Bridging Islamic Finance and Sustainability through Fintech: Focus on The Maghreb Countries Report

Transcription

1. ALMAALI G R O U P ‫ﻣــﺠــﻤــﻮﻋــــﺔ اﻟــــﻤــــﻌـــﺎﻟـــــﻲ‬ INSTITUT ISLAMIQUE DE RECHERCHE ET DE FORMATION MEMBRE DU GROUPE DE LA BANQUE ISLAMIQUE DE DEVELOPPEMENT BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS ON THE MAGHREB COUNTRIES
2. Copyright © Islamic Research and Training Institute, Islamic Development Bank, 2021 Rights and Permissions This work is available under the Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) http://creativecommons.org/ licenses/by/3.0/igo. Under the Creative Commons Attribution license, you are free to copy, distribute, transmit, and adapt this work, including for commercial purposes, with proper attribution. Citation Islamic Research and Training Institute, IsDB & Al Maali Group (2021). Bridging Islamic Finance and Sustainability through Fintech: Focus on the Maghreb Countries. Jeddah, Saudi Arabia. All queries should be addressed to the Islamic Research and Training Institute, Islamic Development Bank Group, 8111 King Khalid Street Al Nuzlah Al Yamaniyah District, Unit #1 Jeddah 2444-22332, Kingdom of Saudi Arabia. Bridging Islamic Finance and Sustainability through Fintech: Focus on the Maghreb Countries L.D. No. 1442/6401 e-ISBN: 978-603-8306-07-9 961,332 dc 1442/6401 DISCLAIMER This work is produced by the staff of the Islamic Research and Training Institute (IRTI) with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of IRTI or IsDB, or IsDB Board of Executive Directors. IRTI does not guarantee the accuracy of the data included in this report, the content of which is intended to provide general information only. The report as such should not be considered as legal or professional advice.
3. FOREWORD There is a growing realization that for finance to serve economic development it needs to be seamlessly integrated with productive , wealth-creating activities. Further, it needs to reflect moral values enhancing principles for good and sustainable outcomes. However, these features are not expressed fully in the present-day financial system. Islamic finance that raised the banner to achieve these results, relying on its high principles, is still striving to make an impact when operating amid the conventional regulatory system and the entrenched debt culture. In this scenario, technological advances have opened new avenues for Islamic finance to achieve its objectives with more ease. Useful innovations have become possible through rich and big data, artificial intelligence, and distributed ledger technologies. This is an area for prospective and intensive research. The Islamic Research and Training Institute (IRTI) is moving in this direction to make finance more useful by applying Islamic principles of finance together with new technologies to address economic development and sustainability challenges. We understand that at present there is an overemphasis in Islamic banking on collateral and warrantees to provide finance. However, collateral and guarantees were the innovations of the past that developed the financial system to bring it to today’s level. Now we need new methods to further develop the financial system for its usefulness to the economy and to retain sustainability. Several recent reports, research papers and innovative projects of IRTI are now aligned to this end. The present report “Bridging Islamic Finance and Sustainability through Fintech—Focus on Maghreb Countries” is part of this effort. It focuses on how to leverage fintech in Islamic banking for linking finance to sustainable development. These are lofty goals when there exist vast variations among countries in their preparedness for the use of fintech and financial innovations towards sustainable development in general. The report tries to strike a balance between the reality and the ideal. It advocates the use of technology in Islamic finance for its efficiency and greater impact on sustainable economic development. The report was prepared by a team comprising researchers from IRTI, led by Dr. Salman Syed Ali, and researchers from Al Maali Group, led by Dr. Wail Aaminou. Support from regional experts and practitioners who contributed through focus group discussions and interviews enriched the contents. Their names appear in the acknowledgement section. We hope that this report, its surveys, the case experiences, and the recommendations will be useful for the policy makers of financial sector, technology, and regulation; and the practitioners working in the Islamic banking industry in general, and for the Maghreb region in particular. We invite our readers to share their feedback on how to further enhance the value of the report to the research community and the decision makers. Sami Al-Suwailem Acting Director General, IRTI
4. EDITORIAL The Covid-19 pandemic has had devastating effects on the Maghreb region with a massive contraction of global GDP and a degradation of social indicators including health , education, unemployment, and inequality. These effects have wiped out many achievements made during the last decade. Building back in the post-covid era and keeping SDGs on track requires strong involvement not only from governments but also from the private sector, especially financial institutions. Participative (Islamic) finance should naturally take part in this process given the centrality of ethics in their core value proposition. This report sheds light on the role of participating financial institutions in closing the financing gap for SDGs in the Maghreb region. It focuses on leveraging fintech to align participative finance and sustainable development. I believe that the present report provides a valuable contribution to regulators, financial institutions, non-profit organizations as well as fintech companies in the Maghreb region on how to create synergies and setup ecosystems that support doing well while doing good. Wail AAMINOU CEO, ALMAALI GROUP
5. ACKNOWLEDGEMENT This report was co-authored by Al Maali Group and IRTI . From Al Maali Group, the primary authors were WAIL M. AAMINOU, AHMED TAHIRI JOUTI, FADWA CHAKER and HOUSSAM AYAOU supported by ANAS HOUZALI, ABDELILAH MORTAJI and CHAYMAA TALAAT IDRISSI. From IRTI, the primary authors and theme developers were SALMAN SYED ALI supported by HILAL M. HUSSAIN and RAMI ABDUL KAFI. We also would like to extend our appreciation to the following experts who participated in the interviews and provided valuable insights on topics of fintech and sustainable development in the context of Maghreb Islamic Financial Institutions: • Mr. MAHFOUDH BAROUNI, FORMER CEO OF ZITOUNA BANK AND BOARD MEMBER IN SEVERAL IFIs in TUNISIA • Dr. SAID BOUHERAOUA, DIRECTOR OF RESEARCH AFFAIRS DEPARTMENT AT ISRA AND ADVISOR TO SEVERAL IFIs • Mr. FOUAD HARRAZE, FORMER CEO OF AL AKHDAR BANK, MOROCCO • Mr. ANAS HASNAOUI, INTERNATIONAL EXPERT IN ECONOMIC EMPOWERMENT AND ISLAMIC SOCIAL FINANCE • Mr. NASSER HIDEUR, CEO OF AL SALAM BANK, ALGERIA • Mr. MOHAMED MAAROUF, FORMER CEO OF BTI BANK, MOROCCO • Mr. HAMID RASHID, CEO OF FINTERRA As Al Maali Group and IRTI retained editorial control over the report, the participation of these experts should not be viewed as an endorsement of all messages in the report.
6. CONTENTS 03 FOREWORD 05 ACKNOWLEDGEMENT 09 EXECUTIVE SUMMARY  13 INTRODUCTION 24 SUSTAINABLE DEVELOPMENT IN MAGHREB REGION 47 SUSTAINABILITY INTEGRATION IN THE BUSINESS MODELS OF MAGHREB ISLAMIC FINANCIAL INSTITUTIONS 1. About Sustainable Development 2. About Fintech 3. The need to bridge Islamic finance and sustainability through Fintech 4. Purpose and target audience of the report 5. Structure of the report 14 17 19 20 23 1. Maghreb Countries’ Commitment to the sustainable development 1.1. Morocco 1.2. Tunisia 1.3. Algeria 26 26 28 30 2. Achievement of the SDGs in the Maghreb Countries 2.1. Thematic Assessment – SDG 1: No Poverty 2.2. Thematic Assessment – SDG 3: Good Health 2.3. Thematic Assessment – SDG 4: Quality Education 2.4. Thematic Assessment – SDG 8: Decent Work and Economic Growth 33 35 37 39 41 3. The Impact of Covid-19 on Achieving the SDGs in the Maghreb Region 43 Conclusion 46 1. General overview of Islamic and Social Finance in the Maghreb countries 1.1. Islamic Banking 1.2. Takaful 1.3. Islamic Capital Markets (ICM) 1.4. Social finance in the Maghreb 48 48 57 58 58 2. The rationale behind the integration between the Islamic Financial sector and Sustainable Development in the Maghreb countries 62 3. Sustainability integration in Maghreb Islamic Financial Institutions 64 Conclusion 67
7. 68 FINTECH LANDSCAPE IN MAGHREB REGION 88 LEVERAGING FINTECH FOR SUSTAINABLE DEVELOPMENT : A SELECTION OF INTERNATIONAL EXPERIENCES 1. The Maghreb Fintech Paradox 1.1. Drivers of Fintech emergence in Maghreb 1.1.1. Young population 1.1.2. Digitally oriented population 1.1.3. Relatively low financial inclusion 1.1.4. High level of remittances with high transfer costs 1.2. Factors precluding Fintech emergence in Maghreb 1.2.1. Internet quality and availability 1.2.2. Preference for cash 1.2.3. Structure of financial markets 1.2.4. Legal and regulatory framework 69 69 69 70 71 72 72 74 75 76 77 2. Zoom on the Fintech legal and regulatory environment in Maghreb 22.1. Payments 2.2. Digital signature 2.3. Crowdfunding 2.4. Cryptocurrencies 2.5. Fintech Sandboxes 2.6. Start-ups 79 79 80 81 82 82 83 3. A selection of Fintech experiences in the Maghreb region 84 4. Conclusion 87 1. Poverty and Fragility (SDG1) 2. Zero Hunger (SDG2) 3. Good health and wellbeing (SDG3) 4. Quality education (SDG4) 5. Clean water and sanitation (SDG6) 6. Affordable and clean energy (SDG7) 7. Climate change mitigation (SDG13) 8. Conclusion 91 97 98 100 102 103 104 105 Introduction 107 Policy intervention 1: Completing the existing legal and regulatory framework 108 106 UNLEASHING FINTECH FOR SUSTAINABLE DEVELOPMENT IN MAGHREB: RECOMMENDATIONS Policy intervention 2: Regulatory sandboxes 1. Policy presentation 2. Policy objectives 3. Policy implementation process 4. Policy challenges 109 109 109 110 110 Policy intervention 3: Innovation labs / accelerators 1. Policy presentation 2. Policy objectives 3. Policy Implementation process 4. Policy challenges 111 111 111 112 112 Policy intervention 4: Developing a taxonomy related to green and social finance 1. Policy presentation 2. Policy objectives 3. Policy Implementation process 4. Policy challenges 113 113 113 114 114
8. Policy intervention 5 : Capacity and skill building 1. Policy presentation 2. Policy objectives 3. Policy Implementation process 4. Policy challenges 115 115 115 116 116 Policy intervention 6: Financial and technical literacy for consumers 1. Policy presentation 2. Policy objectives 3. Policy Implementation process 4. Policy challenges 117 117 117 118 118 Policy intervention 7: Open banking policies 1. Policy presentation 2. Policy objectives 3. Policy Implementation process 4. Policy challenges 119 119 119 120 120 Conclusion 120 121 APPENDICES 122 APPENDIX A: PROGRESSIVE APPROACH IN ADVANCING VBI IMPLEMENTATION (BANK NEGARA MALAYSIA) 123 APPENDIX B: PRESENTING A SELECTION OF THE MOBILE NETWORK EXPERIENCE METRICS 124 APPENDIX C: LINKING FINANCIAL INCLUSION TO SDG TARGETS 125 APPENDIX D: KEY TAKEAWAYS FROM INTERVIEWS WITH EXPERTS (IN ALPHABETICAL ORDER) 133 ENDNOTES
9. EXECUTIVE SUMMARY BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 9
10. The main policy problem this report addresses concerns the low contribution of Islamic Financial Institutions (IFIs) to social, economic and environmental development in the Maghreb region both quantitatively and qualitatively. This problem is rooted in a number of causes and subcauses ranging from scalability and regulation to governance and innovation. To address this problem, the present report points out the integration of social, environmental and economic development into the business models of IFIs through fintech as a key leverage point. Since 2016, Morocco, Tunisia and Algeria have defined road maps for achieving the SDGs through nationwide strategies and crosssectorial programs. However, results thus far have shown a significant overall deficiency in meeting the sustainability challenges in all three countries. Except for SDG 1 (No Poverty) that has been fully met by Algeria, all remaining SDGs fall under the expected achievement levels by the three countries in relatively similar patterns. The lowest performances are found with respect to Gender Equality (SDG 5), Affordable and Clean Energy (SDG 7) and Decent Work and Economic Growth (SDG 8). The three countries are either stagnating or improving on these SDGs. Indeed, significant challenges are predominantly present in 10 out of the 17 SDGs with overall improving patterns whereby the most promising efforts are observed for Good Health and Well-being (SDG 3), Clean Water and Sanitation (SDG 6), and Industry, Innovation and Infrastructure (SDG 9). Challenges remain for the three countries with respect to reducing inequalities (SDG 10), with Morocco and Tunisia particularly faced with reducing poverty (SDG 1) and fostering responsible consumption and production (SDG 12). from Qard Hassan and energy conservation to Zakat payment and charity support. Yet, on average, these institutions’ social and environmental initiatives have been below customers’ expectations. Furthermore, IFIs underperform their conventional counterparts with low levels of disclosures on ethics and sustainability. The Covid-19 pandemic will inherently exacerbate the already vulnerable Maghreb economies, leading these countries to largely miss their sustainable development targets unless policies are improved, international cooperation strengthened, and resources to finance investments mobilized. IFIs have the legitimacy to play a leading role in reconciling finance and sustainability under a unique value proposition given the centrality of ethics in the Islamic Finance paradigm, the integration potential of Islamic Finance operations into the real economy, the possible synergies with Awqaf (Islamic endowment funds) and Zakat institutions (compulsory charity funds), customers positive attitudes with regard to sustainability front and finally, the need to build a value proposition that goes beyond “Shari’ah compliance”. Focusing on the marginal expansion of government services will not be enough to achieve the SDGs. In this context, the integration of sustainability models into Islamic financial institutions strategies will be critical to help mitigate the impact of the crisis and build more resilient economies and societies. Although Islamic finance has been present in the Maghreb since the 1990’s, the development of this industry started only in the 2010’s. From a competitive advantage standpoint, Islamic Financial Institutions rely mainly on debtbased instruments, perceived as similar to conventional financial products, and usually lack economies of scale to enable pricing differentiation. As a result, the value proposition of IFIs remains centered around Shari’ah compliance. On the sustainability side, many IFIs in the region undertake several social initiatives ranging Fintechs are interesting levers that facilitate the transition from “business as usual” to more advanced stages in IFIs’ sustainability journey. Indeed, Fintechs support operational excellence, foster product innovation and offer the possibility to radically transform the customer experience. There are multiple examples of fintech companies initiated by public, private and nonprofit organizations aimed at addressing sustainability challenges. These experiences highlight the role of Fintech in lowering the cost of transactions, improving efficiency and fostering innovation in order to build a value proposition that reconcile financial profit and impact imperatives. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 10
11. While most of the featured fintech initiatives in this report are operating in conventional finance , these experiences provide valuable insights that can be leveraged in the context of Islamic finance. Unfortunately, The Maghreb region is among the least developed regions despite the popularity of the topic and supporting environmental factors such as a young and digitally oriented population, a relatively low level of financial inclusion and a high level of remittances with high transfer costs. Current Fintech initiatives focus primarily on payments and crowdfunding and many companies operate outside the legal and regulatory framework. Constraints for the emergence of fintech in Maghreb include Internet quality & availability, the preference for cash, shallow capital markets and the limited Fintech legal and regulatory framework. This report proposes seven policy recommendations to use Fintechs as a key leverage point to achieve the global SDG agenda in the Maghreb region. They are: 1. Complete the existing legal and regulatory framework of the Maghreb countries as an essential step before engaging in more complex and elaborate policies; 2. Set up regulatory sandboxes as major programs in order to allow the testing of new financial services in a safe environment; 3. Initiate Innovation labs and accelerators to provide the necessary support and guidance for Fintech companies; 4. Develop a taxonomy related to green and social finance as a necessary tool in the objective of unifying the use of this field terms and avoiding confusion across market participants; 5. Upgrade the skill set and know-how of regulators’ and stakeholders’ workforce through capacity building in this rapidly evolving technology environment; 6. Reinforce the financial and technical literacy of consumers towards rendering the use of Fintech services by end users easy, efficient, and cost-effective, thus positively impacting financial inclusion; 7. Put in place open banking policies that target sharing data with third-party developers, which fosters innovation in the provision of digital financial services. Fintechs are interesting levers that facilitate the transition from “business as usual” to more advanced stages in IFIs’ sustainability journey. Applying these recommendations will help establish public strategies that foster Fintech innovation and create appropriate conditions for the success of local Fintech companies. These recommendations are also meant to reduce Fintech related costs, to strengthen customer protection, and to improve financial inclusion. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 11
12. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 12
13. INTRODUCTION BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 13
14. 1 . About Sustainable Development The humanity faces today many pressing challenges. In fact, with a world population of over 7 billion growing by 75 million annually, economic inequality has never been greater1. To illustrate, at least 1 billion people now live below the poverty line with problems of access to health care, insufficient food and unsanitary housing conditions. From a climate change perspective, the effect of extreme natural disasters equates to an annual loss of US$520 billion and creates 26 million new poor people each year according to IFC (World Bank)2. In response to this critical situation, the international community adopted in 2015 a set of goals to end poverty, protect the planet and ensure prosperity for all as part of a new sustainable development agenda. Each objective is broken down into specific indicators (169 in total) to be achieved over 15 years3. SDGs are, today, the universal framework when dealing with sustainable development. The following table shows the selected Sustainable Development Goals (SDGs)4 : SDG Details 1: No poverty End poverty in all its forms everywhere 2: Zero hunger End hunger, promote sustainable agriculture, achieve food security and improved nutrition 3: Good health and well-being for people Ensure healthy lives and promote well-being for all at all ages 4: Quality education Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all 5: Gender equality Achieve gender equality and empower all women and girls 6: Clean water and sanitation Ensure availability and sustainable management of water and sanitation for all 7: Affordable and clean energy Ensure access to affordable, reliable, sustainable and modern energy for all 8: Decent work and economic growth Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all 9: Industry, Innovation, and Infrastructure Build resilient infrastructure, promote inclusive and sustainable industrialization, and foster innovation 10: Reducing inequalities Reduce income inequality within and among countries 11: Sustainable cities and communities Make cities and human settlements inclusive, safe, resilient, and sustainable 12: Responsible consumption and production Ensure sustainable consumption and production patterns 13: Climate action Take urgent action to combat climate change and its impacts by regulating emissions and promoting developments in renewable energy 14: Life below water Conserve and sustainably use the oceans, seas and marine resources for sustainable development 15: Life on land Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification, and halt and reverse land degradation and halt biodiversity loss BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 14
15. 16 : Peace, justice and strong institutions Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels 17: Partnerships for the goals Strengthen the means of implementation and revitalize the global partnership for sustainable development. Table 1: Sustainable Development Goals (Description) Figure 1: Sustainable Development Goals (Icons) BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 15
16. In Brief : Impact of Covid-19 on the fight against poverty Covid-19 crisis is likely to reverse decades of progress in the fight against poverty and to exacerbate inequalities and pre-existing socioeconomic fragilities, which threatens the stability of many regions especially in lowand middle-income countries. To illustrate, hours worked dropped by 20 percent between April and June 2020 compared to the same period in 2019. Remittances are expected to decline by 20 percent by the end of 2020 and finally, estimates indicate a reduction of global economic growth to a rate of -4.5 percent to -6.0 percent in 2020. Figure 2: Impact of Covid19 on the fight against poverty 5 6 7 To achieve the aforementioned Sustainable Development Goals (SDGs) by 2030, countries need to develop roadmaps to meet the commitments made. In view of current trends, countries will largely miss the targets if policies are not improved, if international cooperation is not strengthened, and if the public and private financial resources necessary to finance investments are not mobilized. Focusing on the marginal expansion of government services will not be enough to achieve the SDGs8. Thus, according to the "Sustainable Development Solutions Network"9, which operates under the auspices of the Secretary General of the United Nations, 1.5 to 2.5 percent of global GDP per year may be needed to finance the achievement of the SDGs in all countries. More specifically, low- and middleincome countries (LMICs) would need to increase public and private spending by some US$400 billion per year to reach the SDGs. This corresponds to 4 percent of LMICs’ GDP in purchasing power parity and to 11.5 percent of LMICs’ GDP in Dollars. For its part, the "World Wildlife Fund" (WWF)10 estimates that to limit the increase in global temperature to 2° C (or even 1.5° C) and to adapt to climate change impacts, a transformation of world development patterns is necessary to move towards a more sustainable and resilient economy. An estimated annual investment of around $ 2 trillion over the next 15 years would be needed to transform world energy system, preserve ecosystems and ensure sustainable water use! BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 16
17. 2 . About Fintech Addressing the above sustainability financing challenges has to take place in a world governed by the influential trends of the fourth industrial revolution, which has been enabled by modern technology advances at the crossroads of the physical, digital and biological worlds11. Fintech companies exemplify such a mutation in financial markets. According to HKEX, the Hong Kong Exchanges and Clearing Company12, Financial technology, or Fintech, refers to “financial innovations driven by technological advancement in the forms of new business models, new financial services, and new software and applications that have a great impact on the provision of financial services and the development of the financial industry”. CIBAFI proposes a slightly different definition by including in Fintech “everything from high-speed algorithmic trading in financial markets to delivery of small-scale payment services through smartphones. Some Fintech activities involve new business models, for example peer-to-peer lending, while others involve improving the efficiency and effectiveness of existing business models, for example the use of distributed ledger technology to improve back-office recordkeeping”13 These definitions are not restricted to start-ups or new entrants; they include scale-ups, maturing companies, and even non-pure finance companies such as telecommunication providers and e-retailers. The rise of Fintech is underpinned not only by recent technological developments in blockchain (distributed ledger), mobile technologies or artificial intelligence but also by the emergence of the “service now” mentality and the crowdsourcing of information and solutions14. While acknowledging that there is no commonly accepted taxonomy for Fintech innovations, the Financial Stability Institute of the Bank for International Settlement15 categorizes the Fintech ecosystem into the following categories: Fintech activities • Deposits and lending • Capital raising • Asset Management • Payments, clearing and settlements • Insurtech • Crypto assets Enabling technologies • API • Cloud • Biometrics • DLT • AI & ML Policy enablers • Digital ID • Open Banking • Data protection • Innovation facilitators • Cyber security Figure 3: The fintech ecosystem BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 17
18. Policy enablers Details Digital ID Secures remote identification and authentication of a person ’s identity via a digital channel Open banking Accessing and sharing customer information from banks with third-party firms to build innovative applications and services for customers Data protection Frameworks/strategies for data protection Innovation facilitators Three main types: Innovation hubs, regulatory sandboxes and accelerators. Cyber security Framework that facilitates mitigation of cyber risk and effective response to and recovery from cyber attacks Table 2: Policy enablers details Enabling technologies Details API Application Programming Interfaces Cloud Cloud computing Biometrics Biometric-Based Identification and Authentication DLT Distributed Ledger Technology AI & ML Artificial intelligence and machine learning Table 3: Enabling technologies details Fintech activities Details Deposits and lending • Digital banking • Fintech balance sheet lending (do not raise funds from the “crowd” but rely on other sources, such as own capital or debt issuance) • Loan crowdfunding (Internet based platforms) providing funding from the “crowd” to private companies in the form of debt Capital raising Equity crowdfunding (Internet based platforms) providing funding from the “crowd” to private companies in the form of equity Asset Management Robo advice on investment products using algorithm-based tools Payments, clearing and settlements • E-money services: a fixed value claim on its issuer (e-money provider) that guarantees redemption at a pre-established face value denominated in fiat currency • Digital payment services: make use of technology to facilitate payment transactions Insurtech Covers the use of digital technologies as well as the new business models that have the potential to transform the insurance business Crypto assets Financial activities related to crypto assets Table 4: Fintech activities details BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 18
