in terms of credit and borrowing, but not an enormous one, with around 10% of the population saying this would affect their decision,” she told OBG. “We also saw in other countries that when a new industry like this emerges religious conviction tends to drive a first wave of new customers, but that afterwards factors such as service and network size dictate whether customers stay with their bank.”

In June 2017 credit ratings agency Fitch said it believed that the launch of the segment could raise national bank deposits by between 5% and 10%, but that room for its development was limited by the already high banking penetration rate in the country.

PAYMENT INSTITUTIONS: Another change brought in by the law was the creation of a new category of non-bank payment institutions allowed to operate in the country. Three circulars implementing these aspects were published in March 2017, allowing BAM to launch the process of licensing such establishments. “The combination of the new payment institutions and the national financial inclusion strategy should lead to a major improvement in access to financial services,” Al Aissami told OBG.

The authorities have put in place a flexible graduated regulatory framework for the segment, with a range of minimum capital requirements. Institutions dealing only in money transfers will require minimum capital of Dh6m (€555,600), rising to Dh10m (€926,000) for those providing other services. The regulatory circulars state that the authorities will give institutions around six months to operate before equity requirements are imposed, and they will vary by institution, with higher requirements for those dealing in larger volumes of payments.

Customers will also be able to open three types of accounts at such institutions, with “know-your-customer” requirements varying: for accounts containing less than Dh200 (€19) customers will be obliged only to provide a phone number, while accounts holding up to Dh5000 (€463) will also require them to produce an ID card in person, as well as proof of address for accounts up to Dh20,000 (€1852).

Bennani said that around 10 actors had requested application dossiers for payment institution status. “There is a mix of institutions interested in obtaining the status, including, for example, telecoms operators wanting to establish mobile payment platforms, companies looking to provide e-commerce payment services and existing money transfer companies that want to expand their activities,” she told OBG.

The licensing process should take six to eight months, and BAM has four months to respond to a completed application. However, as many of these operators have not worked in banking or finance previously, work is expected to be needed to be done to enhance their understanding of the regulatory environment and the conditions they must meet.

The creation of such institutions would represent a complete overhaul for the payments segment of the Moroccan banking sector, potentially boosting both financial inclusion and reducing high levels of national cash usage, with positive consequences for the economy as a whole (see analysis). “Morocco is a cash-based economy, with around Dh1.5trn (€138.9bn) of cash in circulation, compared to around Dh600bn (€55.6bn) in bank accounts, and just managing this costs the country around 1% of GDP annually,” Bennani told OBG.

Given that the country has very high mobile penetration rates and advanced e-payment systems, there is an opportunity to use other forms of payments rather than cash transfers. Moreover, BAM conservatively forecasts that it can bring in 50,000 commercial outlets, 6m clients, Dh1bn (€92.6m) worth of transactions and Dh60bn (€5.56bn) worth of cash flow into the system through the new institutions within the first five years of their operation. “The ecosystem of payment institutions should become profitable within about three years,” Bennani told OBG, saying that BAM was very optimistic for the segment’s growth prospects.

In an overlapping effort to reduce cash circulation, BAM, the National Telecommunications Regulatory Agency, and a number of banks and telecoms operators have been discussing the potential establishment of a national low-cost mobile payment platform. A project team has been working to identify what kind of transfers could be captured by such a system, with small transfers between low-income nationals, purchases in small shops, some bill payments and mobile phone recharges initially the most likely candidates. The team is also seeking to identify the technological requirements and technical platforms that would need to be put in place or developed, and various other changes that would be needed to integrate existing payment solutions with mobile payments, among other tasks.

REGIONAL POWER: Morocco has emerged as a significant force in African banking over the last decade, particularly in francophone West African markets, where its three largest banks have been building up subsidiary networks.

BMCE Bank of Africa has the largest presence on the continent in terms of number of countries – and describes itself as the second-largest pan-African banking group by geographical coverage – through its 75% holding in pan-African banking group Bank of Africa, having first acquired a stake in the group in 2007. It has held a majority stake since 2010. The bank now has subsidiaries in 19 countries across the continent, not including Morocco, all but one of them in sub-Saharan Africa.

Attijariwafa Bank acquired the African units of France’s Crédit Agricole in 2008 and now has a presence in 13 countries on the continent, not including Morocco, including 11 in sub-Saharan Africa, where it has a network of some 476 branches (364 in West Africa and 112 in Central Africa).

