Egypt as a microcosm of debate in Islamic finance

Reuters has an illuminating analysis of the questions facing the Egyptian government over how Islamic finance is regulated in the country.  The analysis compares the options facing the government in Egypt in terms of how other countries regulate their Islamic financial industry.  For example, the article describes the following dichotomies:

• Should Islamic banks be allowed to operate Islamic windows or should they be required to open Islamic banking subsidiaries?
• Should sukuk be allowed to be issued using an asset-based structure, or should they be required to be asset-backed?
• Should Shari'ah boards be allowed to operate on an institution-by-institution basis or should there be a national Shari'ah board (or use a lighter-touch approach used in Indonesia, which may be more suitable for Egypt according to Shari'ah scholar Mohammed Daud Bakar). 

As much as the debate between the pragmatic and the ideological may slow the development of more Islamic finance in Egypt, it also highlights some of the overarching debates within Islamic finance.  For example, Qatar (a financial supporter of Egypt's government) required the closing of Islamic windows at conventional banks citing, among other issues, the potential for leakage between the Islamic and conventional sides of banks that offer both types of banking [1]. 

By allowing Islamic windows, Islamic finance can benefit from the entry into the market of international banks that have larger balance sheets and can bring greater resources to bear on developing new Islamic financial products.  The flip side is that it may hamper development of solely Islamic banks, and may lead to the adoption of a mindset that favors developing Shari'ah-compliant of conventional products (however, solely Islamic banks may also have the same mindset due to either regulation or the reliance on management with experience in conventional banking). 

These discussions are healthy and should lead to more analysis of the industry as a whole.  There are enough different institutional forms in use across the globe for the costs and benefits to be weighted.  There is no "right" answer--each country may find one form or another more beneficial--but the debate should be encouraged and should be backed up by rigorous analysis comparing different institutional forms. 

[1] I have written a number of posts about the Qatar Central Bank directive:

• QCB announces directive
• Additional commentary on QCB announcing directive
• QCB directive leads banks with Islamic windows to sell retail banking units
• Unintended consequences of the QCB directive
• IMF Article IV report on Qatar addresses the QCB directive