19. 3 . The need to bridge Islamic finance and sustainability through Fintech From a competitive advantage standpoint, Islamic Financial Institutions rely heavily on debtbased instruments, perceived as similar to conventional financial products and usually lack economies of scale to enable pricing differentiation. As a result, Islamic Financial Institutions value proposition remains centered around Shari’ah compliance, which is insufficient to attract non-religious customers. On the sustainability side, many IFIs undertake several social initiatives ranging from Qard Hassan and energy conservation to Zakat payment and charities support. Yet, on average, these institutions’ social and environmental initiatives have been below customers’ expectations. Furthermore, Islamic Financial Institutions underperform their conventional counterparts with low levels of disclosures on ethics and sustainability. Islamic Finance has the legitimacy to lead the impact finance industry and to bring new perspectives into responsible finance. First, Islamic Finance is already established in most OIC countries and as such can address the immense economic, social and environmental challenges faced by these countries especially in the context of Covid19 crisis. Second, the ethical perspective is natively built into the DNA of Islamic Finance. Third, Islamic Finance business model is inherently embedded into the real economy and can be easily integrated into different sectorial ecosystems. Fourth, Awqaf (Islamic endowment funds) and Zakat institutions (compulsory charity funds) have the necessary levers to channel capital to “below-market return” projects through subsidizing or guaranteeing schemes. Fifth, customers are expecting Islamic finance institutions to be very active on the social front16 17 and finally, impact finance can provide Islamic Financial Institutions with a competitive advantage beyond “Shari’ah compliance” value proposition. Despite the abundant literature on the fit between sustainable development and Islamic Finance as well as some successful impact finance initiatives especially in South East Asia, the market has not yet seen the potential of Islamic Finance industry in driving sustainable development with positive environmental, social and governance outcomes. If the Islamic Finance industry is to embed sustainability into its core business models, then investment in financial technology (Fintech) is an important lever to consider. Fintech today provides, tremendous opportunities that were not possible in the past. Today, technology (smartphones, Peer-to-Peer platforms, Blockchain, artificial intelligence…) offers various possibilities to make financial services affordable, scalable, customizable and effective. Although Fintech startups operating in the Islamic Finance sphere are relatively small in scale, they are growing and developing rapidly18. In 2018, there were only 93 Islamic Fintech startups globally, of which 65 and 15 companies had a focus on Peer-to-Peer finance and wealth management respectively19. In 2017, “Innovate Finance” identified only 103 Islamic Fintech companies across 24 countries20. Therefore, Islamic Fintech represents a tiny proportion of the massive amounts raised globally in the Fintech industry. Total Fintech start-ups valuation in the Middle East and North Africa, for instance, was only US$66.6 million as of December 2017. However, the Fintech market across the MENA region can grow to US$2.5 billion by 202221. As far as Islamic Banks are concerned, Mobile Banking and payments have the highest level of Fintech implementation. Inversely, cryptocurrencies, other uses of Distributed Ledger Technologies (DLT) and robo-advisory have the lowest implementation levels22. As far as sustainability is concerned, several Islamic Fintech business models address social and environment issues. For instance, in Donationbased Crowdfunding, the Global Sadaqah platform matches Sadaqah, Zakat and Waqf donors with credible charity partners internationally23. In investmentbased Crowdfunding, Ethis Crowd’s platform allows to invest directly in real estate development and construction projects, with a special focus on social housing in Indonesia24. In Blockchain, Finterra provides a blockchain ecosystem to improve the performance and efficacy of Waqf management25. Despite these achievements, Islamic Fintech have only scratched the surface of tackling sustainability issues so far. There remains substantial room for progress by scaling and diversifying existing initiatives centered on Peer-to-Peer finance and leveraging other Fintech verticals such as cryptocurrencies and artificial intelligence in sustainable development. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 19
20. 4 . Purpose and target audience of the report The main problem that the report addresses is the low contribution of IFIs to social, economic and environmental development in the Maghreb region both quantitatively and qualitatively. This problem stems from many causes and sub-causes as indicated in the following fishbone (Ishikawa) diagram, which provides a useful tool to graphically visualize this problem diagnosis. Lack of innovation • Limited corporate social responsability initiatives • Embedding social, environemental & economic development into IFIs business models Non alignment of IFIs governance with sustainability Lack of scale • Low capital • Retail focus • Limited customers’ base Islamic Finance ecosystem under construction • Incorporating the ethical perspective into sharia decisions (substance vs form) • Uncomplete or inadequate regulations • Sustainability as a core value • Lack of national IF strategies IFIs low contribution to social, economic and environmental development in the Maghreb region • Tax neutrality issues • Adoption of innovative digital technologies (fintech) Figure 4: Fishbone diagram BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 20
21. Causes – Sub-causes Details Lack of scale Low capital Because IFIs are young, their capital is low compared to their conventional counterparts Retail focus IFIs mostly serve retail customers and have a limited exposure to corporate clients and institutional investors Marginal market share IFIs have a marginal market share compared to conventional finance institutions Lack of innovation Limited corporate social responsibility (CSR) initiatives Although IFIs undertake CSR initiatives, they remain limited in size and scope Embedding social, environmental & economic development in IFIs business models Most IFIs haven’t embedded social, environmental & economic development into their operations and value proposition Adoption of innovative digital technologies (fintech) IFIs adoption of innovative fintech initiatives remains at best limited Unsupportive legal & regulatory environment Uncomplete or inadequate regulations For a long period, many IFIs in Maghreb operated in the absence of a dedicated and appropriate regulatory environment. Today many key regulations (products, governance, solvency…) are still under preparation Tax neutrality issues The absence of full tax neutrality covering all cases has hindered the development of Islamic finance in the region Lack of national IF strategies The Maghreb countries lack national strategies for Islamic finance with clear targets and a consolidated road map addressing the entire IF ecosystem (banking, insurance, capital markets and social finance) Non alignment of IFIs governance with sustainability Incorporating the ethical perspective into Shari’ah decisions (substance vs form) Ethics should be integrated into Shari’ah rulings. In practice, based on existing Shari’ah guidelines, nothing prevents IFIs from financing projects with negative social or environmental externalities Sustainability as a core value When sustainability is set a core value in the IFI mission statement, it should cascade across all the corporate governance system Table 5: Fishbone diagram explanatory note BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 21
22. The fishbone diagram enables the breaking down of the stated problem into manageable issue areas that can be directly addressed by specific policy interventions . In the present report, we chose to focus on the following sub-causes: •Embedding social, environmental & economic development into IFIs business models •Adoption of innovative digital technologies (fintech) The report discusses the relationship between sustainability and Islamic Finance through the information technology perspective. More specifically, the report surveys sustainability challenges in the Maghreb countries and the role Islamic Finance should play in this context (large gap as of today). The report, lastly, analyzes global Fintech experiences in sustainability and makes recommendations to unleash the potential of Fintech in the context of Islamic Finance in the Maghreb region. It is expected that the decision makers at Islamic Financial Institutions (banking, insurance, capital markets and social finance) and in Fintech companies as well as regulators in the Maghreb region will find the report useful. IF institutions in the region are relatively young. Most of them struggle to clarify their competitive advantage beyond Shari‘ah compliance and face a stiff competition from conventional finance. The report’s ambition is to trigger a strategic shift in the Islamic Finance and Fintech industry through their active involvement in the realization of SDGs by leveraging Fintech. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 22
23. 5 . Structure of the report The key questions addressed by the report are summarized in the following storyline: The Maghreb region faces acute issues in sustainable development especially in the current Covid-19 context Why does it make sense for IFIs in the region to align their business models with sustainability ? Why haven’t IFIs adopted such a strategy so far ? (Causes) Why Fintech is an important leverage point to address sustainability issues ? What experiences have been successful internationally in leveraging Fintech for sustainability ? What is the assessment of the Fintech experience in the region ? What policy recommendations can be proposed in this regard ? Figure 5: The report’s storyline The present report is structured as follows: Section 1 discusses policies and assessment of SDGs implementation in the Maghreb countries followed by Section 2, which assesses the integration of sustainability in the business model of Maghreb Islamic Financial Institutions. In Section 3, the report explores the Fintech landscape in the Maghreb region, then International best practices to leverage Fintech for sustainable development are surveyed in Section 4. Finally, the report proposes recommendations to unleash the potential of Fintech for sustainable development in the Maghreb in Section 5. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 23
24. SUSTAINABLE DEVELOPMENT IN THE MAGHREB REGION Policies and Assessment of Implementation of the SDGs BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 24
25. Focus : Key Insights SDG 1: No Poverty • Morocco, Algeria and Tunisia have set ambitious national sustainable development strategies in line with the global 2030 SDG Agenda SDG 3: Good Health and Well-Being • As of 2019, most SDGs were not on track. Variations exist across countries and many indicators are improving SDG 4: Quality Education • The Maghreb countries face persistent challenges in achieving most targets on Poverty (SDG 1), Health care (SDG3), Education (SDG4), and Decent Work and Economic Growth (SDG 8) SDG 8: Decent Work and Economic Growth • The repercussions of the Covid-19 pandemic will exacerbate the already vulnerable Maghreb economies • Integrating sustainability imperatives in financial institutions’ economic models can help mitigate the impact of the crisis and build more sustainable and resilient economies African countries have committed to the United Nations 2030 Agenda for achieving the 17 Sustainable Development Goals (SDGs). In 2019, the Maghreb countries were chief continental leaders26 of SDGs implementation with a steady march towards achieving the goals. Since 2016, Morocco, Tunisia and Algeria have defined clear strategic maps for achieving the SDGs through nationwide strategies and cross-sectorial programs. CABO VERDE SOUTH SUDAN SÃO TOMÉ AND PRÍNCIPE REP. OF CONGO CONTINENTAL LEADER GROWING MOZAMBIQUE MIDDLE OF THE PACK MALAWI EMERGING DISTRESSED ESWATINI LESOTHO Source: 2019 Africa SDG Index and Dashboards Report BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 25
26. 1 . The Maghreb Countries’ Commitment to the sustainable development Selection of the most important programs and initiatives undertaken by Morocco over the past twenty-five years to achieve social, ecological and economic well-being. 1.1. Morocco Morocco is one of the leading African countries in the achievement of the SDGs. The Kingdom has adopted the concept of sustainable development in accordance with the main international and regional conventions it has signed and ratified (e.g., the Rio Summit in 1992, the Johannesburg Summit in 2002 and the Paris Agreement in 2015). To enable the successful materialization of these commitments, Morocco has gradually laid the foundations for sustainable and inclusive growth through a succession of institutional and political reforms carried out over the past twenty-five years. Social inclusion programs and environment protection laws have been adopted as fundamental levers in this process. The National Initiative for Human Development (INDH), the Environmental Upgrade Strategy (MANE), the National Energy Strategy, and the National Charter for the Environment and Sustainable Development are some key milestones in this process (Figure 6). These leading initiatives have coalesced in June 2017 into the flagship National Sustainable Development Strategy (NSDS) which was based on legal framework N°99-12 and enacted by the Council of Ministers under the Chairmanship of His Majesty King Mohammed VI. National Strategy for Sustainable Development 2017 National Energy Strategy 2012 New Constitution 2011 Solar-Wind Plan National Charter for Environement and Sustainable Development 2009 Green Morocco Plan INDH Program / Tourism Vision 2010/ Education Emergency Plan 20082012 2008 Environment Upgrading Strategy / Family Code Moudawana 2005 2004 Social and Economic Development Plan 2000-2004 Environnement Laws 2000 1995 Law 10-95 on water Figure 6: Milestones towards SDGs achievement in Morocco27 BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 26
27. This strategy marks the culmination of Morocco ’s efforts to achieve sustainable and inclusive development. It revolves around 7 key challenges/aims: i. Consolidate governance of sustainable development; ii. Successful transition towards a green economy; iii.Improve natural resource management and development and strengthen biodiversity conservation; iv.Accelerate the implementation of the national policy to combat climate change; v. Grant special vigilance to sensitive territories; vi.Promote human development and reduce social and territorial inequalities; vii. Promote the culture of sustainable development (Figure 7). The NSDS revolves around 7 key challenges, 31 strategic axes and 137 objectives. Centrer Culture of Sustainability Social Cohesion Gouvernance Green and Inclusive Economy Sensitive Territories Green Economy Biodiversity Climate Change Figure 7: Morocco’s National Sustainable Development Strategy BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 27
28. Morocco ’s National Sustainable Development Strategy aims at strengthening policy coherence while extending the governance of development to all stakeholders towards an integrated and shared vision and enactment of sustainability. To ensure the proper monitoring of this strategy, the Government put in place a governance framework through a strategic committee chaired by the Prime Minister and a steering committee chaired by the Secretariat of State in charge of sustainable development. The Ministry of External Affairs and cooperation holds the role of political leadership and the Ministry of General Affairs and Governance oversees public policies harmonization28. The Private Sector has been equally involved in this important transition process. In 2018, the National Confederation of Moroccan Enterprises (CGEM) joined hands with UNDP Morocco and the United Nations to officially launch Global Compact Morocco Network by the signing of a Memorandum of Understanding29. Seven of the largest national companies were part of this event and have shown consistent commitment thus far in integrating the Goals into their corporate strategies. 1.2. Tunisia Tunisia is a leading actor in sustainable development in North Africa. With the revolution of January 14, 2011, the country has recorded remarkable progress in terms of democracy. The 2014 Constitution guarantees rights and freedoms in accordance with international standards and enshrines progressive principles. This young democracy has successfully completed its peaceful political transition, which earned the country the 2015 Nobel Peace Prize. Since its independence, Tunisia has put an emphasis on education, health and women’s freedom. Today, in line with its international commitments, the country has multiplied efforts towards the operationalization of integrated development strategies addressing governance, environmental, ecological and economic issues alike. Some of the most important milestones include the National Strategy for Sustainable Development 2020, the Five-year Development Plan 2016-2020, Digital Tunisia 2020, and the overarching 2030 National Agenda for Sustainable Development (Figure 8). This strategy constitutes the nerve of the war in the march towards a sustainable and inclusive society. It identifies 11 key challenges that encompass the major national strategies adopted thus far (Figure 9). BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 28
29. National 2030 Agenda for Sustainable Development 2017 Five-year Development Plan 2016-2020 2015 National Strategy for Sustainable Development 2020 2014 2013 Digital Tunisia 2020 2009 Economic and social development plan (2007-2011) Water Strategy 2030 2006 National Commission for Sustainable Development 1993 Figure 8: Milestones towards SDGs achievement in Tunisia The social dimension has been strongly highlighted in Tunisia’s 2030 Agenda. “No one left behind” program is a cornerstone aspect of this national strategy. It targets the most vulnerable groups, rural women and girls, abused women, children, young people, people with disabilities (PSH) and the poorest people. More comprehensively, the agenda is built around 11 challenges (Figure 9): i) Establish sustainable consumption and production (green economy, etc.) ii) Strengthen social equity and national solidarity, iii) Sustainable management of natural resources, iv) Promote the quality of citizens’ life, v) Develop sustainable cities, vi) Manage the coastline harmoniously and sustainably, vii) Promote sustainable transportation, viii) Rationalize energy consumption and promote new and renewable energies, ix) Strengthen capacities to adapt to climate change, x) Promote the knowledge society, and xi) Adapt governance for better promotion of sustainable development.30 BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 29
30. Green Economy Sustainable Cities Social Equity Knowledge Society Sustainability Transportation Economic Social Quality Life of Citizens Sustainable Managment of Natural Resources Ecological Gouvernance Capacity Building Renewable Energy Gouvernance for the Goals Coastlise Sustainability Figure 9 : Pillars of Tunisia’s 2030 Sustainable Development Agenda The 2030 Agenda for Sustainable Development is jointly monitored by the Tunisian Ministry of Foreign Affairs, which is responsible for diplomatic leadership, and the Ministry of Development, Investment and International Cooperation, in charge of national planning, technical steering, and inter-ministerial coordination. This multistakeholder steering model is founded on international best-practices and experiences acquired during the development, monitoring and implementation of existing development plans.31 1.3. Algeria Since the Johannesburg Summit in 2002, Algeria has intensified its efforts in the environmental protection and sustainable development, giving thus a preeminent place to the social and ecological aspects in its choices of growth model. This is chiefly driven by the country’s shallow industrialization, which to contribute as little as about 5 percent to economic growth, prompting novel arenas for value creation. New sectors of the green economy, such as renewable energy, water and waste management, eco-building, medicinal plants and environment-related services, are considered viable levers for revitalizing economic growth in a country where trade balance is predominantly driven by the export of hydrocarbons. Green economy is also a catalyst of green technological innovation, an important factor for SMEs/ SMIs’ competitiveness and resilience. In line with this vision, the Algerian Government has implemented a National Strategy for the Environment (NSE) and a National Action Plan for the Environment and Sustainable Development (PNAE-DD) through the adoption, among others, of the National Program for the Integrated Management of Household and Assimilated Waste (PROGHAW), the Coastal Conservation Plan, and the National Climate Plan (Figure 10). BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 30
31. In 2018 , these programs and development plans, which mainly targeted environment protection, climate change mitigation, energy security and water resources management, have been consolidated and articulated around a seminal sustainable development strategy: The National Strategy for the Environment and Sustainable Development (NSESD)32. This strategy has helped pool efforts towards achieving the SDGs. It is structured around 7 strategic axes, 19 objectives, 34 priority actions and around a hundred performance indicators (Figure 11). NSESD has served as a grounding level for operationalizing Algeria’s 2030 United Nations’ Agenda for Sustainable Development. 2030 National Strategy for the Environment and Sustainable Development (NSESD) 2019-2035 Agenda for the SDGs 2018 CapDel Program : Participative Democracy and Local Development 2016 National Climate Plan 2015 - 2050 and Sendai Framework for Disaster Risk Reduction 2015 National Renewable Energy Development Program 2011 National Environnemental Strategy (NSE) and PROGHAW 2002 2002 National Action Plan for the environment and Sustainable Development (PNAE - DD) Figure 10: Key milestones towards Sustainable Development in Algeria BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 31
32. Health and Quality of Life Environmental Gouvernance NSESD Strategy Food Security Resilience to Climate Change Natural and Cultural Capital Green and Circular Economy Resilience to Desertification Figure 11 : National Strategy for the Environment and Sustainable Development Pillars Algeria has shown consistent commitment to Environmental actions and Sustainable Development. Nonetheless, additional focus needs to be put on the social aspect with particular strengthening of gender equality, youth and women empowerment, and access to quality education. To ensure the successful implementation of NSESD, Algeria has nominated an interdepartmental committee in charge of coordination and monitoring of the SDGs chaired by the Minister of External Affairs33. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 32
33. 2 . Achievement of the SDGs in the Maghreb Countries The Maghreb countries, as in most Africa, face structural challenges to implement their respective Sustainable Development Strategies. Lack of policy coherence across sectorial stakeholders and levels of governance, insufficient awareness and capacity in civil society, and lack of adequate financial resources and trustable data are major impediments in the face of the implementation of SDGs. As for monitoring, lack of funding resources, of statistical capacity, and of indicators’ clarity and availability are found to be the most important hurdles across several countries. The ambitious development strategies that the Maghreb countries have set forward have provided these countries with a viable foundation to support their advancement on the SDGs achievement. In 2019, all three countries have deployed efforts towards improving performance on the most pressing development challenges. Overall, the three countries ranked in the top five of the Africa SDG Index Score based on the 2019 Africa SDG Index and Dashboards (Table 6). However, performance scores remain insufficient as compared with international standards and the most important gaps are related to human development aspects (Figure 12). Rank Country Score 2 Tunisia 66.19 3 Algeria 65.77 4 Morocco 64.37 Table 6. SDG Index Ranking - Maghreb region 2019 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Algeria Morocco Tunisia Major challenges Decreasing Significant challenges Stagnating Challenges remain Moderately improving SDG achieved Information unavailable On track or maintaining SDG achievement Information unavailable Figure 12. SDG Dashboard with Trends - Maghreb Region 2019 Source: SDG Center for Africa and Sustainable Development Solutions Network (2019): Africa SDG Index and Dashboards Report 2019. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 33
34. The SDG dashboard shows a significant overall deficiency in meeting the sustainability challenges in all three countries . Except for a single SDG (SDG 1. No Poverty) that has been fully met by Algeria, all remaining SDGs fall under the expected achievement levels by the three countries in relatively similar patterns. The lowest performances are found with respect to Gender Equality (SDG 5), Affordable and Clean Energy (SDG 7) and Decent Work and Economic Growth (SDG 8). The three countries are either stagnating or improving on these SDGs. Significant challenges are predominantly present in 10 out of the 17 SDGs with overall improving patterns. The SDGs with the most promising efforts in this category are Good Health and Well-being (SDG 3), Clean Water and Sanitation (SDG 6), and Industry, Innovation and Infrastructure (SDG 9). Challenges remain for the three countries with respect to reducing inequalities (SDG 10), with Morocco and Tunisia particularly faced with reducing poverty (SDG 1) and fostering responsible consumption and production (SDG 12). BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 34
35. 2 .1. Thematic Assessment – SDG 1: No Poverty As of 2019, Algeria was the first and only African country to have successfully met the first Sustainable Development Goal with 0.3 percent of the population living on less than $1.90 a day (2011 PPP), and 5.5 percent of the population living below the national poverty line. 15 15.2 10 5 4.8 0 Morocco 0.4 0.6 0.3 Poverty headcount ratio at $1.90/day Tunisie 5.5 Population living below the national poverty line (%) Algeria BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 35
36. Morocco has implemented numerous initiatives to bolster social cohesion and eradicate extreme poverty .35 One of the most significant programs is the National Human Development Initiative (INDH), which has enabled 5 million beneficiaries to improve their income and social well-being through 22,000 projects and a MAD 14 billion investment in the first six years of operations. The second phase has been launched with a budget of MAD 21 billion.36 Green Morocco Plan is another important development program that was directly targeted at improving the farm income of 3 million economically vulnerable rural dwellers. The Government has initiated and strengthened several other programs to increase the resilience of vulnerable populations, especially in rural and sub-urban areas (e.g., Dâam program; Social Cohesion Support Fund; Multifunctional Spaces for Women Empowerment; Irtikâe Capacity Building program for associations, cooperatives and disadvantaged areas; Orientation and Assistance Centers for People with Disabilities). Despite these efforts, many obstacles remain, namely with respect to implementing social protection for all (Target 1.3), access to basic services, technology and economic resources (Target 1.4).37 Tunisia has put in place a multisectoral policy to improve the living conditions of its populations and achieve its development agenda. To fight against poverty in all its forms and child insecurity, the country has defined a five-pillar policy revolving around free education, commodity subsidizing, socio-economic integration of the vulnerable via income-generating activities, improvement of life conditions in disadvantaged areas, and generalization of social and sanitary security system. In 2018, 888,130 families (30 percent of the population) benefited from Medical Assistance Programs (Types 1 and 2) and 285,000 families received a monthly financial aid38. The comprehensive reform of the national security system that was conducted in 2013 led to direct benefit toward alleviating poverty by ensuring minimum basic revenue for the elderly, the disabled, children, and active young population with incapacity to generate revenue due to sickness or disability. Access to basic services such as transportation, technology, health coverage and economic resources has improved thanks to various financial and social inclusion strategies (e.g., National Health Insurance Fund, Labes Card, Amen Social, Intelligent Cards, etc.). Significant challenges remain, though, with respect to development targets 1.1, 1.2 and 1.4. Since 2000, Algeria has implemented ambitious development plans and committed important financial resources to promote human development. This policy has paid off in terms of improving the well-being of the population: Algeria has achieved the First UN SDG: No Poverty. Eradicating poverty has come about through multiple endeavors, namely, eliminating extreme poverty and reducing national poverty in monetary terms (Targets 1.1 and 1.2); guaranteeing social protection for all (Target 1.3); and affordable access for all Algerians to basic social services such as health, quality education, basic infrastructure (energy, etc.) and decent housing (Target 1.4). Several mechanisms have been deployed to make such achievements possible including the Agency for Social Development, the National Agency for Youth Employment, unemployment insurance plans, child protection institutions, and national social insurance programs for working and retired populations. To-date, 3,746 social and humanitarian-focused associations are approved and operational, of which 119 manage Centers for family’s provide childhood, disabled children and elderly people39. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 36