In the latest move to expand its presence on the continent, in October 2016 the bank announced its intention to acquire the entirety of Barclays Egypt from UK bank Barclays; the deal was completed in May 2017. The Moroccan bank did not specify how much it had paid for the Egyptian unit, the national market share of which it aims to raise from 1.5% to 5% within five years, but said the price was equivalent to around twice the Egyptian institution’s book value. International financial media estimated the value of the deal at around $500m.

GBCP is the third Moroccan bank with a strong presence in sub-Saharan Africa. The bank developed on the continent primarily through its 2012 purchase of a majority stake in Banque Atlantique, which is active in eight states in West and Central Africa, a stake it raised to 75% in September 2016.

ROOM FOR GROWTH: Observers say that the African expansion strategy has been positive for the three major Moroccan banks as well as for the countries into which they have invested, though there are questions about how much further it can go.

“There is more room for growth in the countries Moroccan banks are moving into than at home, so the expansion strategy makes sense. Furthermore, banking competition is much lower in francophone West African markets than in southern or East Africa,” David Cowan, managing director and Africa economist at Citi, told OBG, saying that he hoped the trend would bring about greater financial depth in such countries. “The question is whether that provides Moroccan banks with a springboard to move into other sub-Saharan African markets, which are much more competitive. There will be opportunities in the near future for Moroccan institutions to enter markets such as Kenya and Uganda – where some local banks are in difficulty and from where some international institutions are showing signs of wanting to withdraw – and possibly also Angola and Nigeria, but such a move could also be risky.”

Tahri-Joutei told OBG that expansion into other parts of the continent was likely. “We don’t see the expansion of Moroccan banks into Africa slowing down, as there are still enormous opportunities, as demonstrated by Attijariwafa’s acquisition of Barclay’s Egypt,” he said, adding that BMCE Bank of Africa itself was still looking to expand, especially in southern Africa, and that the bank had made a strategic choice to focus on lending to SMEs in sub-Saharan Africa in particular.

While the three banks’ expansion drives have brought opportunities, they also entail risks. Ratings agency Fitch noted in July 2017 that while the banks’ African activities were helping to boost profits at the Moroccan institutions, they were also exposing them to greater credit and operational risks.

In February 2017 the IMF also described the sector’s expansion into the region as one of several sources of concern, noting that it “opens new channels of risk transmission” and that “riskier cross-border exposures now account for about 20% of their assets”. However, it also noted that the authorities were stepping up supervision of foreign subsidiaries and cooperating closely with their regulatory counterparts in African countries on such risks.

Tahri-Joutei said that institutions from the kingdom benefitted from a lack of exposure to some regional risks. “Moroccan banks do not have a large presence in hydrocarbons-reliant countries, with no lenders in Nigeria for example, so are less exposed to exogenous shocks,” he told OBG.

However, one challenge for the sector would be the move towards Basel III standards among African countries. “Moroccan banks will need to find funds to meet Basel III requirements in sub-Saharan countries in which they are present,” Tahri-Joutei said, adding that Morocco itself was also moving towards the standard, but that this would be easier to meet as many banks already exceed the rules’ main requirements. “Moroccan capital markets are also better developed so it is easier, for example, to issue subordinated debt here.”

NON-BANK LENDING: There are 34 financing firms operating in the country, including 16 specialised consumer credit providers, six leasing companies and two real estate lenders. As with the banking sector, the industry is quite concentrated, with the three largest firms accounting for 62% of consumer credit lending, according to BAM. The segment’s NPL ratio stood at 9.5% in June 2016, with a rate of 11.4% for consumer finance firms and 8.7% at leasing firms, higher than in the banking sector as a whole.

OUTLOOK: The future development of Morocco’s banking sector will depend to a large extent on the uptake of Islamic banking services and of those provided by the new payment institutions to be established under the 2015 banking law. Additionally, ongoing regulatory reforms should further strengthen the stability of the country’s financial system, and the recent recovery in bank lending and a slowdown in the rise of NPLs both bode well for sustainable growth across the sector as a whole.

Meanwhile, the continued expansion in sub-Saharan Africa – particularly in francophone West Africa – by Moroccan banks should see an increase in profits at major institutions in the coming years.