37. 2 .2. Thematic Assessment – SDG 3: Good Health The three countries present large similarities in the overall performance on SDG 3. They all face important challenges throughout the different development targets but display moderate improvement towards achieving the goal. Relatively, Tunisia scores higher than its Maghreb neighbors with respect to most SDG 3 key performance indicators. Adolescent fertility rate (births per 1,000 women ages... Traffic deaths rate (per 100.000 population) Age-standardised death rate due to cardiovascular... Incidence of tuberculosis (per 100,000 population) New HIV infections (per 1,000) Mortality rate, under 5 (per 1,000 live births) Neonatal mortality rate (per 1,000 live births) Maternal mortality rate (per 100,000 live births) 0 Morocco Tunisie 50 100 150 200 250 300 350 Algeria Universal Health Coverage Tracer index (0-100) 80 70 60 50 40 30 20 10 0 50 Subjective wellbeing (average ladder score, 0-100) Life Expectancy at birt (years) 76.4 76 Tunisie BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 37
38. Morocco has reported significant improvement in healthcare and well-being . Infant and young child mortality rate (0 - 4 years of age) fell from 30 per thousand in 2011 to 23.3 per thousand in 2018.40 Moderate improvement has been registered on neonatal mortality rates and maternity mortality rates as compared with the past decade (Targets 3.1 and 3.2). Improving access to quality healthcare in urban and rural areas and reducing inequalities in accessing healthcare services is a major challenge for the country. Several initiatives have been implemented related to both reinforcing existing infrastructure and enhancing management practices of hospitals and sanitary units across the country’s regions. In addition, controlling shortages of human resources in healthcare facilities and building their capacity is a continuous challenge that the Government is seeking to address.41 Although the implementation of public health programs has allowed the global Health improvement, wide inequalities remain between rural and urban areas and between males and females. Furthermore, the situation of life styles (sedentary life, bad nutritional habits and degradation of environmental quality (air, soils, etc.) has led over the past years to an increase in respiratory and chronic diseases, especially in large and dense cities. Finally, it is necessary to strengthen the actions toward making up for some acute belatedness, namely in strengthening the prevention and treatment of substance abuse (Target 3.5), achieve universal health coverage (Target 3.8), and substantially reduce the number of deaths and illnesses (Target 3.9). Tunisia’s strategy for improving health and well-being has led to substantial strides towards achieving this goal.42 Maternal mortality rate fell below 70 per 100 000 births (Target 3.1), and neonatal and child mortality rates dropped to 7.5 and 13 per 1,000 respectively in 2018 (Target 3.2). Tunisia has set up national programs for screening the infection and spread of communicable diseases (Target 3.3). A national tuberculosis control program has been implemented and tuberculosis is classified now in the country as a preventable and curable disease with a mortality rate of below 1 per 100,000 in 2018. Tunisia is committed to the global program initiated by the World Health Organization to fight against non-communicable diseases (NCD) 2017-2025 (Target 3.4). Moreover, the 2018-2025 national strategy for prevention and control of noncommunicable diseases is a multisectoral approach that aims to ensure a long and healthy life for all by 2025. Between 2010 and 2015, the mortality rate attributed to cardiovascular disease, cancer, diabetes or chronic respiratory disease for the population aged 30 to 70 has slightly decreased from 12.4 percent to 12.1 percent for women and from 22.6 percent to 21.1 percent for men. Tunisia has committed to Universal Health Coverage (UHC) as per the 2030 UHC Pact signed in 2018 in Salalah. In 2018, the country displayed a fair 79.4 UHC tracer index, surpassing its Maghreb neighbors (Target 3.8). Moreover, Tunisia has set up several programs to prevent and reduce illness and deaths from hazardous chemicals and pollution (Target 3.9). The country formalized a development program aiming at promoting “an integral mode of development based on social equity and well-being for all in a healthy and preserved environment” (National Agenda 21).43 Despite these efforts, several challenges remain including unequal access to health services, chronical disease treatment, poverty of households, quality of service, and governance. Algeria has maintained efforts to keep improving towards achieving SDG 3. The Algerian government has implemented a national Plan for the reduction of Maternal Mortality for the 2015-2019 period. Monitoring pregnancy and childbirth period has increased from 76 percent in 1992 to 97.1 percent in 2012-13. Maternal mortality rate went from 117.4 deaths per 100,000 births in 1999 to 57.7 in 2016 (Target 3.1). Child (under 5-years) mortality rate decreased from 55.7 per thousand live births in 1990 to 24.2 per thousand live births in 2018 and neonatal mortality (under 28 days) was estimated at 17.1 per 1,000 live births in 2018 (Target 3.2). Algeria has achieved a net decrease in communicable diseases (Target 3.3) and has implemented multiple initiatives to control non-communicable diseases (Target 3.4) (e.g., The National Cancer Plan for the period 2015-2019, the National Multisectoral Committee for Mental Health, etc.) Moreover, the Government defined a legal framework by adopting a law to fight drug use and trafficking (Target 3.5). The National Office for Drug Addiction was set up to fight drug abuse and addiction and to develop, propose and implement a national policy to meet this development target. Lastly, Algeria made important efforts to provide specialized medical care covering all the national territory by developing home care activities, establishing mobile health units for nomadic populations and providing health care to patients in areas where medical specialties do not exist (Target 3.8). BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 38
39. 2 .3. Thematic Assessment – SDG 4: Quality Education Access to quality education is an important challenge for most African countries. If Tunisia and Algeria have displayed relatively better results, Morocco continues to face major hurdles towards achieving this development goal. Gross intake ratio to last grade of lower secondary education (%) Literacy rate of 15-24 year olds, both sexes (%) Mean years of schooling (years) Net primary enrolment rate (%) 0 Morocco Tunisie 10 20 30 40 50 60 70 80 90 100 Algeria BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 39
40. Morocco has launched structural reforms in primary , secondary and higher public education. While quality could not be sacrificed, these “emergency” reforms have been mostly targeted at addressing the large infrastructure deficiencies found in this sector. Since 2015, a hundred new schools were opened each year with 137 new schools in 2019 alone. Further efforts have been deployed in favor of rural areas, namely through establishing community schools and dormitories of which the number of beneficiaries increased by 20 percent. In 2019, schooling rate reached 99 percent in primary education and 91 percent in middle school. However, student attrition remains a significant challenge. If elementary school dropout rate decreased to 0.6 percent in 2019 from 2.9 percent in 2015, it is still at a peak 5 percent in rural areas.44 In middle school, this rate slightly decreased between 2015 and 2019 from 12 percent to 10.7 percent, suggesting large losses and additional efforts to be made, especially for little girls in rural areas. Preschool education presents another major deficiency with only 4,000 classrooms as of 2019. Nonetheless, reinforcing bridges between vocational training and formal education, and empowering teaching staff with skills and capacity building, along with the promotion of education for sustainability at various levels, have all put the country on a positive track toward achieving SDG 4.45 Since its independence in 1956, Tunisia made of education a national priority. The country has adopted an aggressive strategy to ensure all Tunisians have access to education, without exception. Schools were built in the most remote regions in the country and access to education and training was open to all children from the age of 6 by a legislation adopted in 1958. In 2018, Tunisia has democratized access to education with a schooling rate exceeding 99 percent for children aged 6-11, an enrollment rate in public universities of more than 89 percent, and 37 percent of students benefiting from a scholarship46. Four major axes are monitored under SDG 4 as part of Tunisia’s 2030 Agenda for Sustainable Development: i) Provide a full education cycle for all girls and boys (early childhood, primary, secondary), ii) Facilitate affordable access for all to higher education, technical and professional training, iii) Eliminate gender disparities in education and ensure access to education of the most vulnerable, and iv) Generalize education for sustainable development. Algeria has committed to achieving SDG 4 through a clearly outlined national policy. The country’s challenge is not only generalizing access to education but also ensuring this education system meets the quality and performance criteria set forward in the 2030 Strategic Framework. The four main objectives of Algeria’s national education policy are: i) Providing the best education for all, ii) equality of chances from preschool to higher education, iii) Literacy for all, and iv) Education for the appropriation of universal values. In the year 2018-2019, enrollment rate in public elementary schools reached 97 percent, and 96 percent in middle schools. This number increased between 2000 and 2018 at a 4 percent growth rate per year. Preschool education has been progressively generalized to all 5-year-old children, with the support of public local and institutional authorities, associations and non-profit organizations, as well as the private sector. The Algerian Government focused attention on dropouts aged between 6 and 16 through specifically targeted programs, and reinforced empowerment of housewives and girls in rural areas through qualifying professional trainings.47 BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 40
41. 2 .4. Thematic Assessment – SDG 8: Decent Work and Economic Growth Most African countries face major challenges in achieving SDG 8. In Maghreb, both Algeria and Tunisia display red-flag performance indicators with a steady trend for Algeria. Morocco displays orange-flag overall performance, suggesting significant challenges to be addressed. Starting a Business Adults (15 years and older) with an account at a bank or other financial institution or with a mobile-moneyservice provider (%) Employment-to-population ratio 0 Morocco Tunisie 20 40 60 80 100 Algeria 3 2 1 0 Morocco Tunisie 5-year average GDP Growth per capita (%) Prevalence of Modern Slavery (victims per 1,000 population) Algeria BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 41
42. Morocco has adopted a series of aggressive strategies to accelerate the transition to a green and sustainable economy which is the second pillar of the country ’s National Sustainable Development Strategy. The Government defined adapted regulatory frameworks and has put in place multiple cross-sectoral initiatives monitored at various ministerial levels to ensure this transition. Subsidies are offered in support to enterprises operating in green energy, sustainable agriculture, recycling and responsible use of water and natural resources. Particular attention is given to vulnerable territories, mountainous areas and marine life. These initiatives have helped maintain the 5-year average GDP growth rate per capita at 2 percent in 201848 and contain unemployment rate at 10.1 percent during the same year and bring it down to 9.2 percent in 2019.49 After the 2011 revolution, Tunisia has failed to boost growth to reduce unemployment. With weak economic recovery, growth rate was 1 percent in 2016, 1.9 percent in 2017 and 2.5 percent in 2018.50 Overall unemployment rate was 15.5 percent toward the end of 2018, 12.5 percent for men and 22.9 percent for women. This rate was particularly high among higher education graduates with 17.2 percent and 38.8 percent for men and women respectively.50 Face to these challenges, Tunisia has put in place a set of instruments and incentive programs aimed at creating jobs and integrating vulnerable categories into the labor market (e.g., Country Program for Decent Work in Tunisia 2017-2022, Social Contract, National Council of Social Dialog, National Strategy of Entrepreneurship 2019, Strategy for Social Enterprises, National Action Plan for the Fight against Child Work in Tunisia, etc.) However, despite the multiplicity of strategies and action plans, in the absence of rigorous monitoring and results assessment, little can be said about the efficiency of the currently deployed initiatives. Tunisia continues to face youth unemployment and child work (estimated at 7.9 percent) as the major hurdles hampering the achievement of SDG 8. Algerian GDP growth is strongly dependent on hydrocarbons. In 2017, this industry represented 20 percent of GDP, 38 percent of State budget revenue, and 95 percent of exports.51 This dependency has resulted in fluctuations of economic growth and severe economic decline when global oil prices dropped. In 2018, the 5-year average GDP per capita growth rate was 1.1 percent, a net decline in comparison with the 3.5 percent rate registered over the period 2002-2017.52 In such a context, restructuring and diversifying the economy is the first challenge facing the country. Unemployment of the active population, established at 11.7 percent in 2018 from 30 percent in 2000, remains a major challenge, especially among the youth. To address these challenges in alignment with the 2030 Agenda, Algeria has set forward an economic policy aiming at: i) Promoting a diversified economy and a sustainable and sustained growth, ii) Enhancing productivity and modernizing technological infrastructure, iii) Creating more jobs to reduce unemployment and ensure better wealth distribution, and iv) Defending and consolidating workers’ rights in line with Algeria’s international commitments. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 42
43. 3 . The Impact of Covid-19 on Achieving the SDGs in the Maghreb Region The Covid-19 pandemic poses serious challenges to global economy and well-being. African countries will be among the most severely hit by the externalities of this crisis. Even if these countries are less affected than the rest of the world for the time being, their vulnerable economies, weak medical infrastructure and the disruption in global supply chains will have drastic negative impacts on growth. Morocco, Tunisia and Algeria are no exception to this continental inertia. The repercussions from the Coronavirus outbreak will be felt across several sectors and levels:   Economic Growth SDG 8 The high dependency of African economies in general on foreign economies predicts a negative economic spinoff for the continent estimated at an average loss of 1.5 points on economic growth 2020 . This loss is mainly explained by a persistent dependency on global commodity prices. In Maghreb, the Algerian economy is dependent to a large extent on hydrocarbons and oil export. The late 2014 drop in oil prices contributed to a significant decline in national GDP which fell to an average 2.3 percent in the period 20152017. Today, the current pandemic is expected to engender even more disastrous consequences. With crude oil facing the biggest demand shock in its history – below 30 dollars a barrel due mainly to the cessation of world trade and the production disagreement between Saudi Arabia and Russia, the largest economic hit will be mostly felt by commodity-dependent economies, such as Algeria. Indeed, the International Monetary Fund estimates that each 10 percent decline in oil prices will, on average, lower growth in oil exporters by 0.6 percent and increase overall fiscal deficits by 0.8 percent of GDP.53 The prior unpreparedness of these economies to such disruptions will make recovery long and painful. Non-oil commodity prices have also declined since January, with natural gas and metal prices dropping by 30 percent and 4 percent, respectively. Tourism and airlines industries will be equally impacted by the Covid-19 crisis with the generalization of social distancing, travel restrictions and border closing. IATA estimates the economic contribution of the air transport industry in Africa at US$ 55.8 billion dollars, supporting 6.2 million jobs and contributing 2.6 percent of GDP. With airports shutting down due to Covid-19, African airlines have BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 43
44. already lost US $ 4.4 billion in revenue by March 11, 202053 and are expected to experience a -42 percent decline according to the 2019 United Nations Conference on Trade and Development. In Morocco and Tunisia, tourism contributes 7 percent and 13.8 percent to GDP with 12.3 million and 8.3 million tourists in respectively , . The disruption of the global hospitality industry will engender substantial losses for these countries in terms of jobs and economic value. Export and import will be affected as well by the externalities of this global pandemic. Trade is projected to drop by at least 35 percent for African countries from the level reached in 2019, translating into an estimated loss at around US$270 billion.53 The Maghreb countries’ major trading partners are the European Union, China and the United States. For these countries, 59 percent of exports are directed to Europe, and with the fall in crude oil prices and demand contraction, trade will experience acute shrinkage in both volume and value. For Morocco, the abrupt interruption of global supply chains will result in deep losses for the automotive industry (-44 percent)57 and in phosphates exports which represented 6 percent and 4.4 percent of GDP respectively in the period 2017-2019. Global prices of staple commodities, such as wheat, rice, and tea, could severely impact the trade balance of the Maghreb countries which are net importers of these commodities. Such an impact could worsen with an extension of the crisis till the end of 2020. Besides the decrease in internally collected tax revenue due to nearly frozen economic activity, external sources of financing will also undergo abrupt shortages. For the Maghreb countries, remittances, which have been the largest and most consistently increasing source of international financial flows principally from Europe, could drastically decline due to sluggish economic activity worldwide. Foreign Direct Investments are also expected to fall in contrast with the unprecedented 11 percent surge in 2019 in the continent57. Morocco, which was among the top five recipient countries in 2017 (US$3.6 billion, +35.5 percent), could experience a substantial drop in FDI inflows expected to range between -5 percent and -15 percent in 2020.53 Social Well-Being SDG 1 and SDG 3 The social impacts of the Covid-19 pandemic have been appalling. The morbidity and mortality rates have been unparalleled even in the most developed countries which have been faced with above-capacity demand and inability to adequately address the unpredicted upsurge in the number of infected patients. In Africa and Maghreb, even though the infection rate BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 44
45. has been slower than the rest of the world , the lack of basic medical infrastructure and the governments’ incapacity to finance health services, partly because of dropping tax revenues, could lead, in the absence of drastic measures, to an invasive spread of the virus and a failure to contain its impacts in the short and medium terms. Public spending on social services will be affected due to the scarcity of resources that the Covid-19 crisis will create. Spending in infrastructural development could drop by at least 25 percent due to lower tax revenues and difficulty in mobilizing external resources. The Maghreb countries will also experience a shortage of medicine and health equipment as their biggest suppliers, the European Union and Asia, have halted drug manufacturing because of the pandemic. This health crisis will be exacerbated by a poverty crisis caused by massive job losses. In Morocco, 810,000 jobs have been temporarily lost as of April 2020 and 113,000 companies have declared temporary work stoppage since March 15th due to Covid-19 according to the Ministry of Employment. These figures are worsened by the informal sector which employs more than 70 percent of the population and contribute to around 30 percent of GDP. Women will be most severely hit by this pandemic which will amplify already existing inequalities. According to United Nations Women in Morocco, the disproportionate impact of the health emergency and confinement on women will further impede their access to resources and income-generating activities, thus intensifying multiple forms of discriminations and vulnerabilities. These trends are similar across Algeria and Tunisia where hundreds of thousands of employees are left jobless without compensation, the State being unable to support everyone. The most vulnerable must defy death daily to provide for their most basic needs according to the NGO CONECT. into the business models of organizations has proved effective in overcoming global crisis and reinventing business practices and management paradigms.59,60 This new imperative has become even more essential with the outbreak of Covid-19 which caused the global economy to freeze for several months and thought leaders to re-question existing growth models.61 In the Maghreb region, sustainability efforts have been gradually integrated into business and institutional activities mainly driven by political development agendas and country-level priorities. However, these efforts have remained insufficient in face of increasingly challenging socioeconomic times. However, as the crisis unfolds, the most troublesome challenge for Maghreb countries is to maintain populations under strict respect of lockdown measures. Failure to do so could be devastating for these countries. The Tunisian Minister of health deplored that a minority harms the majority and depicted a nightmarish scenario if the current relaxation persists.58 Overcoming the Crisis and Beyond: Sustainability Integration Integrating sustainability BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 45
46. Conclusion As discussed , Maghreb countries have put in place a number of strategies to tackle sustainable development challenges involving all political stakeholders as well as the civil society. However, structural challenges remain, hindering the achievement of the SDGs. The Covid-19 pandemic will inherently exacerbate the already vulnerable Maghreb economies, but the integration of sustainability models in the national, corporate, FIs strategies will certainly help mitigate the impact of the crisis and build more resilient economies / societies. The following Chapter, entitled “Sustainability Integration in the Business Models of Maghreb Islamic Financial Institutions” explores the facets and mechanisms of such integration and unveils the main opportunities and challenges for the Maghreb countries to build and operationalize sustainability-driven strategies within Islamic Financial Institutions. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 46
47. SUSTAINABILITY INTEGRATION IN THE BUSINESS MODELS OF MAGHREB ISLAMIC FINANCIAL INSTITUTIONS Key Insights • Although Islamic finance has been present in the Maghreb Since the 1990’s, the industry development started only in the last decade. • Islamic finance market share in the region is still very low but growth prospects are important • Except Shari’ah compliance, Islamic Financial Institutions lack a strong competitive advantage compared to conventional finance players • Sustainability is seldom integrated into the business model of Islamic Financial Institutions in the region. At best, these institutions undertake isolated Corporate Social Responsibility initiatives • Addressing sustainability issues through the core business model provides a logical and promising positioning for Islamic Financial Institutions in the region This chapter presents the Islamic Finance industry in Maghreb countries, the rationale behind incorporating sustainability into the business model of Islamic Finance Institutions (IFIs) and the key challenges that hold back IFIs from integrating such initiatives into their core business models. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 47
48. 1 . General overview of Islamic and Social Finance in the Maghreb countries 1.1. Islamic Banking 1.1.1. Islamic Banking in Morocco In October 2006, the Central Bank of Morocco (Bank Al Maghrib) authorized conventional banks to propose alternative financing products based on Ijārah, Murābahah and Mushārakah contracts. In May 2010, the first alternative finance company, Dar Assafaa, a wholly-owned subsidiary of Attijariwafa Bank, obtained the license from Bank Al Maghrib to offer alternative products for real estate financing. These alternative products were not competitive from a pricing standpoint compared to conventional banking products because of the absence of tax neutrality and the lack of a supporting ecosystem (Takaful, capital markets instruments…). 2015 was a turning point for the Islamic finance industry or participative finance (the adopted terminology by the regulator). According to the 103-12 law, participative banks are allowed to propose their services after the approval of the Superior Council of Oulama (national Shari’ah scholars’ committee). In total, Bank Al Maghrib has granted licenses to five Islamic banks and four windows (Cf. Table 7 below) Islamic banks in Morocco Nature Shareholder(s) Bank Assafa Full-fledged Attijariwafa bank Umnia Bank Full-fledged CIH bank, CDG and Qatar International Islamic Bank Bank Al Yousr Full-fledged BCP and Guidance Financial Group Al Akhdar Bank Full-fledged Crédit Agricole and ICD (Islamic Development Bank) Bti Bank Full-fledged BMCE Bank of Africa and Al Baraka Group Dar Al Amane Window Société Générale BMCI Najmah Window BMCI (BNP Paribas Group) Arreda Window Crédit du Maroc (Crédit Agricole Group) Sanad Tamwil Window CCG (national guarantee fund) Table 7: List of Moroccan Islamic (participative) banking institutions 2006-2007 Launching of the alternative financing products 2010 Establishment of the first alternative finance institution Dar Assafa 2015 103-12 banking law approved 2017 Starting of participative banking activity Figure 13: Moroccan Islamic banking milestones BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 48
49. By the end of 2019 , the number of Islamic Banks branches exceeded 127throughout the Moroccan territory According to January 2020 monetary statistics by the Central Bank, total Islamic Banking assets was around MAD12.85 billion62 (US$1.3 billion) with a market share that does not exceeds 1 percent63 of the banking sectors total assets. Total participative financing in December 2019 reached MAD 9.1 billion64 (US$ 962 Million). Moreover, total deposits reached MAD 3.964 billion (US$ 413 Million) in reference to the same report. By the end of 2019, the number of Islamic Banks branches exceeded 12765 throughout the Moroccan territory. Currently, Moroccan Islamic banks rely on Murābahah as the only available products for financing real estate, vehicles, raw material, equipment and inventories for retail and corporate customers. As for deposits, Moroccan participative banks propose checking accounts and investment accounts based on Muhārabah (profit & risk sharing). As far as refinancing is concerned, Moroccan participative Banks propose Wakalah bil Istithmār to financial and non-financial investors willing to invest in a Shari’ah compliant way. To complement this refinancing instrument, the Central bank is considering setting up a Shari’ah compliant interbank market. Figure 14 summarizes the current participative products offered in the Moroccan market. The actual offerings are not covering all customers’ needs. Mushārakah, Muhārabah and Istihnā‘ are not available and Ijārah and Salam contracts and circulars have just been released in May 2020 but have not been released yet by banks. Overall, the Moroccan participative banking sector is largely geared towards financing real estate mainly for retail customers (around 85% of banks’ financing portfolio).66 BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 49
50. Financing Deposits Mur ābahah real-estate 1200 1000 Current account 955 800 Investment account Murābahah vehicle 600 400 Murābahah equipments 200 0 Murābahah raw materials 413 409 209 Decembre 2018 December 2019 Murābahah inventory Total deposits Total financing Figure 15: Total participative deposits and financing between December 201867 to 2019 (US$ Million) Figure 14: Moroccan participative banking main products in 2019 According to Figure 15, the total amount of participative deposits and financing has doubled between December 2018 and 2019. Total financing has reached US$955 million in December 2019 compared to US$409 million in 2018 (growing by 133 percent between 2018 and 2019). Total deposits in December 2019 have reached US$413 million compared to US$209 million in 2018(growing by 97 percent). It is worth noting that unlike Tunisia and Algeria, Islamic Banking deposits in Morocco cover only half of financings, which obliges Islamic Banking Institutions to refinance their activity through a Wakala bil Istithmār with institutional investors. 1 2 3 NUMBER OF PLAYERS TOTAL ASSETS MARKET SHARE 5 Banks & 4 windows US$ 1.3 Billion Less than 1% of total banking assets Figure 16: Key figures of Moroccan Islamic Banking in 2019 BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 50
51. 1 .1.2. Islamic Banking in Tunisia Over the last decade, Tunisian Islamic Banking Industry has witnessed important developments from both business and regulatory perspectives. In 2016, the Central Bank of Tunisia (BCT) passed a law related to Shari’ah compliant banking (48-2016). This law establishes a specific legal framework governing the exercise of Islamic Banking operations by allowing banks and conventional financial institutions to engage in Islamic Banking after the authorization of the Central Bank. In addition, the BCT issued, on October 14th 2019, complementary circulars supplementing the Law. The issued circulars cover, among others, the Islamic Finance operations (Murābahah, Istihnā‘ and Mushārakah), investment deposits, Islamic windows and the rights and obligations of banks and financial institutions. Prior to the exemption from double taxation in 2016, Islamic products offered were costly in comparison with their conventional counterparts, which was mainly due to the value added tax applied to the profit margin and the double taxation on property transfer. Three Islamic banks operate in Tunisia currently (Table 8). Al Baraka Bank started its operations in 1983 as an offshore bank (Beit Ettamwil Tounsi Saoudi – Best Bank) before the existence of any Islamic Banking regulatory framework. In 2010, Zitouna Bank entered the market as the first on-shore Islamic Bank, followed in 2014 by Al Baraka Bank as a full-fledged bank. Lastly, Wifak Bank introduced its Islamic Banking products to the Tunisian market in 2015. Islamic banks in Tunisia Nature Shareholder(s) Al Baraka Bank Full-fledged Al Baraka Banking Group, The Tunisian State, Caisse Nationale de Sécurité Sociale and others Zitouna Bank Full-fledged Majda Tunisia, Groupe Triki, Poulina Group, Société centrale laitière du cap bon and Mokhtar Group holding Wifak Bank Full-fledged ICD and local investors Table 8: List of Tunisian Islamic Banking Institutions 1983 Al Baraka Bank, the first offshore Islamic bank in Tunisia 2010 Al Zitouna Bank, th first onshore Islamic bank in Tunisia 2014 Al Baraka Bank, transformed into an on shore bank 2015 Setup of Wifak Bank 2016 48-16 banking law approved Figure 17: Tunisian Islamic Banking milestones BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 51
52. Tunisian Islamic Banking total assets is around US $10 billion, which represents approximately 5.1 percent68 market share in 2019. 1 2 3 NUMBER OF PLAYERS TOTAL ASSETS MARKET SHARE 3 full-fledged Islamic Bank US$ 2.5 Billion 5.1% of total banking assets Figure 18: Key figures of Tunisian Islamic Banking in 201969 70 1455 1253 1088 2015 Financing 1296 1153 2016 1261 1427 1188 2017 2018 Deposits Figure 19: Evolution of Shari’ah compliant total financing and total deposits 2015 and 2018 (in Million US$)71 867 781 753 668 232 2015 Murabaha 211 2016 216 2017 235 2018 Ijara Figure 20: Evolution of Murābahah and Ijārah financing offered by Tunisian Islamic banks between 2015 and 2018 , in Million US$72 BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 52
53. 129 114 103 37 37 7 23 27 2016 2017 33 Zitouna Bank Al Baraka Bank 2018 Wifak Bank Figure 21 : Evolution of the number of branches for the three Islamic Banks73 69% 61% 65% 2015 Total assets Financing 66% 64% 64% 59% 58% 49% 68% 66% 66% 56% 55% 2016 2017 2018 57% 2019 Customer deposits Figure 22: Evolution of Zitouna Bank Market share (total assets, financing and customer deposits)74 During the last years, Tunisian Islamic banking institutions have performed rather positively in terms of the financing and deposits, although growth has been slowing in recent years as illustrated in Figure 19. Furthermore, the total number of Islamic Banking branches has been increasing steadily (Figure 21) to reach 197 branches in 2019 covering most of the Tunisian territory.75 As indicated in Figure 22, Zitouna Bank is the market leader in terms of financing and deposits. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 53
54. 1 .1.3. Islamic banking in Algeria Al Baraka Bank Algeria, Maghreb’s first Islamic Bank, entered the market right after the new banking law of April 14th, 1990, ended the State monopoly. Its arrival on the market was the result of a joint venture between the Bank for Agriculture and Rural Development (BADR) and Al Baraka Banking Group. Al Baraka Bank started its banking without any regulatory framework related to Islamic Banking. Since 2018, the Algerian Central Bank has been putting in place a regulatory framework authorizing both Islamic (participative) Banks and windows. This framework defines the following products to be offered by Algerian Islamic Banking Institutions: Murābahah, Mushārakah, Muhārabah, Ijārah, Istihnā‘, Salam, checking accounts and investment accounts. As in Morocco, Islamic Banking products and operations are to be approved by a national Shari’ah committee (Algerian Supreme Islamic Council). Moreover, windows activities must be segregated from the parent organization from accounting, organizational and human resources standpoints.76 Today, two Banks (Al Baraka Bank and Al Salam Bank) and two windows (Trust Bank and Algerian Gulf Bank) offer Shari’ah compliant banking products (Table 9). All of these players started operating in the country in the absence of any regulatory Islamic Finance framework, which is still under finalization. In terms of performance, Figure 25 and Figure 26 show a strong growth pattern of the total banking deposits and financing from 2012 until 2018 of both Al Baraka and Al Salam Bank. However, according to IFSB Islamic Financial stability report in 2019 the Algerian Islamic Banking market share is till around 2 percent with US$1 Billion total assets approximately. 77 Finally, the number of Islamic Banks’ branches in Algeria is low compared to Morocco and Tunisia (Figure 27). 1990 End of the state monopoly on the banking sector 1991 Set up of Al Baraka Bank, the first islamic bank in Algeria 2008 Set up of Al Salama Bank Algeria 2018 Islamic Banking regulatory framexork is put in place progressively 2020 Additional regulatory requirements related to islamic banking Figure 23: Algerian Islamic Banking milestones Islamic Banks in Algeria Type Shareholder(s) Al Baraka Bank Full-fledged Al Baraka Banking Group Al Salam Bank Full-fledged Mr. Almahiri, Al Salam Bank Bahrain, L.C.B Investment Holding Company And Others Algerian Gulf Bank (AGB) Window Burgan Bank, TIB and JKB Trust Bank Window Trust Algeria Investment Company, Compagnie d’Assurances et Réassurance Générale Du Qatar, Trust Algeria Assurances Et Réassurance and Others BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 54
55. 1 2 3 NUMBER OF PLAYERS TOTAL ASSETS MARKET SHARE 2 Banks & 2 windows US$ 1 Billion 2% of total banking assets Figure 24: Key indicators of Algerian Islamic Banking 2000 1500 1000 500 0 2012 Financing 2013 2014 2015 2016 2017 Deposits Figure 25: Al Baraka Bank Algeria evolution of total financing and deposits between 2012-2017 (in US$ million)78 1000 800 600 400 200 0 2014 Financing 2015 2016 2017 2018 Deposits Figure 26: Al Salam Bank evolution of total financing and deposits between 2014-2018 (in US$ million)79 BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 55
56. 60 50 40 30 20 10 0 2007 2013 2017 2019 Figure 27 : Evolution of the number of Islamic Banks’ branches in Algeria between 2007 and 201980 In Brief : Maghreb Central Banks’ response to Covid19 crisis To limit the impact of the pandemic on the banking sector and the economy, Maghreb Central Banks implemented various regulatory measures to support economic activity and households while ensuring financial stability. These policy interventions are generally applied to both the Islamic and conventional banks and include reducing the refinancing cost of the central bank, the use of various capital and liquidity buffers, easing reserve requirements, debet moratoria and credit guarantees to SMEs. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 56
57. 1 .2. Takaful 1.2.1. Takaful in Morocco In 2019, the government finalized and enacted the 87.18 law, which amends and adds on to the existing insurance laws 59.13 and 17.99. The new law contains a number of provisions related to conditions of exercise and licensing of Takaful operators. In addition, the law provides directives on the management of Takaful funds on behalf of contributors by licensed Takaful and Retakaful companies. Finally, the law discusses family as well as general Takaful products and the governance framework for Takaful operators. However, other drafted circulars related to operational and organizational aspects are still under process by the local insurance authority (ACAPS) and the Ministry of Finance. 1.2.2. Takaful in Tunisia On July 24th 2014, Tunisia updated and completed the insurance law with a specific regulatory framework dedicated to Takaful (Law n° 2014-46)81. The first and second chapters of this law deal respectively with the Takaful insurance system and the financial and accounting management of Takaful companies. The third chapter covers Takaful contracts while the fourth chapter covers the Retakaful ones. The fifth chapter presents general provisions on Takaful. 18.7 15.8 8.9 10.5 8 5.9 ZITOUNA TAKAFUL 2017 EL AMANA TAKAFUL ATTAKAFULIA INSURANCE 2018 Figure 29: Tunisian Takaful operators’ total revenues in 2017 and 2018 in Million US$ 47 43 32 ZITOUNA TAKAFUL EL AMANA TAKAFUL ATTAKAFULIA INSURANCE Number of intermediairies Figure 30: Number of Takaful intermediaries In Tunisia, four Takaful licensed companies offer Shari’ah compliant products. The first Tunisian Takaful operator starting its operations was “Best Re” in 1985 offering offshore Retakaful solutions. Zitouna Takaful was the second established Takaful operator in 2011, followed by El Amana Takaful and Attakafulia in 2013. According to General Insurance committee annual report 201882, Tunisian Takaful operators have recorded a significant growth in terms of revenues in 2018 compared to 2017 as illustrated in Figure 29. Zitouna Takaful is leading the Tunisian Takaful sector followed by El Amana Takaful and Attakafulia with estimated total revenues of US$18.7, US$10.5 and US$8 million respectively in 2018. Furthermore, in terms of point of sales, Zitouna Takaful is the market leader with 40 distributors. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 57
58. 1 .2.3. Takaful in Algeria Even though Islamic Banks operate since the 1990s, the Takaful sector remains mostly inexistent despite its importance to support the growth of the Islamic Banking sector. However, regardless of the absence of a specific regulatory framework, Salama, an Algerian conventional insurance company, has been the only company offering General and Family Takaful products. In December 2019, the finance law allowed insurance companies to offer Takaful services and indicated that specific regulations should be established to structure this activity. 1.3. Islamic Capital Markets (ICM) 1.3.1. ICM in Morocco The regulatory framework related to Sukūk in Morocco is defined in the 33.06 securitization law that was gradually updated by 119.12, 05.14 and 69.17 laws. The new securitization laws widened the scope of eligible assets for securitization such as tangible assets, real estate and movable assets and provided guidelines for Sukūk issuance and governance. Until now, Sukūk regulations cover only Sukūk Ijārah. Regulations on other Sukūk structures are currently in preparation by the Ministry of Finance. In 2018, Morocco issued its first domestic Sukūk Ijārah. The issuance amount was US$106 million with an annual yield of 2.66 percent. Sukūk investors were mainly local conventional finance institutions. 1.3.2. ICM in Tunisia The scope of law No.30 (Loi relative aux Sukūk islamiques), approved on July 30, 2013, covers Sukūk definitions, Sukūk issuing rules, SPV requirements, Sukūk trading and compliance. This Sukūk law was completed in 2018 by governmental decree n° 2018579 that defines the conditions of corporate Sukūk issuance. Before the Sukūk law came into application, Zitouna Bank issued in 2016 participative certificates “CHAHEDET ZITOUNA”83 with a total amount of US$16.62 million and an annual yield of 8 percent. Islamic investment funds are covered by the law No 201348, which was approved on December 9th, 2013. The law focuses mainly on Shari’ah governance (composition of the Shari’ah committee, Shari’ah auditing, disclosures…) as well as zakat payment. Several Islamic funds have been setup in Tunisia including ATID Fund, Al Kaouther Fund, FCPR MAX-Jasmin, Theemar Investment Fund, UGFS Islamic Fund and CEA Islamic Fund. 1.3.3. ICM in Algeria As of today, there are no specific regulations on Sukūk in Algeria. In 2018, Al Salam Bank Algeria was preparing to issue Sukūk alIstithmār.84 1.4. Social finance in the Maghreb This section presents an overview of selected social finance experiences in the region covering Waqf, Islamic Microfinance and Zakat. 1.4.1. Waqf in Morocco The Waqf institution in Morocco is under the supervision of the Ministry of Awqaf and Religious Affairs and the Supreme Council for the Financial Control of Waqf. In 2010, the Moroccan government adopted for the first time a Waqf specific law. This law aims at preserving the Waqf and providing modern legal means that guarantee its protection and its growth. In addition, the law provides investment methods that enable Waqf to contribute to economic and social development projects.85 BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 58
59. In 2018 , the “2030 Awqaf strategy” was adopted. The strategy emphasizes, among others, the importance of cash waqf, digitizing and developing synergies with the financial sector in order to address sustainability challenges through financial mechanisms.86 1.4.2. Waqf in Tunisia Waqf in Tunisia was established since the first days of Islam in the country, it flourished during the Ottoman period and continued even during the French colonization era. However, Waqf was abolished after the independence by the former Tunisian President Habib Bourguiba in 1956. After the Arab spring, there have been many attempts to revive this institution by adopting a specific Waqf law. The draft law has been subject to many debates inside the Tunisian parliament. 1.4.3. Waqf in Algeria Waqf in Algeria is under the supervision of the Ministry of Religious Affairs and Waqf. As in Tunisia, public and private Awqaf witnessed an important development during the Ottoman era in Algeria but were later marginalized during the French colonization. Despite a lack of a specific legal and regulatory environment, some pilot initiatives have been initiated in the field of cash waqf. According to M. Nasser Hideur, CEO of Al Salam Bank and former Secretary General of Al Baraka Algeria, Al Baraka along with the Ministry of Religious Affairs and Awqaf took the initiative to set up a company financed by cash Waqf. This company operated in the taxi business and the proceeds generated by its activity went to teaching Quran. The idea behind the project was to make waqf accessible to everyone, which is not the case for Waqf based on real estate. Although the business was promising, the project faced legal issues related to considering the company’s shares as Waqf. 1.4.4. Zakat fund in Algeria Algeria is the only Maghreb country with a Zakat fund. Established in 2003, the fund is a religious and social institution that operates under the supervision of the Ministry of Religious Affairs and Waqf. The Zakat Fund is chaired by a National Committee overseeing 48 regional committees. Each regional committee is composed of grassroots committees in the districts across the country. In 2016, total Zakat collection amounted to DZD 1267.2 million (circa USD 11.5 million) . After deducting salaries of officials and operational expenditure of the Zakat fund, resources are channeled to the needy for consumption as in the case of families in hardship and without a source of income. What is more, when the collected funds exceed DZD 5 million, Zakat finances income-generating activities (small and micro projects) through Qard Hassan (Figure 31) . Zakat funds for consumption Families in hardship and without a source of income When the annual collected funds exceed DZD 5M Zakat funds for investment Financing small and micro projects through Qard Hassan Figure 31: Distribution of Algerian Zakat funds BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 59
60. 1 .4.5. Islamic Microfinance in Tunisia Approved by the Ministry of Finance in 2016, Zitouna Tamkeen is the first full-fledged Islamic Microfinance institution in the region. Zitouna Tamkeen aims at promoting financial and economic inclusion of youths and individuals in social distress. Zitouna Tamkeen offers a variety of Shari’ah compliant instruments to finance and technically assist projects with social and economic impacts. The Tunisian Islamic Microfinance institution provides four main services. First, financing of economic empowerment projects. This involves studying the value chains with high potential in terms of job creation and calibrating the intervention points in order to reach the greatest number of beneficiaries. Second, providing micro-insurance to beneficiaries via existing Takaful operators. Third, micro-financing using a wide range of Shari’ah compliant financing products. Forth, capacity building and human capital development through training and development. Another experience in Islamic Micro and Meso finance with a focus on youth employment was undertaken by the Tunisian Bank of Solidarity with the support the Islamic Development Bank from 2015 to 2020 (cf. Figure 34)89 Zitouna Tamkeen 1 Economic empowerment 2 Micro-insurance 3 Micro-finance 4 Human capital development Figure 32: Zitouna Tamkeen service offerings 30% 70% Individual financing Economic empowerment Figure 33: Breakdown of financed projects by Zitouna Tamkeen BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 60
61. Islamic finance performance indicators in the Maghreb countries are still modest compared to other regions due to a variety of factors . In Brief : «Yes_tu» program of the Tunisian Bank of Solidarity The Tunisian Solidarity Bank, created in 1997 at the initiative of the Tunisian State, specializes in mesofinance to promote very small businesses. «Yes_Tu» is a youth employment support program, financed by the Islamic Development Bank (50 M USD) and implemented by the Tunisian Solidarity Bank since 2015. The financing contacts used are Ijara and Mourabaha. As of August 2019, the program financed 5600 entrepreneurs and contributed to the creation of 9243 jobs. Islamic finance performance indicators in Maghreb countries are still modest compared to other regions due to a variety of factors. First, although the industry started in the 1990s, regulations have been put in place only recently and many domains have not been covered yet (Takaful in Algeria and Morocco & Algeria, Islamic funds in Morocco…). This absence of regulations has two implications, on one hand Islamic Banks and Takaful operators offered limited range of products that did not address all financial needs especially for corporate clients. On the other hand, as stated by Dr. Said Bouheraoua, Director of Research Affairs Department at ISRA “this situation limited the number of players which hindered the intensity of competition and innovation especially in markets that experienced liquidity surplus as in Algeria”. Second, Maghreb Islamic Banks and Takaful operators have not developed a competitive value proposition that goes beyond merely Shari’ah compliance. As a result, they face stiff competition from conventional financial institutions that have built economies of scale and scope over a long period of time. Finally, the Islamic Finance ecosystem in the region is still in the construction phase. For instance, Takaful is present only in Tunisia, capital market instruments are generally missing and social finance initiatives are scattered and poorly integrated with Banking and Takaful activities. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 61
62. 2 . The rationale behind the integration between the Islamic Financial sector and Sustainable Development in Maghreb countries Globally, Islamic Finance assets exceeded US$2.19 trillion in 2018 (Table 10) with 6.9 percent growth year over year according to IFSB stability report 2019. Given the limitations of public funding to finance SDGs in developing countries, including in the Maghreb countries (Figure 35), private funding should be mobilized to close the gap in such areas as health, education, infrastructure, energy, water, and sanitation. Therefore, Islamic Financial Institutions can play a major role in contributing to reduce this gap for three main reasons. IF assets’ breakdown globally Takaful Contribution 27.7 Islamic Funds’ Assets 61.5 Sukūk Outstanding 530.4 Total 2,190 Banking Assets 1,571.3 Table 10: Breakdown of Islamic Finance assets in 2018 Worldwide (Million US$) 90 600 Billions of 2016 US dollars 500 400 528 Billion (0.5 percent of global GDP) 300 0.3 percent of global GDP 200 Increased tax revenue 100 0 Additional Spending Financing Figure 35: Financing gap of SDGs in low income developing countries 91 BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 62
63. Islamic finance is yet to move to the development finance where the central focus is economic development in addition to the financial perspective First , Shari’ah, a cornerstone of Islamic Finance, explicitly prohibits the use of interests, speculation, gambling and financing or investing in any illicit activities. In addition, Shari’ah emphasizes the principles of social justice and beneficence and naturally interlinks the Islamic Financial activity with the real economy. Based on the aforementioned principles, Islamic Finance values naturally fit with the sustainability approach. Second, Islamic Finance provides, in addition to debt contracts, innovative financial solutions based on profit and loss sharing such as Mushārakah or Muhārabah. Furthermore, Islamic Finance can leverage unique mechanisms such as Zakat, Qard Hassan, Waqf, Microfinance and Takaful to design effective solutions that address key social and environmental issues. As stated by Mr. Hamid Rashid, CEO of Finterra “Islamic Finance has been positioned as something that can do much more than cater to the commercial economy of a Country. It has tools included in them that allows any profit made by commercial financial institutions to be redistributed to those who are in need within the community”. Third, Maghreb Islamic Finance institutions usually struggle with building a competitive advantage beyond Shari’ah compliance. This position is shared by Mr. Anas Hasnaoui, international expert in economic empowerment who believes that “Islamic finance is yet to move to the development finance where the central focus is economic development in addition to the financial perspective”. Embedding sustainability into the business model of Islamic Financial Institutions is not only an opportunity to tackle sustainability financing needs but also to compete with conventional financial institutions that have been more active in sustainable development initiatives. In addition, in the context of Maghreb countries “Islamic financial institution are new entrants to the market; hence It should be natural for them to be aligned with sustainable development, which is a priority currently” says Mr. Fouad Harraze, Former CEO of Al Akhdar Bank. Finally, such a sustainability positioning is in line with the customers’ behavior shift. Indeed, customers, particularly millennials, are increasingly expecting financial institutions to be more involved in addressing social and environmental issues92 especially during the Covid19 pandemic. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 63
64. 3 . Sustainability integration in Maghreb Islamic Financial Institutions IFIs in can address sustainability issues through two strategies (cf. Figure 36): • Endogenously through corporate social responsibility initiatives such as supporting charities and distributing Qard Hassan loans for the needy. Corporate Social Responsibility (CSR) activities can either be conducted episodically or be part of a strategic orientation of IFIs by a formal commitment in terms of objectives and disclosures; • Exogenously through the integration of the sustainability paradigms into the business model of IFIs. Examples includes aligning a bank’s financing portfolio with of a selection of SDGs, issuing a green or a social Sukūk, developing blended finance instruments and setting up a Shari’ah compliant Environmental, Social and Governance (ESG) fund. The two strategies are not mutually exclusive, quite the opposite. Combining the two orientations strengthens the sustainability value proposition of IFIs (STAR quadrant). As stated by Mr. Mohamed Maarouf, former CEO of BTI Bank, who believes in the complementary between the two approaches: “A business model driven by sustainability cannot be successful without a good internal social environment for instance” Strong committment to CSR No or episodic CSR activities EXOGENOUS ALIGNMENT STARS BUSINESS AS USUAL ENDOGENOUS ALIGNMENT No integration of sustainable developement in the business model Figure 36: Classifying IFIs strategies in sustainability Sustainable developement embedded in the business model A business model driven by sustainability cannot be successful without a good internal social environment BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 64
65. Based on the above framework , Maghreb IFIs mostly fall within the “business as usual” quadrant. On the one hand, IFIs haven’t embedded sustainability into their business model (with the exception of Zitouna Tamkeen), although some players committed to make a sustainable impact on society, economy and the environment through good practices and offerings. On the other hand, although IFIs have undertaken many important CSR initiatives (Figure 37), the quality of IFIs social reporting (when they exist) indicates that these institutions still have to make progress in terms of CSR practice. Participative Finance Scientific Congress Supporting needy children & orphans Research prize in Islamic finance Wakf : Setting up a medical research center in Algeria Supporting the education cost of staff children Supporting Tech start-ups Figure 37: A selection of CSR initiatives by Maghreb Islamic Financial Institutions Many factors explain why Islamic Finance Institutions are not incorporating sustainability into their core business in Maghreb (Figure 38). Low levels of awarenss Lack of a supportive ecosystem Urgent first approach Narrow investment universe Conventional finance mindset Figure 38: Major challenges in addressing sustainability issues by Maghreb Islamic Financial Institutions BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 65
66. • Conventional finance mindset: In many instances, the creation of IFIs was at the initiative of conventional finance institutions. In addition, IFIs operate in regulatory environments designed initially for conventional finance but later adapted to Islamic finance. These factors suggest that escaping the conventional finance mindset and coming up with radically different business models and practices remains challenging • Low levels of awareness: Sustainable finance is a relatively new field. Maghreb Islamic Financial Institutions are not always aware of the options available and are often unable to access the information that would help them make a decision to finance a given social or green initiative; • Urgent first approach: As presented in previous sections, Maghreb Islamic Financial Institutions are on average, small, young, local and mostly retail-oriented. Moreover, the Islamic Finance ecosystem is still in the construction phase and many pieces of the puzzle are still missing. Even though sustainable finance has a strong rationale in Maghreb, financial institutions may be tempted to postpone such initiatives after dealing with issues that are perceived as more urgent; • Narrow investment universe: Currently, the sustainable finance investment universe for a given Islamic Financial Institution is relatively narrow and highly constrained, therefore limiting business opportunities and risk diversification. For example, green and social Sukūk and Islamic Sustainability Funds are not available in the region; • Lack of a supportive ecosystem: In Maghreb region, both conventional impact finance and Islamic Finance are in the development phase. Islamic impact finance is largely dependent on the development of a broader ecosystem to support its growth with such components as Islamic Capital Markets instruments, policy support and impact measurement infrastructure. Coordination among all the stakeholders is yet to be streamlined. In Brief : Value Based Intermediation (VBI) The Malaysian Center Bank (BNM) initiated VBI to restructure the business model of IFIs in order to make a sustainable impact on society, economy and the environment through good practices and offerings. The implementation phases of VBI consist of four maturity stages : • The first stage : Initiating a transparent commitment and visible advocacy of VBI adoption; • The second Stage : Setting up banking practics, products and services that demonstrate principles of VBI in the bank’s core business; • The third stage : Engaging active stakeholders through a comprehensive review of existing banking offerings and practices; • The last stage : Establishing an institutional behavior and culture that are entierely based on VBI. Figure 39: Value Based Intermediation by Malaysian Central Bank BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 66
67. Conclusion In the previous section , we discussed the rationale behind the alignment of IFIs with sustainable development and identified hurdles that hinder IFIs endeavors in this direction. Experience from more advanced markets like Malaysia suggests that sustainability strategies is a transformation process that requires commitment from top management and the board, affects all operations of IFIs and involves internal as well as external stakeholders (Cf. Appendix A). Fintechs are interesting levers that facilitate the transition from “business as usual” to more advanced stages in IFIs sustainability journey. Indeed, Fintechs support operational excellence, foster products innovation and radically transform customers’ experience, among others. In the next section, we will explore a selection of successful international experiences that leverages fintech to address diverse sustainability issues. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 67
68. FINTECH LANDSCAPE IN THE MAGHREB REGION Key Insights • Maghreb is among the least developed regions of the world in Fintech despite the popularity of the topic and supporting environmental factors • Constraints for the emergence of Fintech in Maghreb include Internet quality & availability, the preference for cash, shallow capital markets and the limited Fintech legal and regulatory framework • Current Fintech initiatives focus primarily on payments and Crowdfunding and many companies operate outside the legal and regulatory framework • COVID-19 crisis increased the appeal of Fintech in the region and accelerated the regulatory process This chapter covers the Fintech landscape in the Maghreb region. First, we present the Maghreb Fintech Paradox whereby Maghreb is among the least developed regions in the world for Fintech despite the systemic factors favorable to the emergence of this industry. Second, we present an overview of regulations related to Fintech in the region. Third, we survey a selection of Fintech experiences in Maghreb countries. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 68
69. 1 . The Maghreb Fintech Paradox 1.1. Drivers of Fintech emergence in Maghreb Many factors potentially favor the development of Fintech in Maghreb (Figure 40). Fintech supporting facrors 1 Young population 2 Digitally oriented population 3 Relatively low financial inclusion 4 High level of received remittances with high transfer costs Figure 40: Fintech supporting factors in Maghreb countries 1.1.1. Young population In 2018, Maghreb population was estimated to be around 100 million, about 1.3 percent of the world’s population and 7.8 percent of Africa’s population. The demographic transition in Maghreb countries has gradually changed the population’s age structure. While this population can still be considered as relatively young, the age pyramid has gradually shifted with an active population (15 to 59 years old) currently representing the most preponderant part of the pyramid (around two thirds) (Table 11)93. Moreover, while formerly predominantly rural, Maghreb countries have quickly transformed into predominantly urban societies. Urban population tripled between 1980 and 2018 while rural population grew only by 20 percent during the same period (Table 12)93. 1980 2018 Under 15 15-60 Over 60 Under 15 15-60 Over 60 Morocco 43.5 % 51.8 % 4.8 % 27.1 % 61.8 % 11.1 % Algeria 46.4 % 48.6 % 4.9 % 29.3 % 61.1 % 9.6 % Tunisia 41.9 % 52.5 % 5.7 % 24.0 % 63.3 % 12.7 % Table 11: Evolution of the age pyramid in Maghreb between 1980 and 2018 (Source: HCP) Urban population (% of total population) 1980 Urban population (% of total population) 2018 Morocco 41.1% 62.4% Algeria 43.5 % 72.6% Tunisia 50.6% 68.9% Table 12: Urban population rate in Maghreb between 1980 and 2018 (Source: HCP) BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 69
70. 1 .1.2. Digitally oriented population Access to internet has been growing steadily in the region over the past two decades. Today, around two thirds of the population are connected to internet mostly through mobile phones (Table 13) 94 95 96. Internet users (Million) Internet users (% of population) Internet users’ growth (01/2019 to 01/2020) Morocco94 25.32 69% +13% Algeria 22.71 52% +12% 7.55 64% +0.6% 95 Tunisia 96 Table 13: Internet access rates in Maghreb (Source: Hootsuite) Virtually all citizens of the Maghreb countries have mobile phones, which tend to be connected to a broadband network (3G-4G) as shown in Table 14 94 95 96. Mobile phone connections (Million) Mobile phone connections (% of population) Percentage of mobile connections that are Broadband Year-on-year change in Average speed of mobile Internet connections Morocco94 43.35 118% 65% +62% Algeria95 49.48 114% 70% +35% Tunisia96 17.77 151% 53% +7.6% Table 14: Mobile phone figures in Maghreb (Source: Hootsuite) In the Maghreb countries, half of internet users are active users of social media. In Morocco, for instance, the users spend every day 2 hours and 33 minutes on average on different social media platforms (Table 15)94 95 96. Morocco Active social Media users (Million) Social media penetration rate 18 49% Algeria95 22 51% Tunisia 7.3 62% 94 96 Table 15: Social media usage patterns (Source: Hootsuite) BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 70
71. 1 .1.3. Relatively low financial inclusion The share of population with access to financial services remains low although it has improved during the last decade. Access to financial services is defined as the share of the adult population with an account ownership at a financial institution or with a mobile-money-service provider (Table 16).97 Global Financial inclusion ranking Account ownership at a financial institution or with a mobile-money-service provider (% of population 15+) Makes online purchases And / or pays bills online (% of population 15+) Morocco 126 28.64% 2% Algeria 100 42.78% 4.6% Tunisia 113 36.91% 6.6% Table 16: A selection of financial inclusion indicators in 2017 (Source: World Bank) In Brief : Importance of financial inclusion in the context of COVID-19 Financial inclusion benefits economies and societies as a whole. This is particularly true in the context of COVID-19 where the pandemic imposes limitations on face to face interactions. Maghreb countries’ governments have undertaken considerable efforts to distribute money in support of low-income households with little access to traditional financial institutions. By leveraging advances in mobile mony, Fintech services and online banking, governments can quickly and effectively incorporate unbanked families into the financial system to facilitate money transfer to cope with similar cries. Figure 41: Importance of financial inclusion in the context of COVID-19 BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 71
72. 1 .1.4. High level of remittances with high transfer costs The migration from the Maghreb countries dates back to the first half of the 20th century and has taken place predominantly in Western Europe which hosts 80 percent of Maghreb migrants with around 15 million people of North African origin in 2016.98 Maghreb migration waves to Europe have been driven by geographic proximity, previous labor recruitment agreements and postcolonial ties99. The strong growth of Maghreb diaspora in Europe and globally has naturally led to a steady increase in remittances to countries of origin (Table 17). However, the cost of money transfer has remained relatively high and above the SDG Target 10.C of 3 percent sought to be attained by 2030,100 which open doors to alternative solutions. In Billion US$ (2019) As % of GDP (2018) Morocco 6.7 5.9 % Algeria 1.79 4.8 % Tunisia 1.9 1% Table 17: Personal remittances received in Maghreb countries101 (Source: World Bank) 1.2. Factors precluding Fintech emergence in Maghreb 2011-01 2011-05 2011-09 2012-01 2012-05 2012-09 2013-01 2013-05 2013-09 2014-01 2014-05 2014-09 2015-01 2015-05 2015-09 2016-01 2016-05 2016-09 2017-01 2017-05 2017-09 2018-01 2018-05 2018-09 2019-01 2019-05 2019-09 2020-01 2020-05 2020-09 In recent years, Fintech has attracted the attention of Maghreb financial institutions, start-ups, the media and the general public (Figure 42). Multiple events promoting Fintech are regularly organized by incumbent financial players, regulators, academic institutions and incubators. Figure 42: Fintech interest trend in Maghreb countries (2011-2020) based on “Google Trends” data102 103 (Source: Google Trends) BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 72
73. Despite Fintech ’s popularity and the above-described supporting factors, Maghreb is among the least developed regions in the world in this industry. None of the Maghreb countries appears in the 2018 IFZ Global Fintech Rankings (30 countries)104 nor is it listed in “the 2019 Fintech 100 ranking105. Moreover, in “The 2020 Global Fintech Index”106, Tunis is ranked 6th in MENA region and 196th globally. Regionally, Morocco and Tunisia were classified under emerging African Fintech ecosystems in “Digitalizing Africa: The rise of Fintech Companies” report107. In another Fintech study focusing on MENA region, Morocco and Tunisia are ranked seventh and ninth respectively in terms of number of Fintech start-ups (Figure 43).108 Mr. Hamid Rashid from Finterra summarizes the Fintech situation in the region: “There is development of Fintech in the Maghreb, but it is not as rapid as the rest of the countries in the region. There is interest in using Fintech for Islamic financial institutions in the region. However, the use of Fintech seems to be quite low. It is more in the research phase to understand how Fintech can be integrated into the operations of the Islamic financial institutions” 2018 IFZ Global FinTech Rankings 2019 Fintech 100 ranking 2020 Global Fintech Index Digitalizing Africa report 2019 MENA Fintech venture report 2019 Figure 43: Maghreb countries presence in selected international and regional rankings (Source: PWC & CFC, KMPG, Findexable, MAGNiTT and ThomsonReuters) The following sections present factors explaining the underdevelopment of fintech in the region. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 73
74. 1 .2.1. Internet quality and availability According to Opensignal109, Internet quality can be captured through several metrics including (cf. appendix B for further details): • Download speed experience • Upload speed experience • Quality of Mobile video experience • 4G availability • Voice app experience • Game experience Based on these metrics, it would be fair to claim that mobile internet quality in Maghreb region is at best average compared to other regions. Mobile internet quality maghreb countries global ranking (out of 100 countries) 98 98 97 94 94 88 73 51 61 57 Algeria 61 61 59 57 49 DOWNLOAD SPEED EXPERIENCE Morocco 62 UPLOAD SPEED EXPERIENCE 4G AVAILABILITY MOBILE VIDÉO EXPERIENCE GAMES EXPERIENCE 60 53 VOICE APP EXPERIENCE Tunisia Figure 44: Mobile internet quality in Maghreb countries: Global ranking (out of 100 countries)110 (Source: OpenSignal) With respect to fixed broadband, the situation is not better. In fact, Table 18 indicates that Maghreb countries are not well ranked globally in terms of download speed in fixed broadband. Fixed broadband download speed (Ranking out of 175 countries) Fixed broadband download speed (Mbps) Morocco Algeria Tunisia 123 172 158 20.29 4.81 10.23 Table 18: Maghreb countries Fixed broadband download speed and global ranking (Source: Speedtest® by Ookla®111) BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 74
75. Additionally , the fixed broadband penetration rate in the region (measured by subscriptions per 100 000 people) has been lower than middle income countries during the last ten years . Middle income 12 Tunisia 10 Algeria 8 6 Morocco 4 2 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Figure 45: Evolution fixed broadband subscriptions per 100 000 people in Maghreb and Middle-income countries from 2010 to 2019 112 (Source: World Bank) 1.2.2. Preference for cash The informal economy’s weight is very significant in Maghreb countries both in terms of GDP and employment (Figure 46). Since transactions in the informal sector are cash-based, formal financial institutions (including fintech companies) are de facto penalized. As stated by Mr. Fouad Harraze, Former CEO of Al Akhdar Bank “the development of electronic payments in particular and Fintech in general, is hampered by deep-rooted preferences for cash”. Undeclared output as % of GDP 37.9% 35.7% 39.6% % of the labor force not contributing to social security 76.2% 63.3% 51.4% Figure 46: Undeclared output as % of GDP and % of the labor force not contributing to social security in Maghreb countries113 (Source: World Bank) BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 75
76. 1 .2.3. Structure of financial markets In Maghreb, there is a significant gap between the development of the banking system and the development of capital markets, which means that even large firms are not immune to financing constraints. The efficiency of capital markets is key for the success of startups operating in the fintech field. Table 19 and Table 20 show the evolution of IPOs (Initial Public Offer) and IFOs (Follow-On Public Offer) in Maghreb countries from 2010 to 2019114. In 2019, total capital raised in Maghreb countries through IFOs and IPOs amounted to US$ 1 144 million, which is less than 0.35% of the region GDP115 ! 1980 2018 2018 2018 Number of IPOs Capital raised ($m) Number of IPOs Capital raised ($m) Number of IPOs Capital raised ($m) Number of IPOs Capital raised ($m) Morocco 1 195 0 0 2 84 0 0 Algeria 1 21 2 11 1 8 0 0 Tunisia 1 58 0 0 1 1 0 0 Table 19: Evolution of IPOs in Maghreb countries (2016-2019) (Source: PWC) 2016 2017 2018 2019 Number of IFOs Capital raised ($m) Number of IFOs Capital raised ($m) Number of IFOs Capital raised ($m) Number of IFOs Capital raised ($m) Morocco 0 0 2 145 0 0 5 1 100 Algeria 2 12 6 24 1 42 4 144 Tunisia 0 0 0 0 0 0 0 0 Table 20: Evolution of IFOs in Maghreb countries (2016-2019) (Source: PWC) BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 76
77. Additionally , many studies point out to the limited competition in the banking sector (Cf. Table 21) which leads to lower incentives for innovation, including in Fintech. According to Mr. Mohamed Maarouf, former CEO of BTI Bank, limited competition in the banking sector explains why digitizing initiative undertaken by incumbent players are usually incremental innovations. Country Findings Morocco According to a study by the Moroccan Central Bank, the banking sector in Morocco displays a moderately high degree of concentration. Nevertheless, the use of the Panzar and Rosse model116 to assess banks’ market power indicates a situation of monopolistic competition, like many developed and emerging countries117. Another study by S&P Global indicates that the Moroccan banking system is one of the largest and most concentrated in North Africa118 Algeria Of the twenty banks operating in Algeria, six state-run banks retain the lion’s share of the market, accounting for nearly 90 percent at the end of 2017119. The dominance of the public sector is a major hinder of competition dynamic. Tunisia Statistics from World Integrated Trade Solution (WITS)120 indicate a Herfindahl–Hirschman Index121 for Tunisian banking sector of 0.15 in 2017 compared to 0.1 for Morocco in the same year, which suggests a higher level of concentration in the Tunisian Banking sector compared to Morocco Table 21: Concentration and competition in Maghreb banking markets (Source: Moroccan Central Bank, S&P Global, Oxford Business Group and WITS) 1.2.4. Legal and regulatory framework As indicated in the following figure, the legal and regulatory framework is at an embryonic stage, with many Fintech domains not covered by laws or regulations. The discrepancy between the rapid changes in financial technologies as compared with time consuming legal and regulatory processes represents a major challenge. Chapter 2 explores in further details the Fintech legal and regulatory environment in the Maghreb countries. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 77
78. Crowdfunding E-Wallets Crypto-assets Distributed ledger Technology Open Banking Biometrics Specific laws of regulations exist or are at an advanced stage Specific laws of regulations do not exist or are at an initial stage Figure 47 : Specific regulations covering Fintech in Maghreb countries In Brief : Operating in the absence of specific laws or regulations The absence of specific laws and regulations in many Fintech domains does not prevent Fintech companies from entering the market. The striking example is Crowdfunding where many platforms are active in equity, loan and donation activies at a time where the legel and regulatory environment is not yet finalized. While these platforms enrich the financial ecosystem and bring value to their funders and beneficiaries, the status quo poses several risk including consumer and investor protection, anti-money laundering (AML) and business continuity. Figure 48: Operating in Fintech in the absence of regulation BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 78
79. 2 . Zoom on the Fintech legal and regulatory environment in Maghreb 2.1. Payments Historically, payments have been provided exclusively by banking institutions. This monopoly ended in Morocco and Tunisia in the past two years and payment companies are now fully active in Morocco (cf. Figure 49 and Figure 50).122 123 124 According to the latest estimations, payment companies in Morocco already manage more than 1.5 million e-wallets. 125 More detailed indicators on payment companies in Morocco are particularly scarce and hard to collect. 2015 New banking law approved (103-12) 2018 Two Central bank circulars on payment companies (6/W/16 & 7/W/16) Since 2018 11 licenses granted by Central Bank Figure 49: Payment companies’ milestones in Morocco 2016 New banking law approved (2016-48) 2018 Central bank circulars on payment companies (2018-61) 2020 2 licenses granted by Central Bank Figure 50: Payment companies’ milestones in Tunisia Regulations in Morocco and Tunisia allow payment companies to deliver various services (Figure 51) through three e-wallet categories that are defined depending on the account’s maximum limit. Know Your Customer (KYC) requirements differ depending on the account and these companies are not allowed to offer financing services. One of the advantages enjoyed by payment companies is the possibility to onboard clients digitally. In Morocco, it was only after April 23rd, 2020 – in the midst of the Covid19 crisis – that banks have been authorized to onboard retail and corporate clients remotely through digital authentication tools. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 79
80. Payment accounts Money transfer Currency exchange Services Cards , e-wallet app. Cash deposit and withdrawal Figure 51: Main services of payment companies in Morocco and Tunisia 2.2. Digital signature All the Maghreb countries introduced laws on digital signature and the electronic exchange of legal data (Morocco: Law 53-05, Tunisia: Law 2000-83 & Algeria: Law 15-04). The goal of these laws is to support dematerialization policies initiated by the public administration and the private sector. However, the number of certificates issued is still very low (35 000 certificates in 2019 in Morocco and 21 738 in Tunisia in 2018).127 In April 2020 and as a response to the COVID19 crisis, Barid Al-Maghrib, the only trusted third party in Morocco, announced the simplification of the processes for granting electronic signature certificates as well as the reduction of certificates’ prices. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 80
81. 2 .3. Crowdfunding Despite the growing number of crowdfunding platforms operating in the Maghreb region, their activities are currently not under any specific crowdfunding regulation. In Morocco and Tunisia, a crowdfunding legal framework is in preparation while in Algeria, crowdfunding was authorized in the amended finance law 2020 following Covid19 crisis.128 Table 22 summarizes crowdfunding laws in Maghreb countries. Current status Morocco Tunisia Algeria Law approved by the parliament lower house on February 2020 Law submitted to the Parliament on February 2020 crowdfunding authorized in the amended finance law Lending, equity and donations Lending and equity Equity Lending and donations: The Central Bank Equity: The Securities Commission Lending: The Central Bank Equity: The Securities Commission The Securities Commission 30 000 US$ Not specified Not specified Maximum US$ 1 million per year per project Maximum US$ 2 million per year per project Not specified Not specified Crowdfunding activities covered Supervisory bodies Crowdfunding company minimum equity Limits for projects financed Table 22: Maghreb Crowdfunding laws and regulations comparison (Source: Ministries of Finance in Morocco and Algeria. Ministry of Communication Technologies in Tunisia) Barid Al-Maghrib simplifies the processes for granting electronic signature certificates and reduces the certificate prices COVID-19 Boosts Fintech Crowdfunding authorized in the amended finance law in Algeria The Central Bank allows Moroccan Banks to onboard retail and corporate clients remotely through digital authentication tools Figure 52: When COVID-19 boosts Fintech BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 81
82. 2 .4. Cryptocurrencies There is no regulation specifically addressing cyptocurrencies or crypto-assets in the Maghreb countries. However, in November 2017, the Moroccan Central Bank, the Securities’ Commission, and the Ministry of Finance jointly warned the public that any use of cryptocurrencies and specifically BITCOIN as a method of payment would be a clear breach of the applicable laws. This warning was made on the premises that cryptocurrencies do not offer any protection to customers, are volatile, and are used as a support to criminal activities and money laundering. 2.5. Fintech Sandboxes Tunisia is the only Maghreb country with a Fintech sandbox, which was officially launched on January 2020. According to the Tunisian Central Bank, the Sandbox is a test environment that allows monitoring the testing of innovative solutions offered by small-scale Fintechs and with voluntary customers. This is a flexibility granted by the regulator aimed at punctually exempting startups from certain obligations without allowing them to use this Sandbox to circumvent potential regulatory or legal provisions upon expiry of the test period.129 After an application process that lasts one-month, selected Fintech companies are admitted into the Sandbox for a period up to one year. The sandbox’s eligibility criteria130 are herein presented (Figure 53). An innovative solution A realistic business plan A clear added value for end users A communication plan Readiness for regulatory tests An already tested solution Figure 53: BCT Sandbox eligibility criteria (Source: Central Bank of Tunisia) BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 82
83. 2 .6. Start-ups Tunisia is the only Maghreb country with a dedicated legal and regulatory framework for Startups (the Startup Act). This framework, presented in Table 23, seeks to facilitate the launch and development of Tunisian startups. Element Details Law No. 2018-20 Law N°. 2018-20 (April 17, 2018) related to Startups Decree N ° 2018-840 Decree N° 2018-840 (October 11, 2018) setting the conditions, procedures and time limits for granting and withdrawing the startup label and for the benefit of incentives and advantages for Startups and the organization , prerogatives and operating procedures of the labeling committee Circular of the Central Bank of Tunisia 2019-01 Circular of the Central Bank of Tunisia N° 2019-01 (January 30th 2019) related to startups foreign currency accounts Circular of the Central Bank 2019-02 Circular of the Central Bank of Tunisia N° 2019-02 (January 30th 2019) related to the use of international payment cards by labeled start-ups Table 23: Startup Act Legal & regulatory framework (Source: Startup Act, Tunisia) The Startup Act includes 20 measures structured around a Label of merit and benefits to entrepreneurs, investors and Startups (Figure 54). As of September 2020, 338 startups got the Startup Act label out of 600 applications.131 BENEFITS TO INVESTORS Incentives to encourage Investors invest in Stratups: Guarantee fund, fiscal deduction, Capital gains tax exemption... BENEFITS TO ENTREPRENEURS Incentives to encourage Investors invest in Stratups: Guarantee fund, fiscal deduction, Capital gains tax exemption... BENEFITS TO STARTUPS COMPANIES Advantages to support the development of Startups from Tunisia : Supportive taxation, foreign currency accounts, sdministrative support. Figure 54: Start-up act benefit package132 (Source: Startup Act, Tunisia) BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 83
84. 3 . A selection of Fintech experiences in the Maghreb region This section presents a selection of Fintech experiences in the Maghreb countries. As shown in the examples below, Fintech activities in Maghreb cover various activities, most of which are concentrated in the payment and banking areas. As a result, Maghreb Fintech companies address sustainability challenges mainly from the financial inclusion standpoint which is explicitly mentioned as a target in SDG1 ( eradicating poverty), SDG 2 (ending hunger, achieving food security and promoting sustainable agriculture), SDG 3 (health and well-being), SDG 5 (gender equality and economic empowerment of women), SDG 8 (promoting economic growth and jobs), SDG 9 (supporting industry, innovation, and infrastructure) and, SDG 10 (reducing inequality). (Cf. Appendix C) In our analysis, we did not identify any Fintech company positioned exclusively on the Islamic Finance sphere. However, some Fintech companies count in their clients’ portfolio Islamic Financial Institutions (Figures 55-64). ABOUT KAOUN ABOUT SOBFLOUS • Kaoun implements identification and automation products to make financial services faster and more accessible to everyone • Tunisian Start-up label : 2019 • Website: kaoun.com • Sobflous is an electronic wallet (web and mobile) • Tunisian Start-up label : 2019 • website : sobflous.tn MAIN PRODUCTS & SERVICES MAIN PRODUCTS & SERVICES • Payment solutions built with distributed ledger technology for retail and corporate clients • Paments solution integration with core banking systems • • • • REVENUE MODEL REVENUE MODEL • Fees generated depend on transfer and payment amounts • Company does not disclose revenues source Figure 55: KAOUN general presentation (Source: KAOUN) Invoice payment services Money transfer Merchant payment Purchase of phone refill Figure 56: SOBFLOUS general presentation (Source: SOBFLOUS) BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 84
85. ABOUT DEEPERA ABOUT SQOIN • Democratize finance by offering investment advisory for everyone through Al models • Tunisian Start-up label : 2019 • Website: instadeep.com • Specialized in blockchain, SQOIN develops solutions to facilitate e-commerce through an exchange of tokens on the blockchain. • Tunisian Start-up label : 2020 • Website : sqoin.us/coin/ MAIN PRODUCTS & SERVICES MAIN PRODUCTS & SERVICES • • • • • • • Crypto software package to help companies implement cryptocurrency exchange • Sqoin cryptocurrency: The Sqoin protocol is permissionless cryptocurrency that can fully protect the privacy of transactions with no-knowledge in cryptography • A blochchain solution to manage companies’ internal payment systems and reduce related fees Algorithmic trading using machine learning Al based solution to fight insurance fraud Data Market Feed Order Managment System Mobile trading Stock Exchange Management Clearing System REVENUE MODEL REVENUE MODEL • Revenue generated through real time managment of stock exchange orders on mobile application, sale of information technology systems related to stock exchange management (front to back), chatbots, Al trading system, etc. • Company does not provide information about revenue model Figure 57: DEEPRA general presentation (Source: DEEPRA) Figure 58: SQOIN general presentation (Source: SQOIN) ABOUT NINVESTI ABOUT BANXY • Connect young entrepreneurs with the Algerian diapora wishing to invest in innovative projects in Algeria • Ninvesti is still in the setup phase • Website: ninvesti.com • Created by Natixis Algeria, Banxy is the first Digital bank in Algeria • Website: banxybank.com MAIN PRODUCTS & SERVICES MAIN PRODUCTS & SERVICES • Lending based Crowdfunding • Equity based Crowdfunding • Rewards based Crowdfunding • Current accounts • Saving accounts • Debit cards REVENUE MODEL REVENUE MODEL • As per similar business models, revenues are generated based on a percentage of collected amounts • Banking fees Such as international and local bank transfer fees, renewing credit cards, maintenance fees, etc. Figure 59: NINVESTI general presentation (Source: NINVESTI) Figure 60: BANXY general presentation (Source: BANXY) BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 85
86. ABOUT INWI MONEY ABOUT CIWA • Mobile payment and E-Wallet company subsidiary of INWI a mobile operator • Website : inwimoney.ma • Ciwa is a 100 percent free digital solution to organize and manage the tontine • Website: ciwa.io MAIN PRODUCTS & SERVICES MAIN PRODUCTS & SERVICES • • • • • • • • Invoice payment services Money transfer Merchant payment Purchase of phone refill Managing tontine processes Managing cash flows Managing tontine communities Credit risk scoring using artificial intelligence REVENUE MODEL REVENUE MODEL • Fees apply on funds retrieval (vary depending on the amount) and on phone balance transfer. • Company does not provide information about revenues sources Figure 61: INWI MONEY general presentation (Source: INWI MONEY) Figure 62: CIWA general presentation (Source: CIWA) ABOUT ADRIA ABOUT WULUJ • Adria Business and Technology is a software company that develops and implements software solution for banks and financial institutions • Website adria-bt.com • Wuluj is a pre-sale platform that offers entrepreneurs the opportunity to market their product or service at least at the prototype stage • Website: Wuluj.com MAIN PRODUCTS & SERVICES MAIN PRODUCTS & SERVICES • Software solutions for • Mobile banking • Digital signature • Wallets • Cash managment • Trade finance • Stock exchanges • Reward based Crowdfunding • Donation based Crowdfunding REVENUE MODEL REVENUE MODEL • Revenues generated through sale of financial services solutions, advisory, training and maintenance. • As per similar business models, revenues are generated based on percentage of Crowdfunding collected amounts. Figure 63: WULUJ general presentation (Source: WULUJ Figure 64: ADRIA general presentation (Source: ADRIA) BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 86
87. Conclusion The Maghreb countries enjoy a set of factors that are conducive of the development of Fintech in the region . A young population combined with relatively low financial inclusion rates, among other discussed factors, are key ingredients to the emergence of local Fintech success stories. However, many challenges prevail and are yet to be overcome. These include internet quality, preference for cash as well as regulatory challenges. Particularly, developing the legal and regulatory framework for Fintech in Maghreb is vital. The limitations of the existing framework prevent Fintech companies from achieving their full growth potential and poses serious risks on both investors and consumers. Although several encouraging initiatives have been taken to introduce few Fintech business models in Maghreb, these initiatives are scattered and have got only limited reach. Covering regulatory gaps will not only propel the development of Fintech products and services, but it will also help manage and mitigate the risks associated with current market players who operate under unclear regulatory guidelines. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 87
88. LEVERAGING FINTECH FOR SUSTAINABLE DEVELOPMENT : A SELECTION OF INTERNATIONAL EXPERIENCES Key Insights • Financial technologies provide tremendous possibilities to align finance with sustainability challenges • Fintech for sustainable development initiatives are diverse. They are initiated by the public and private sector; they operate in developed and developing countries and are at different development stages • While many successful initiatives bridging Fintech and sustainable development are in the conventional finance side, these experiences can be leveraged in the context of Islamic Finance This Chapter presents examples of global Fintech initiatives addressing sustainable development challenges. These experiences demonstrate that it is possible to align financial and impact objectives through Fintech levers. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 88
89. The Fintech initiatives presented in this chapter were selected through a process (Figure 65) that ensures a diversity in terms of: • Coverage of multiple sustainability challenges: SDG1 (Poverty), SDG3 (Health), SDG4 (Quality Education), SDG6 (Clean water and sanitation), SDG 7 (Affordable and clean energy) and SDG13 (Climate Change Mitigation) • Mix between conventional and Islamic finance experiences • Applied in both in developing and developed countries • Fintech experience initiated by public, private and nonprofit organizations • Fintech across different development stages: Seed, early stage, growth and expansion Search engines Fintech reports Islamic Finance reports Magazines articles Academic articles Discussions with experts SDGs addressed Conventional vs Islamic finance Developing vs developed countries Public, private and non profit Fintech development stage 23 Fintech experiences Figure 65: Selection process of Fintech experiences The presentation of global Fintech experiences is structured through the following perspectives: • Background information: General information on the Fintech initiative owner and environment • Value proposition: The innovation added value in terms of addressing sustainable development challenges (poverty, education, energy, healthcare…) • Revenue stream: The revenue model that allows the Fintech initiative to generate revenues • Impact: Key performance indicators that capture the impact of the Fintech initiative on sustainable development BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 89
90. The following table summarizes the international experiences presented in this Chapter . Main SDGs addressed SDG 1 – No Poverty SDG 2 – Zero Hunger SDG 3 – Good Health and Well Being SDG 4- Quality Education SDG 6 - Clean water and sanitation Initiative Owner Objective Easy Paisa (Pakistan) Financial inclusion for all M-PESA (Kenya) Funding for everyone Ecofarmer (Zimbabwe) Protection of farming activities Finterra (Malaysia) Waqf platform Kiva (USA) Crowdfunding for new opportunities ZakiBaznas (Indonesia) Zakat chatbot Zakatify (United States) Zakat management application Blossom finance (Indonesia) Sukūk for Microfinance institutions India Stack (India) Digital services for all Angsur (Indonesia) Microfinance for students Ethis Crowd (Indonesia) Islamic crowdfunding for housing Irisguard (EyePay in Jordan) Financial inclusion through authentication Easypaisa (Pakistan) Health insurance for all M-TIBA (Kenya) Healthcare for all Government of Sierra Leone Retention of the healthcare workforce Cover US (United States) Impact token for healthcare Mint (USA) Fintech for financial literacy Amply (South Africa) Tracking the attendance of children at schools Safe Water Network (Ghana) Access to water for all SDG 7 – Affordable and clean energy M KOPA (Kenya) Pay-as-you-go for electricity Sun Exchange (South Africa) Electricity for all SDG 13- Climate Change Mitigation REDD-Chain Impact token to preserve forests BYD (China) Encouraging electric vehicles Table 24: International Fintech experience presented in the Chapter BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 90
91. 1 . Poverty and Fragility (SDG1) In light of the targets defined by the United Nations Sustainable Development Goals, Financial technologies can help in implementing appropriate social protection systems and measures, providing equal rights to economic resources, as well as access to basic services, ownership and control over land and other forms or property, inheritance, natural resources, appropriate new technology and financial services, reducing the exposure of the poor and those in vulnerability to climate related extreme events. 1 Financial inclusion for all Easypaisa (Pakistan) Background information Easypaisa133 is Pakistan’s first mobile banking platform launched in 2009. It was initially launched as a money transfer service, but it turned into a complete platform that enables people across the country to adopt the digital way of life. Easypaisa operates as a branchless banking service offering to its customers a wide range of products. Value proposition Easypaisa offers a multitude of services that include bill payment, QR payment, money transfer, loans, business related digital payment solutions. Revenue stream Easypaisa charges fees on money transfer, interbank funds transfer, balance inquiry, cash withdrawal from mobile account, ATM cash withdrawal, besides charges on insurance products and interest on loans. Impact • Nearly 650,000 transactions are conducted on Easypaisa every day • In 2015, 230.7 million transactions conducted through Easypaisa, equivalent to approximately 635,000 every day. The total value of these transactions in 2015 was approximately $7.8 billion, equivalent to 3 percent of Pakistan’s GDP in 2015. • 20 million active customers using Easypaisa, of whom 1.6 million have mobile money accounts • In 2016, 75,000 agents in more than 800 locations across Pakistan meaning it has the largest financial footprint in the country, and one of the largest mobile money service offerings in the world134. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 91
92. 2 Funding for everyone M-PESA (Kenya) Background information M-PESA is a mobile phone-based money transfer service, payments and micro-financing service, launched in 2007 by Vodafone Group plc and Safaricom, the largest mobile network operator in Kenya. It has since expanded to Tanzania, Mozambique, DRC, Lesotho, Ghana, Egypt, Afghanistan, South Africa, India, Romania, and Albania. Value proposition M-PESA allows users to deposit, withdraw, transfer money, pay for goods and services, access credit and savings, all with a mobile device. Specifically, M-PESA enables customers to access micro credit products of a minimum of KSHs.100 (less than USD 1) any time and receive the loan instantly on their M-PESA account. In fact, M-PESA customers build a credit score enabling them to access loans via the company bank partners. Customers can also access an overdraft facility on M-PESA to support them to make payments when they don’t quite have enough balance on their account. The better their credit score, the larger their overdraft can be Revenue stream M-PESA charges fees on funds withdrawal from agents, transfers, ATM withdrawals besides interest on loans Impact M-PESA enables around 41.5 million customers to access secure and affordable basic financial services. In 2019, 12 billion transactions were conducted using the wide range of services proposed by M-PESA. The company has more than 430,000 agents operating in 7 countries135. 3 Protection of farming activities EcoFamer (Zimbabwe) Background information EcoFarmer was launched in 2013 in Zimbabwe as a weather indexed insurance business. It offers farmers, government, contracting companies, NGOs, farmer unions etc. a wide range of digital solutions to ensure the highest level of productivity across the agriculture value chain. Value proposition EcoFarmer allows customers (farmers) to get access among others to insurance services reducing their exposure to the effects of climate related extreme events. Indeed, such initiatives are also expected to reduce the number of people that could become vulnerable in such circumstances. Specifically, Ecofarmer Weather Indexed Insurance indemnifies the farmer against the loss of grain as a result of a false rainfall start, drought or excessive rainfall during the insurance contract period Revenue stream Premiums are charged for EcoFarmer different Insurance products. EcoFarmer offers other products such as booking farming products using mobile phones (tractors, spreaders, rippers, etc.) as well as sale of agricultural inputs (seeds, chemicals and fertilizers) to be delivered to the recipients in Zimbabwe136. Impact In 2018, the EcoFarmer Platform had over 700 000 registered farmers benefiting from the company’s different products137. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 92
93. 4 Waqf platform Finterra (Malaysia) Background information A technology-based company providing blockchain-based Islamic applications that address global issues, Finterra was established in 2017 and currently has presence in Malaysia, Singapore, Hong Kong, UAE, and India, with plans to further expand into Africa and the rest of Middle East. Value proposition Finterra offers a Waqf platform using blockchain technology and allows Waqf Boards, NGOs, Corporate CSR, Trusts and other stakeholders with the opportunity to create causes, submit project outlines / plans which are required to fund Waqf projects and causes. Donors can contribute to either Cash Waqf or Waqf projects. The platform promotes transparency in all financial transactions, use of smart contracts, sound governance practices through e-KYC and reporting, etc138. Revenue stream • Cloud software subscription fees to users on the Waqf Blockchain platform • White-labelled software implementation services fees to clients that purchase whitelabelled software licenses for Waqf Blockchain, or other FinTech solutions, like e-Wallet, Payment Gateway and Trading/exchange Platform • Consulting, advisory and training services • Transaction fees applied to the transfer of funds within the Blockchain eco-system • Success fees applied to charitable, waqf, or investment causes for raising funds in Finterra’s blockchain crowdfunding platform Impact Finterra’s Waqf platform has already served 8 countries by 12 Waqf fund pools where 680 verified donors have contributed and impacted the lives of 9450 individuals139. 5 Crowdfunding for new opportunities Kiva (USA) Background information Kiva is a crowdfunding platform that aims at unlocking capital through loans for the underserved population. Indeed, Kiva aims at improving the quality and cost of financial services to achieve financial and economic inclusion around the world. The main principle underlying Kiva platform is to facilitate the access of people to financial resources without any additional cost. Indeed, the operating costs of Kiva are covered by voluntary donations from Kiva lenders. Value proposition The borrower applies for a loan on Kiva.org, then, the loan application goes through the underwriting and approval process. Once the application is approved, the loan is posted to Kiva for lenders to support until the fundraising is complete. The borrower starts to repay the loan based on the given repayment schedule and the borrower’s ability to repay. At the end of the process, lenders use repayments to fund new loans, donate or withdraw the money. Revenue stream Kiva covers most of their operating costs through voluntary donations made by Kiva lenders. The remainder of costs are covered through grants and donations from foundations and supporters. Kiva don’t take fees from lenders. 100 percent of funds lent on Kiva go to funding loans.140 Impact By the end of Mai 2020, Kiva has dealt with 3.6 million borrowers with more than US$1.45 billion of loans granted to 1.9 million lenders across 77 countries. The repayment rate is equal to 96 percent and the minimum contribution to loans is US$25. Out of beneficiaries: • 282,126 are in conflict zones • 1,178,249 are in least developed countries • 918,381 are farmers • 218,000 gained access to clean energy141 BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 93
94. 6 Zakat chatbot Zakibaznas (Indonesia) Background information The National Board of Zakat (BAZNAS) is the only official body formed by the government, based on Republic of Indonesia’s Presidential Decree No. 8 of 2001, which has the role and function of collecting and distributing zakat, infaq, and alms at the national level. Value proposition BAZNAS collaborated with Artdigi to launch a virtual charity assistant named @zakibaznas. This virtual assistant, equipped with Natural Language Processing, conducts conversations with users to provide assistance in performing transactions and obtaining information (example: Zakat calculation) Revenue stream Not applicable Impact @zakibaznas is part of BAZNAS strategy to boost zakat collection through various digital channels (crowdfunding platforms, integration with e-commerce platforms, mobile payment, SMS payment M-cash machines). Zakat collection in Indonesia grew by 37.34 percent and 24.6 percent respectively in 2016 and 2017142 7 Zakat management application Zakatify (United States) Background information Planning and managing all aspects related to Zakat payment by individuals can be burdensome. Zakatify makes this process easier, secure and more convenient. Value proposition Zakatify allows users to pay their Zakat by first helping them discover charities that matter the most to them and the causes they intend to support. Users can choose from a diverse database of verified, tax-exempt and Zakat eligible charities in the United States. Through Zakatify, users can set automatic monthly donations besides sharing their experiences and engaging online with other Zakatify users. The mobile application is powered by PayPal which receives donations and regrants them to chosen charities. Payments are processed by PayPal for secure transactions.143 Revenue stream Zakatify charges a 5 percent platform fee144 Impact Users of the Zakatify app have the possibility of giving Zakat to 1500 charities in the United States through the platform143 BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 94
95. 8 Suk ūk for Islamic Microfinance Blossom Finance (Indonesia) Background information Blossom Labs, Inc. is a US Delaware company, operationally headquartered in Jakarta. Founded in 2014, Blossom aims to increase the availability of Islamic financial services using technology Value proposition Blossom Finance launched its Smart Sukūk platform to standardize and automate legal, accounting and payment aspects of Sukūk. The platform utilizes Ethereum smart contracts to increase the efficiency and reach of Sukūk issuance globally. Unlike in traditional Sukūk, issuers of Smart Sukūk can raise notes as small as US$20,000145 Revenue stream No up-front administrative or service fees charged to investors. Blossom Finance earns a share of investor profits145. Impact In 2019, Blossom finance successfully raised $50,000 through world’s first Sukūk issuance on a public blockchain. The proceeds went to Indonesia’s BMT Bina Ummah, an Islamic micro finance cooperative that supports micro-SMEs and entrepreneurs who do not receive conventional financing146 9 Digital services for all India Stack (India) Background information India Stack is a set of Application Programming Interface that allows a user in India to demand services digitally. Offered services include proving identity, completing KYC, making digital payments, making digital signatures, sharing of data, etc. For example, India Stack has facilitated the creation of a unique identification system named ‘Aadhaar’. This creates a unique digital ID for each beneficiary which has allowed the government to deliver accurate payments for unemployment benefits and subsidies. Digital verification using iris, face or fingerprint scans, ensure the benefits reach the right person anywhere within the country. Value proposition India Stack provides four distinct technology layers: • Presence-less layer: Where a universal biometric digital identity allows people to participate in any service from anywhere in India • Paperless layer: Where digital records move with an individual’s digital identity, eliminating the need for massive amount of paper collection and storage • Cashless layer: Where a single interface to all the India’s bank accounts and wallets to democratize payments • Consent layer: Which allows data to move freely and securely to democratize the market for data147 Revenue stream India Stack is fully government funded Impact As per July 2019, India Stack has authenticated 2.98 billion Aadhaar, performed 150 million e-KYC, and connected to 339 million bank accounts.148 BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 95
96. 10 Microfinance for students Angsur (Indonesia) Background information Angsur serves the unbanked population by providing Shari’a-compliant financing to undergraduate students without credit history and collateral.149 Value proposition Angsur gathers social media data and assesses creditworthiness based on digital presence. Then, financing is extended through Murābaḥah contracts where installments are paid over 1 to 12 months according to the borrower’s preferences, with usually more than 10 percent advance payment. Education on the Angsur microfinance benefit is performed by other students called Angsur Student Partners.150 Additionally, Angsur takes 2.5 percent from product margin for sadaqah which will be distributed to orphan and people who lives in slums. Revenue stream Profit on Murābaḥah transactions Impact Angsur is still in the “seed” stage 11 Islamic Crowdfunding for Housing Ethis (Indonesia) Background information Ethis is the first Shari’ahh-compliant Islamic crowdfunding startup. It is an Indonesiabased investment platform for those interested in real estate and impact investing, and aims to fund property-based projects. Ethis operational model is based on: • Identifying real-estate investment opportunities (Indonesia). • Allowing investors to pool their money and invest in Shari’ahh-certified property-related investment opportunities. • Working with Islamic scholars to certify investments as Halal. Value proposition • The first fully Shari’ahh-certified property crowdfunding/ investment platform. • Invest from any country in Indonesian real estate The platform matches small and large investors as well as institutions directly to property development projects in exciting markets such as Indonesia. The investment structures are based on Murābaḥah or Istitsna’a. The investors sign up, fill their information, and share their ID copy. Then, the investors can browse campaigns, select the project to invest in and submit the investment application. The investor transfers online his/her funds to the project’s bank account and receives monthly project updates by email. Revenue stream Ethis collects an operating fee of 6 percent of the total amount raised from each fully funded project. Impact Ethis has raised project value of USD 45.1 million. The venture has supported the construction of over 8,300 houses with the help of 1,275 investors.151 BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 96
97. 2 . Zero Hunger (SDG2) Extreme hunger and malnutrition remain a huge barrier to development in many countries. There are 821 million people estimated to be chronically undernourished as of 2017, often as a direct consequence of environmental degradation, drought and biodiversity loss. Over 90 million children under five are dangerously underweight. Undernourishment and severe food insecurity appear to be increasing in almost all regions of Africa, as well as in South America. Financial technologies can contribute to solve these issues as depicted in the following example. 1 Financial inclusion through authentication Irisguard (EyePay in Jordan) Background information Fintech is used by humanitarian and financial aid donors for Syrian conflict victims by digitally registering the refugees with EyePay, an application released by the company Irisguard. EyePay operates using blockchain technology, Ethereum, to support financial inclusion of Syrian refugees in Jordan by processing supermarket and ATM transactions in real-time. The registration uses the refugee’s iris as their digital identity to help them manage their cash. Value proposition Once a shopper has their iris scanned, the system automatically communicates with UNHCR’s registration database to confirm the identity of the refugee, checks the account balance with the financial services firms and then confirms the purchase and prints out a receipt – all within seconds. Revenue stream Iris Guard invest in the infrastructure and provide flexible charging options including both a CAPEX and OPEX model. The company seeks to establish efficient and cost-effective charging model with the aim to minimize set up costs and run on a fee per transaction basis throughout the duration of the operation152 Impact • 2,767,999 beneficiaries globally with 1,300 Touch Points • 15.7 million processed transactions ($1.2b in value) • In Jordan, iris scan allows more than 1000,000 Syrian refugees to purchase food from camp supermarkets without exchanging cash.153 BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 97
98. 3 . Good health and wellbeing (SDG3) Financial technologies can contribute in increasing health financing and the recruitment, development, training and retention of the health workforce in developing countries, especially in least developed countries and Small Island developing States. Moreover, it can contribute in achieving universal health coverage, including financial risk protection, access to quality essential healthcare services and access to safe, effective, quality and affordable essential medicines and vaccines for all. 1 Health insurance for all Easypaisa (Pakistan) Background information Easypaisa commercializes health related insurance products underwritten by insurance companies and Takaful operators through mobile accounts’ solutions providing significant benefits with a minimum annual premium and a flexibility of treatment. Value proposition Through Easypaisa, customers can have access to insurance plans including hospitalization cover, doctor consultation, Tele doctor consultation besides other benefits.154 Revenue stream The company charges premiums for insurance products Impact By the end of 2015, Sehat Sahara (an Easypaisa insurance product) had over 100,000 subscribers and had settled 1,400 claims with an average claim value of approximately $50.155 2 Healthcare for all M-TIBA (Kenya) Background information M-TIBA is a Kenyan health financing technology platform for consumers, insurers, healthcare providers, and governments. It enables users to manage their insurance policy or health payments on their mobile. It helps insurers, donors, and governments to distribute benefits efficiently and transparently. Value proposition M-TIBA allows among others to: • Manage health policy using mobile phones • Receive medical funds from employers using mobile phones • Distribute special funds by donors providing large scale health schemes management • Access a cash advance by M-TIBA healthcare providers Revenue stream • Registering onto M-TIBA is free. • Saving in the M-TIBA from M-PESA is free of charge. • Sending money to another person’s MTIBA attracts the normal M-PESA Pay Bill transaction fees156 • Interests on a short-term cash advance157 Impact • • • • Over 4.7 million users across Africa Handled more than 1048 million transactions 3128 health providers on the platform Handled more than 684k treatment claims.158 BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 98
99. 3 Retention of the healthcare workforce Government of Sierra Leone Background information In 2014 , Ebola was devastating the Western African countries that were facing various social and economic issues. The Republic of Sierra Leone had to deal particularly with the issue of paying salaries to emergency workers. They had to cross a long distance to get their salaries in cash and sometimes, they would find their money disbursed to impostors. As a result, emergency workers started to resign which made the situation worse159 Value proposition The government decided to move to mobile payments since 95 percent of the country was covered by a mobile phone network and 90 percent of the emergency workers had mobile phones. However, when implementing mobile payments, the government found out that only 15 percent of emergency workers had mobile money accounts and with the Ebola threat that was forcing social distancing, the only available solution was to use facial recognition technology to solve the authentication issue159. Revenue stream Initiative funded by the government Impact Switching to making the payments on mobile-phone accounts through facial recognition, allowed emergency workers to be paid in a week, rather than after a month with deductions159 4 Impact token for healthcare CoverUS (United States) Background information In the United States, more than 50 percent of patients are skipping doctor’s appointments, prescriptions and medical procedures until they have the necessary funds to pay for it. Moreover, the healthcare industry does not have enough data to conduct highly targeted marketing campaigns to raise awareness of people towards healthy actions and to collect real-time, real world health data from patients at scale. All these elements increase the cost for research and development. Value proposition CoverUS enables consumers to profit from their direct sharing of healthcare data through participation in surveys and adherence programs. Indeed, consumers receive a compensation for their participation that could be used to pay for health treatment. The CoverUS platform is based on Blockchain that supports transparent third-party auditing of data sharing and financial transactions on a distributed ledger. CoverUS uses blockchain technology as a way to let members directly transact their health data with parties that are interested in that data and get value from it. Revenue stream At the center of the CoverUS strategy is a subscription-based mobile app. New user download and interact with the app, which stores their health data on their smartphone and serves as their digital wallet.160 Impact Making medication more affordable. CoverUs users save up to 87 percent off their medications at 67,000 pharmacies BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 99
100. 4 . Quality education (SDG4) Financial technologies can contribute in providing the necessary funds to ensure that all girls and boys get access to quality early childhood development, care and primary education, complete free, equitable and quality primary and secondary education. Moreover, Fintech can contribute in increasing the number of youth and adults who have relevant skills for employment, decent jobs and entrepreneurship. FinTech can help youth and adults to achieve literacy and numeracy. 1 Fintech for financial literacy Mint (USA) Background information Intuit Inc. is an American business and financial software company, founded in 1983 in Palo Alto, California. Intuit Inc. develops and sells financial, accounting, and tax preparation software and related services for small businesses, accountants, and individuals Value proposition Intuit Mint application offers a wide range of services and features like: • Bill payment tracker: the application gathers all the bills –from credit card and utility bills, to rent payments and any other bill- in one place to manage them easily. • Budgeting: the application calculates average spending by category to create easily a budget based on spending history. • Free credit score: the application calculates credit scores for free and helps customers to improve their solvency and liquidity. • Alerts: the application includes alerts to avoid unnecessary fees when the balances are low or bill payments are due in order to avoid fees and penalties. • Budget categorization • Investment: application to track investment portfolio Revenue stream Sale of financial, accounting, and tax preparation software and related services for small businesses, accountants, and individuals. Impact Intuit (parent company of Mint) has prepared 150,000 individuals for jobs, created 2,200161 jobs and contributed USD 63 million of labor income for distressed communities162 BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 100
101. 2 Tracking the attendance of children at schools Amply (South Africa) Background information The South African government has a per-child-per-day subsidy program of over US$200 million to support over 800 000 children qualifying as low income across thousands of registered preschools around the country. To benefit from this program, teachers have to track the daily attendance through an unverifiable paper-based system and quarterly reports to review by administrators at the Department of Social Development before any payment can be done. This process is costly with the possibility of errors and fraud risks. Value proposition Children in South Africa have self-sovereign digital identities that are encrypted within an individual’s personal data store that is controlled only by them and their parents. These digital entities and educational history are recorded on a ledger that allows parents and children to receive the benefits they are entitled to. When a child arrives at school, the teacher uses a mobile application to log attendance in a verifiable standardized claim format, making the data interoperable across platforms. These data can be verified by an external authority. Then, a smart contract generates an impact token that the school can convert to subsidies from the government. Revenue stream Grants Impact • Improved quality education for children • Governments are able to understand better where and how services are delivered and improve program resources planning and allocation • Since the pilot began in 2016, more than 61,000 digital attendance records have been created across 85 ECD centers in South Africa, primarily in the Western Cape BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 101
102. 5 . Clean water and sanitation (SDG6) Water scarcity affects more than 40 percent of people, an alarming figure that is projected to rise as temperatures do. Although 2.1 billion people have improved water sanitation since 1990, dwindling drinking water supplies are affecting every continent. Financial technologies can positively affect the lives of people by ensuring universal safe and affordable drinking water to many people. 1 Access to water for all Safe Water Network (Ghana) Background information Despite an investment of roughly half a billion USD in infrastructure, many people in Ghana still lack access to safe water. Besides, many people rely on surface water which contains life-threatening parasites. In some regions of the country, the water has significant water discoloration and contains dangerous minerals. During the dry season, many areas suffer from water scarcity. Safe Water Network was founded in 2006 to address the above issues. In 2008, Safe Water Network established field offices in Accra, Ghana and New Delhi in India. Value proposition • Safe Water Network works with communities to develop locally owned and managed Safe Water Stations. Safe Water Network provides low cost technology to treat water, provides local operators with the training and tools to operate water stations, develops educational programs and marketing campaigns to explain the benefits of safe water usage, etc. • The water services are offered through water ATMs and smart prepaid meters for household connections that improve access by increasing water availability and empowering consumers to collect water when it is most convenient for them. Besides, customers are able to top-up water ATM cards and prepaid “smart” meter balances for household connections via cashless payments at any place and time. Revenue stream Water is sold to the community at an affordable price. This revenue is used to pay for the operating costs of running and maintaining the Safe Water Station. This overcomes a key obstacle to sustainability because many systems fail due to not having the money to pay for repairs or to perform routine maintenance. Impact As of 2019 in both Ghana and India, 1.6 million people had access to safe water.164 BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 102
103. 6 . Affordable and clean energy (SDG7) Between 2000 and 2016, the number of people with electricity increased from 78 to 87 percent, and the numbers without electricity dipped to just below one billion. Yet as the population continues to grow, so will the demand for cheap energy, and an economy reliant on fossil fuels is creating drastic changes to our climate. Financial technologies can support equipping the underserved with clean and cheap energy creating drastic positive changes to our climate. 1 Pay-as-you-go for electricity M-KOPA (Kenya) Background information M-KOPA is the largest firm in Africa (eastern Africa) providing mini rooftop solar panels in connection with mobile phone network enabling the provider to switch off or on the panels remotely. Value proposition M-KOPA in Kenya provides a solution that can help enterprises and merchants to open for more hours with an acceptable cost of energy and to increase their income and have a positive impact on employment and investment. Indeed, instead of paying US$250 in one shot for such installations, M-KOPA offer them to pay 50 cents daily through mobile money accounts, otherwise, the panels would be switched off. Revenue stream M-KOPA charges for electricity using the “pay-as-you-go” financing model allowing customers to get instant access to products while building ownership over time through flexible micro-payments. M-KOPA offer other products related to smartphones ownership and financial services.165 Impact • Access to the company’s products has enabled millions of off-grid homes to replace their toxic kerosene lanterns or diesel generators with a higher-quality, clean solar solution, effectively avoiding 1.8 million metric tons of CO2 and black carbon emissions. • USD 428 million the company’s customers have saved switching to solar energy using M-KOPA. • M-KOPA services allowed 50 percent of their customers to support or generate income.166 2 Electricity for all Sun Exchange (South Africa) Background information Sun Exchange is a South-African blockchain based peer to peer solar leasing platform. Through Sun Exchange, anyone, anywhere in the world, can own solar energy-producing cells and build wealth by leasing cells to power businesses and organizations in emerging markets, with installations and maintenance taken care of by Sun Exchange167. Value proposition Once solar projects have been accepted as viable and responsible, a crowd sale for the solar cells that will power the project is run. Then, installation of the solar project begins. The appointed local construction partners install solar cells, which typically takes four to six weeks, but can be longer for larger projects. Schools, businesses and organizations pay to use the clean electricity that solar cells produce. The lease starts when the solar cells start generating electricity. Solar cells owners receive monthly solar income, net of insurance and servicing fees, into their Sun Exchange wallet in their choice of the local currency of the project or Bitcoin167. Revenue stream Percentage of financial transactions on the platform Impact Sun Exchange has over 4,000 registered members located in over 70 countries168. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 103
104. 7 . Climate change mitigation (SDG13) Fintech can contribute to strengthening resilience and adaptive capacity to climate related hazards and natural disasters in all countries. It can integrate climate change measures into national policies, strategies and planning and improve education, awareness-raising and human and institutional capacity on climate change mitigation, adaptation, impact reduction and early warning. 1 mpact tokens to preserve forests REDD-Chain Background information According to some studies169, land-use change and deforestation generate between 12 and 29 percent of global Greenhouse gas emissions. Therefore, limiting deforestation and forest degradation would reduce emissions. In this context, this initiative aims at giving a financial value to forests as an incentive to farmers who would conserve the forests. Value proposition The Blockchain technology enables the traceability of impacts for donors and recipients and encourages the increase of results-based payments using smart contracts. The conservation of forests is observed and controlled using high resolution satellite images, providing confirmation that the conditions of the smart contracts in place have been fulfilled. Artificial Intelligence enhances data verification and quality while generating new knowledge and analysis. Finally, local actors are rewarded with tokens for submitting the necessary information on forest conservation through mobile applications. These local farmers can monetize forest conservation on REDD-Chain and by setting up digital wallets, they can have direct access to financial services. Revenue stream The core RCP-platform shall be operated in a not-for-profit setup, covering its costs with a user-based service fee170 Impact Raising awareness of people by contributing in reducing deforestation BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 104
105. 1 Encouraging electric vehicles BYD (China) Background information Being the largest emitter of carbon dioxide emissions in the world, China would become the largest carbon market in the world based on its national carbon trading scheme to provide incentives for the country to move to a sustainable energy future. Indeed, those who rely on clean and renewable energy sources would earn a credit while those who continue to emit Greenhouse gas would pay for them. Value proposition • The blockchain-based ecosystem collects the necessary data through the application that calculates the emission reductions and then, almost instantly, through a smart contract, reward users with carbon credit tokens for using a clean form of transportation. • In addition, data is utilized by insurance and financial service companies to provide accurate, cost-effective product packages to their customers171 Revenue stream Rewarding drivers based on their performance and carbon footprint does not have a specific revenue stream per se. However, the platform contributes to the strategy of positioning BYD as an international leader in clean transportation172 Impact Reducing Greenhouse gas emissions 8. Conclusion In this chapter, we have explored various examples of Fintech companies initiated by public, private and nonprofit organizations and addressing sustainability challenges globally. These experiences highlight the role of Fintech in lowering the cost of transactions, improving efficiency and fostering innovation in order to build a value proposition that reconcile financial profits and impact imperatives. While most of the featured Fintech initiatives are operating in conventional finance, these experiences provide valuable insights that can be leveraged in the context of Islamic finance. In the next chapter, we will explore practical policy recommendations that have the potential to foster the development of Fintech experience that are aligned with sustainable development in the Maghreb countries. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 105
106. UNLEASHING FINTECH FOR SUSTAINABLE DEVELOPMENT IN MAGHREB : RECOMMENDATIONS Key Insights • Financial technologies provide tremendous possibilities to align finance with sustainability challenges • Fintech for sustainable development initiatives are diverse. They are initiated by the public and private sector; they operate in developed and developing countries and are at different development stages • While many successful initiatives bridging Fintech and sustainable development are in the conventional finance side, these experiences can be leveraged in the context of Islamic Finance BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 106
107. Introduction The main policy problem this report addresses concerns the low contribution of IFIs to social , economic and environmental development in the Maghreb region both quantitatively and qualitatively. This problem is rooted in a number set of causes and sub-causes ranging from scalability and regulation to governance and innovation. To address this problem, the present report points out the integration of social, environmental and economic development into the business models of IFIs through Fintech as a key leverage point. This section proposes a selection of policy interventions that support the application of the abovementioned leverage point. The policy recommendations are as follows: 1. Completing the existing legal and regulatory framework of the Maghreb countries is an essential step before engaging in more complex and elaborate policies; 2. Regulatory sandboxes are a major program that should be set up in order to allow the testing of new financial services in a safe environment; 3. Innovation labs / accelerators should be initiated to provide the necessary support and guidance for Fintech companies; 4. Developing a taxonomy related to green and social finance is a necessary tool in the objective of unifying the use of this field terms and avoid confusion across market participants; 5. Capacity and skill building for both regulators and other stakeholders is crucial to upgrading their workforce’s skills and know-how in this rapidly evolving technology environment; 6. Financial and technical literacy for consumers aims at rendering the use of Fintech services by end users easy, efficient, and costeffective, which positively impacts financial inclusion; 7. Open banking policies target sharing data with third-party developers which fosters innovation in the provision of digital financial services. Each of the above policy recommendations is described as per the following framework: Element Details 1. Policy description Defining the policy recommendation scope and presenting the main stakeholders and relevant statistics 2. Policy intervention objectives Presenting the potential benefits behind the policy 3. Policy implementation process A linear causal sequence from intervention to intermediate variables and changes in the final problem of concern 4. Policy challenges Discussing policy challenges and mitigation strategies Table 25: Presentation of policy recommendations BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 107
108. Policy intervention 1 : Completing the existing legal and regulatory framework Before engaging in more complex and costly policies, the Maghreb countries should complete their existing Fintech related legal and regulatory frameworks. As explained in Chapter 3 (Figure 66), in addition to crowdfunding and E-Wallets, the Maghreb countries should develop and enact specific regulations regarding crypto-assets, distributed ledger technology, biometrics, etc. Crowdfunding E-Wallets Crypto-assets Distributed Ledger Technology Open Banking Biometrics Specific laws of regulations exist or are at an advanced stage Specific laws of regulations do not exist or are at an initial stage Figure 66: Specific regulations covering Fintech in Maghreb countries These regulations constitute the basics upon which other more elaborate policies can be established. In terms of cost, effort and time, completing the existing legal and regulatory frameworks is an optimal way to start the building blocks of a wider and more comprehensive Fintech strategy. For regulators, it is far better to concentrate on this aspect in the beginning as it allows them to tackle simpler and less complex issues first. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 108
109. Policy intervention 2 : Regulatory sandboxes 1. Policy presentation Regulatory Sandboxes are ‘Formal regulatory programs for market participants to test new financial services or models, with live customers, subject to certain safeguards and oversight’173. Regulatory sandboxes have been widely adopted as an innovative regulatory initiative. According to the World bank, there are more than 60 Sandboxes globally174. Sandbox schemes differ in terms of targeted participants, eligibility criteria for accepting projects, testing parameters, application process and exit strategy. For instance, in Australia the ASIC (Australian Securities and Investments Commission) regulatory sandbox175 is targeted towards only new unregulated entrants that do not hold a license to carry out a regulated financial service, while in most jurisdictions these initiatives are also open to regulated institutions and technology providers. In some jurisdictions (Abu Dhabi, Japan and the UK), participants are accepted under a cohort scheme, while in other jurisdictions participants are accepted in an ongoing basis176. As mentioned in Section 3 of this report, Tunisia is the only Maghreb country with a Fintech sandbox, which was officially launched in January 2020. Therefore, the sandbox recommendation concerns Morocco and Algeria solely. 2. Policy objectives In a report by United Nations Secretary-General’s Special Advocate for Inclusive Finance for Development (UNSGSA), more than 50 percent of the regulators interviewed highlighted the difficulty to develop the required depth of knowledge of the Fintech space to inform sound policymaking. Sandboxes provide a tool for regulators to collaboratively engage in marketplace innovation, probe the risks and benefits of emerging technology, and develop long-term policy from a more informed position. The potential benefits of a regulatory sandbox are summarized in the following table: Regulator Innovators Consumers Inform long term policy making through learning and experimentation educe time-to-market by streamlining the authorization process Promote introduction of new and potentially safer products Signal commitment to innovation and learning Reduce regulatory uncertainty, such as that new technologies and business models will be prohibited Increase access to financial products and services Promote communication and engagement with market participants Gather feedback on regulatory requirements and risks Update regulations that may prohibit beneficial innovation Improve access to capital Table 26: Benefits of Sandboxes to stakeholders BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 109
110. 3 . Policy implementation process Application period Review period Sandbox phase Exit DESCRIPTION Establishing sandboxes • Develop & implement digital communication strategy • Public consultation and outreach • Estabilish core team, governance and reporting structure • Identify internal expert networks • Appoint Sandbox selection committee • Track and engage inbound enquiries • Review and revise FAQ • Administrative review of applications • Conduct background checks on applicants • Interview applicants • Select finalists • Assign participants to a dedicated supervisory team • Design testing plans • Implement testing plans • Review of test results by supervisory team • Final recommendations by the sandbox committee • Public reporting on lesson learned • Revision to sandbox framework (if appropriate) • Revision to licensing and regulatory regime if appropriate KPIs PROSESS The implementation process of regulatory sandboxes is presented in the Figure below: • Alicated budget • Duration of the application period • Number of applications received • Duration of the review period • Number of startups selected • The cost per sandbox participant • percentage of firms successfully completed testing • Number of sandboxtested products released into the market • percentage of firms that receive investment during or following their tests Figure 67: Regulatory sandbox implementation process The ultimate step in a regulatory sandbox process is the Exit phase with one of the following options174: • Full authorization: If the test is successful, and the firm is deemed capable of being suitable for the market, the firm applies for full authorization so the restricted authorization or temporary licensing can be removed; • Regulatory Change: This is the recognition that the regulatory framework as it currently stands is not adequate and requires a regulatory change to support this new type of business model; • Extension: Participant firms can also apply to extend the period in the Sandbox test environment if conclusive results are not obtained; • Cease and Desist: If the testing has revealed to the firm and the regulators that it is not suitable for the market, either due to the lack of readiness or the need for the product not clear within the market. 4. Policy challenges Regulators face four main challenges in implementing regulatory sandboxes: • Regulators are not usually technology experts, which may make it difficult to understand and assess innovative business models and practices. Consequently, engaging with Fintech ecosystem stakeholders is key. They include new-entrants, incumbents, individual experts, academics, industry associations and other regulatory authorities; • In small Fintech Markets like in Algeria and Morocco, regulators may receive few applications to the Sandbox. Communication strategy is therefore critical for success of the sandbox initiative; • Central banks and regulators are traditionally risk-averse, often valuing stability over innovation. However, innovation can create opportunities to simultaneously enhance stability and inclusion; • Sandboxes require substantial resources and capacity to implement, as well as engagement with multiple stakeholders through various committees. The development of a regulatory sandbox typically requires a minimum of at least six months and go up to 18 months177. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 110
111. Policy intervention 3 : Innovation labs / accelerators 1. Policy presentation Innovation lab / innovation office / accelerator or incubator are terms commonly used interchangeably to refer to a unit set up by a supervisory agency to provide a dedicated point of contact for firms to raise enquiries with competent authorities on Fintech-related issues and to seek non-binding guidance on regulatory and supervisory expectations, including licensing requirements. Most commonly, innovation labs provide support, advice, guidance and even, in some cases, physical office space, to regulated and unregulated firms. Single points of contact, dedicated newly created units, identified networks of experts or similar organizational arrangements can be considered as Innovation labs.178 With Tunisia launching very recently its innovation lab179, we recommend the implementation of such a policy in Algeria and Morocco. 2. Policy objectives Innovation labs can help signal to the market that the regulator is keen to interact with and support more and more the emerging field of the Fintech industry. These labs can play different roles ranging from providing assistance in making an application to authorize new products to hosting Fintech related events and would serve the supervisory authorities to better understand new business models and technologies as well as identify their challenges associated with Fintech. An important implication of the latter is the mutual learning experiences shared between regulators and Fintech companies which results in overall synergies between the two parties and significant advancement in the Fintech industry. The attractiveness of innovation labs lies in the fact, among others, that they are less resource intensive to establish. According to the ‘Regulating Alternative Finance’ WBG–CCAF survey, respondents reported that Innovation Offices supported a much higher number of firms than Regulatory Sandboxes.180 According to this survey, the number of firms supported by innovation labs amounted to 2163 while only 180 firms were assisted by regulatory sandboxes. Moreover, experience in certain countries shows that innovation labs help companies reduce the time-to-market of their projects and, at the same time, allow financial authorities to have a better understanding of financial innovations.181   BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 111
112. 3 . Policy Implementation process PROSESS Establish innovation labs DESCRIPTION • Define objectives of innovation labs as well as fields of expertise to be addressed • Appoint experts for the project management by the regulator • Identify internal and external expert networks • Review of guidance and advice requests • Engage with applicants for a better understanding of their needs • Offer innovation labs advisory services to selected Fintech companies • Put in place office spaces • Host Fintech related events • Public reporting on lessons learned • Adjustment to the policy if needed KPIs The implementation process of innovation labs is as follows: • Allocated budget • Number of experts • Duration of the review time • The cost per innovation lab participant • Number of firms that benefited from advisory services • percentage of use of offices • Number of hosted events • Number of firms whose products have been put in the market • percentage of firms that receive investment Roll out Innovation labs Adjust Figure 68: Innovation labs implementation process 4. Policy challenges Just like for sandboxes, regulators are faced with complexities of the new technologies entailed in the fintech industry. Providing support, guidance and advice require some degree of knowledge and expertise in the respective fields. As a mitigating factor, capacity building, as will be discussed later in the recommendations, is a key factor to equip regulators with the necessary skills allowing them to accompany Fintech companies in their quest of market success. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 112
113. Policy intervention 4 : Developing a taxonomy related to green and social finance 1. Policy presentation Despite the fact that finance professionals are increasingly aware of green and social finance, the absence of a taxonomy implies that there are still no unified terms of the concepts used in this field. Terms such as impact investing, ESG investing and socially responsible finance can be mistakenly used in the absence of a clear and common regulatory taxonomy. Social and green finance taxonomy requires the development of a classification of both the objects of the financing process, mainly social and green investments, and entities such as enterprises and organizations that fall under the indications of social businesses. This gives opportunity for a clear interpretation of all components of the sustainable finance system and facilitates investors’ decision-making process concerning their investment preferences and values. 2. Policy objectives In the field of green and social finance, there is usually no common definition and categorization of many concepts that tend to be interrelated besides being used interchangeably. This usually creates confusion among stakeholders especially parties publishing reports in this field. This is why it is of extreme importance to develop a taxonomy related to this area in order to unify the terms used and their meanings at the national level, ensure comparability between publications and most importantly uniform the understanding of the different used terms and concepts across the green and social finance. For example, the Moroccan Capital Markets Authority (AMMC) have issued guidelines on green, social and sustainability bonds to encourage investors efforts in the financing of sustainable development. Although these initiatives represent a giant step towards the uniformization of social and green finance used concepts, developing a global taxonomy on the national or regional levels is paramount to the industry development and success. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 113
114. 3 . Policy Implementation process PROSESS Form a taxonomy ad hoc committee DESCRIPTION • Define the policy objectives • Communicate about the public initiative • Select experts involved in developing the taxonomy • Form the taxonomy related committee • Engage with stakeholders (financial institutions, associations, etc.) • Draft the taxonomy • Receive stakeholders’ remarks and adjust the taxonomy accordingly • Update the taxonomy • Ensure a wide communication at the national level of the taxonomy • Ensure the gradual compulsory use of the taxonomy by stakeholders • Public reporting on lessons learned • Revision of taxonomy in case needed KPIs The implementation process of a green and social finance taxonomy is as follows: • Allocated budget • Duration of the draft period • Number of queries and remarks received • Number of communication events held • Number of stakeholders present in these events • Number of stakeholders using the taxonomy Publish a draft of the taxonomy Publish the final version of the taxonomy Adjust Figure 69: Green and social finance implementation process 4. Policy challenges Developing a national taxonomy related to green and social finance would face the following challenges: • Lack of understanding of the taxonomy policy or simply ignorance of the existence of such a policy could be an impediment to its success. Ensuring communication at the national level is essential; • The use of the taxonomy by all stakeholders is paramount for the success of the policy. In case its use is not compulsory, the wide adoption of the green and social taxonomy would be challenging. Hence, reports, publications, events, data, information and all published materials must respect this taxonomy; • Immediate application of the policy would be challenging for some stakeholders as they need some time to grasp the new concepts as well as adapt their publications to the terms adopted in the taxonomy. This could be managed through the gradual compulsory use of the taxonomy to give stakeholders the necessary time to adjust to the new policy. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 114
115. Policy intervention 5 : Capacity and skill building 1. Policy presentation Capacity and skill building refer to the process of developing and strengthening skills, capacities and knowledge necessary for organizations to thrive in a fast-changing environment. In the context of Fintech, capacity building is closely linked to the promotion of an innovative organizational mindset and nurture inhouse talent in the different fields required by the Fintech industry.184 In addition, capacity and skill building could be targeted to cover the social and green finance scope to complement the efforts of developing a related taxonomy in order to provide stakeholders with the necessary knowledge in this field. Specifically, capacity building at each Maghreb country level can achieve excellent results in case of knowledge sharing between different stakeholders (investors, policymakers, Fintech companies, financial institutions) where practical issues can be exposed and insights can be shared for a better learning of all. 2. Policy objectives Because regulators need to keep up with the rapidly changing environment of Fintech to carry out their important mission of financial stability and consumer protection, capacity building for regulators is needed. In fact, regulators should not only build technical skills of their workforce but should be ready to keep up with Fintech new business models and products (e.g., crypto assets) and regulate them properly. These efforts should be generalized in all stakeholders’ organizations where capacity building programs in Fintech relevant fields should be implemented. Green and social finance is another area where organizations need to strengthen their workforce capacities and skills. As discussed earlier, the taxonomy of green and social finance should be imposed to market participants gradually. Capacity building in this instance has a twofold objective i) equip the workforce with the skills they need in this subject and ii) reduce the timeframe to the global application of the taxonomy in the market. Universities can participate in this effort of knowledge spreading offering their research capacities on relevant topics as well as Fintech and social finance training programs and degrees. Companies and financial institutions should promote an organizational mindset that encourages innovation and rewards achievement in this regard. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 115
116. 3 . Policy Implementation process Roll-out the policy Adjust the policy DESCRIPTION Prepare the policy • Define the policy themes and objectives • Define the targeted categories within an organization • Define partners such as universities and training companies and the details of the partnerships • Ensure internal communication about the policy • Conduct capacity building sessions • Collect remarks and readjust content accordingly • Evaluate the success of the overall policy periodically • Revision to the policy if needed KPIs PROSESS The implementation process of this policy is as follows: • Allocated budget • Number of partner institutions • Number of modules offered • Number of conducted sessions • Number of participants • Number of successful participants • Number of trained highly skilled workers • Number of these workers becoming executives • percentage of retained highly skilled employees Figure 70: Capacity and skill building implementation process 4. Policy challenges Developing capacity and skill building could face the following challenges: • Capacity building within an organization needs to be conducted by experts of the Fintech and sustainable finance industry. These should be identified and carefully chosen. They include investors, policy makers and Fintech entrepreneurs. Partners can also be multilateral institutions (IsDB, World Bank, etc.) that offer capacity building in a certain number of Fintech and sustainable finance relevant fields; • Encouraging a change in the organizational mindset that should be first and foremost innovation friendly is not an easy task. Whether it concerns the regulators or other organizations, this mindset should be shared by all employees from the top to the bottom of the organization, that they need to upgrade their skills to keep up with new Fintech and non-Fintech concepts and ideas. Education about this aspect is key and practical changes set by the executives (such as rewarding innovation) are essential. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 116
117. Policy intervention 6 : Financial and technical literacy for consumers 1. Policy presentation Digital and financial literacy refers to knowledge, acquired skills and necessary habits to use digital devices for financial transactions effectively. This includes basic literacy as well as the ability to use technology and understand financial services. Together, digital and financial literacy are core competencies for using Fintech products safely and for achieving economic mobility and financial inclusion. Examples of financial literacy initiatives comprise apps, documents (printed or online), interactive games, as well as to traditional educational approaches (such as classes, courses, seminars, leaflets or distance learning) . In Maghreb, even though some initiatives already exist in this perspective , these need to be upgraded to include the knowledge required by the new Fintech products and services. Adopting a national policy for Fintech financial literacy and financial inclusion would benefit the targeted countries in terms of synergies between the public and private sectors. 2. Policy objectives In the context of Fintech, financial and digital literacy are important to facilitate an easy, efficient and costeffective use of Fintech services by end users. Financial and technical literacy campaigns, by both public and private sectors, should use all available communication channels with a special focus on the digital channel and social media as these allow a cheap and wide sharing of information especially among the youth. Including financial and technical literacy content in school curricula, workshops, trainings, conferences, etc. is also beneficial for the dissemination of valuable information permitting to adopt Fintech services widely and effectively across the region. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 117
118. 3 . Policy Implementation process Roll-out the strategy Adjust the strategy DESCRIPTION Prepare a national strategy for Fintech financial literacy • Identify key stakeholders of the policy (public sector, private sector, non-profit organizations, universities, etc.) • Select participants from each stakeholder • Set up the necessary committees • Define the national strategy initiatives and roadmap • Define communication channels • Roll out financial literacy initiatives (trainings, seminars, booklets, apps, interactive games…) • Ensure effective communication about the strategy • Public reporting on lessons learned • Revision of the national strategy if needed KPIs PROSESS This policy implementation process is as follows: • Number of participants • Allocated budget • Duration • Number of initiatives • Number of targeted people • Number of people that adjusted their financial behavior thanks to the strategy Figure 71: Financial and technical literacy for consumers (implementation process) 4. Policy challenges Implementing a national Fintech related strategy of financial and technical literacy would face the following challenges: • A lack or inefficient communication about the content made as part of this strategy will certainly hinder reaching its objectives. Thus, ensuring a wide a communication about the strategy and the content is crucial. This can be achieved through the use of all communication channels i.e., both the traditional and digital channels. • Even with the existence of a financial literacy policy, because of the relative complexity of the Fintech industry, some people may choose to avoid using digital financial services completely which will result in financial exclusion. This could be addressed through simplifying the concepts to suit everyone’s level of understanding. In this perspective, educational videos seem to be the most efficient and the less expensive instrument. Moreover, they are motivating and they have the power of attraction and can influence emotions and make learning an interesting journey. • Financial exclusion can take place as well because individuals may become concerned about privacy and security. This highlights the need for government to include a comprehensive education strategy that encompasses all aspects and subjects of Fintech. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 118
119. Policy intervention 7 : Open banking policies 1. Policy presentation Open banking refers to the sharing and leveraging of customer-permissioned data from banks with thirdparty developers and firms to build applications and services that provide real-time payments, greater financial transparency options for account holders, marketing, etc. Globally, application of this policy differs between jurisdictions that follow a prescriptive approach by mandating banks to share customer-permissioned data with registered third parties, and those that follow a facilitative approach by issuing guidance that includes recommended designs and technical specifications to encourage API (Application Programming Interface) adoption as an innovation enabler in financial services. As an example, the Fintech Law in Mexico enacted by the Mexican Federal Government has set forth open banking plans for Mexico’s entire financial sector. The Law requires financial institutions to establish open APIs, with the aim to make financial data accessible while respecting privacy and commercial confidentiality. As of today, no country in the Maghreb have adopted this policy meaning that it applies to Algeria, Morocco and Tunisia. 2. Policy objectives Without access to relevant financial institutions information, Fintech companies’ capacity to design reliable and cost-effective products is tremendously reduced. Open banking policies seek to increase competition in the banking sector and to foster innovation in the provision of digital financial services.190 For the success of this policy in Maghreb, Fintech regulations should require all financial institutions to implement standards relative to establishing open banking policies with the aim to make financial data accessible while respecting customer privacy and security. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 119
120. 3 . Policy Implementation process Enact Open banking regulation – phase 2 Adjust the policy DESCRIPTION Prepare the policy Enact Open banking regulation – phase 1 • Identify key stakeholders of the policy (Regulators, Financial institutions, Fintech companies, etc..) • Define recommended designs and technical specifications of data sharing • Develop privacy and security policies • Enact the open banking law • Gradual sharing of data following the agreed technical specifications • Developing new products based on shared data by Fintech companies • Update the taxonomy • Ensure a wide communication at the national level of the taxonomy • Ensure the gradual compulsory use of the taxonomy by stakeholders • Public reporting on lessons learned KPIs PROSESS This policy implementation process is as follows: • Duration to enact the regulation • Allocated budget • Number of new products launched • Duration of this phase • Number of new products launched • Number of people using the new products • Number of new products launched • Number of people using the new products Figure 72: Open banking policies (implementation process) 4. Policy challenges Data privacy and security as well as third-party risk management are the main risks entailed in the open banking policies. Regulatory frameworks of the Maghreb countries should cover: licensing of third parties; restrictions around screen scraping practices; data privacy and disclosure/consent requirements; conditions with which third parties should comply for sharing and/or reselling data onward to “fourth parties” or using the data for purposes beyond the customer’s original consent; and expectations or requirements for data storage and security.192 Conclusion The recommendations set forth in this last part do not pretend to be exhaustive. However, if applied, these constitute a perfect starting point to set up a strong Fintech industry capable of enhancing the operational environment of Fintech companies. The Maghreb countries could gain important benefits by implementing these strategies. These range from lowering Fintech related costs, strengthening customer protection, increasing financial inclusion and ultimately creating appropriate conditions for the success of local Fintech companies. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 120
121. APPENDICES BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 121
122. Appendix A : Progressive approach in advancing VBI implementation (Bank Negara Malaysia) Initiating 1. The first phase is a starting ground for IBIs where emphasis is given on transparent commitment to integrate VBI into overall operations and offerings and advocacy efforts in creating awareness and instilling solid understanding on VBI to both internal and external stakeholders. 2. IBIs are expected to reflect their VBI-related aspiration in the institutions’ mission statement or any other medium relevant to institution to chart its priority and focus area moving forward. 3. Also, IBIs may demonstrate commitment through participation in relevant movement/association or voluntarily subject themselves to relevant parameter/certification, either at international or domestic level e.g. VBI Community of Practitioners (CoP), Sustainable Banking Network, UN Global Compact, UN Principles for Responsible Investment and Responsible Finance Investment (RFI) Foundation. 4. During the initiating phase, IBIs also begin to develop the following basic tools (prerequisites) for VBI implementation: a. Specific VBI implementation roadmap, which translates the mission into action ‘. Such roadmap is supported with structured performance tracking to ensure that meaningful changes are crystallized, not remain as high-level aspirational statements. b. Internal infrastructure and capacity building necessary for execution of the VBI implementation roadmap. This could be in the form of improvement in banking infrastructure, talent or expertise and internal governance structure & process. Emerging 1. Emerging phase witnesses IBIs gradually integrate principle of VBI in their offerings and banking practices: a. Development & offering of banking products and services that are consistent with VBI. For instance, financial products & services that aim to fulfill customers’ needs in the right manner. Consequently, IBIs are expected to monitor & manage any unintended consequences of their offerings such as promoting excessive consumption/ borrowing. b. Adoption of value-based banking practices – for example, broader considerations (e.g. environmental & social risks) in credit assessments in addition to the current credit-worthiness assessment on customers. Engaged 1. Comprehensive review of existing banking offerings and practices will eventually attract active stakeholders’ activism, where financial decision-making of wider stakeholders is largely influenced by the enhanced transparency strategy, specifically on IBIs progression of VBI implementation strategies & impact reporting. 2. In addition to considering views of wider stakeholders in IBIs key decision making process (inclusive governance), VBI promotes relevant strategic partnerships between IBIs & other stakeholders with infrastructure & competencies that reside beyond banking industry. Such practice will enhance current operational efficiency. Established 1. The final phase of VBI implementation should observe total change in institutional behavior and culture, where IBIs inherently & continuously aim to deliver positive & sustainable impact (including financial returns) to the community, economy and environment through its day-to-day operations. 2. Such impact-driven mindset will shape a different banking paradigm. IBIs play a proactive role in realigning their business activities with the current needs of community & overall economic agenda of the country, hence resulting in minimal regulatory intervention. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 122
123. Appendix B : Presenting a selection of the mobile Network Experience metrics Video experience: Measures the average video experience of Opensignal users on 3G and 4G networks for each operator. Our methodology involves measuring real-world video streams and uses an ITU-based approach for determining video quality. The metric calculation takes picture quality, video loading time and stall rate into account. We report video experience on a scale of 0-100. Voice app experience: Measures the quality of experience for over-the-top (OTT) voice services — mobile voice apps such as WhatsApp, Skype, Facebook Messenger etc. — using a model derived from the International Telecommunication Union (ITU)-based approach for quantifying overall voice call quality and a series of calibrated technical parameters. This model characterizes the exact relationship between the technical measurements and perceived call quality. Voice App Experience for each operator is calculated on a scale from 0 to 100. Games experience: Measures how mobile users experience real-time multiplayer mobile gaming on an operator’s network. Measured on a scale of 0-100, it analyzes how the multiplayer mobile Games Experience is affected by mobile network conditions including latency, packet loss and jitter to determine the impact on gameplay and the overall multiplayer Games Experience. 4G availability: Measures the average proportion of time Opensignal users spend with a 4G connection on each operator’s network. Download speed experience: Measures the average download speed experienced by Opensignal users across an operator’s 3G and 4G networks. It doesn’t just factor in 3G and 4G speeds, but also the availability of each network technology. Operators with lower 4G Availability tend to have a lower Download Speed Experience because their customers spend more time connected to slower 3G networks. Upload speed experience: Measures the average upload speed experienced by Opensignal users across an operator’s 3G and 4G networks. Upload Speed Experience doesn’t just factor in 3G and 4G speeds, but also the availability of each network technology. Operators with lower 4G Availability tend to have a lower Upload Speed Experience because their customers spend more time connected to slower 3G networks. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 123
124. Appendix C : Linking financial inclusion to SDG targets Targets related to financial inclusion Targets’ description 1.4 By 2030, ensure that all men and women, in particular the poor and the vulnerable, have equal rights to economic resources, as well as access to basic services, ownership and control over land and other forms of property, inheritance, natural resources, appropriate new technology and financial services, including microfinance 2.3 By 2030, double the agricultural productivity and incomes of smallscale food producers, in particular women, indigenous peoples, family farmers, pastoralists and fishers, including through secure and equal access to land, other productive resources and inputs, knowledge, financial services, markets and opportunities for value addition and non-farm employment. 3.8 Achieve universal health coverage, including financial risk protection, access to quality essential health-care services and access to safe, effective, quality and affordable essential medicines and vaccines for all 5.A Undertake reforms to give women equal rights to economic resources, as well as access to ownership and control over land and other forms of property, financial services, inheritance and natural resources, in accordance with national laws 8: Promoting economic growth and jobs 8.3 Promote development-oriented policies that support productive activities, decent job creation, entrepreneurship, creativity and innovation, and encourage the formalization and growth of micro-, small- and medium-sized enterprises, including through access to financial services SDG 9: Supporting industry, innovation, and infrastructure 9.3 Increase the access of small-scale industrial and other enterprises, in particular in developing countries, to financial services, including affordable credit, and their integration into value chains and markets SDG 10: Reducing inequality 10.2 By 2030, empower and promote the social, economic and political inclusion of all, irrespective of age, sex, disability, race, ethnicity, origin, religion or economic or other status SDGs 1: Eradicating poverty 2: Ending hunger, achieving food security and promoting sustainable agriculture 3: Health and well-being 5: Gender equality and economic empowerment of women Table 27: Linking financial inclusion to SDG targets (Source: United Nations )193 BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 124
125. Appendix D : Key takeaways from interviews with experts (in alphabetical order) Mr. MAHFOUDH BAROUNI, FORMER CEO OF ZITOUNA BANK AND BOARD MEMBER IN SEVERAL IFIs in TUNISIA • • • • • • • • • • • • • • • The experience of Islamic finance in Tunisia dates back to 1993 with Best Bank (Owned by Al Baraka 80 percent and the Tunisian government 20 percent) i. An off-shore bank with limited operations for resident customers ii. A very profitable bank Despite the achievements of Islamic Finance Institutions in Tunisia in terms of market share, number of clients and growth, they haven’t not fully played their role in economic and social development The new banking law was passed in 2016, however, the regulatory texts are yet to be completed The sukuk law was not applied although it was approved since 2016 (no sovereign or corporate sukuk issuance so far) The Islamic funds law was passed in 2013 Given the centrality of ethics in Sharia, sustainable development perspective should be important for Islamic Finance Institutions Having a social, environmental and economic impact supposes the presence of a strong Islamic Finance ecosystem (banks, insurance, capital markets, social finance…) to support such a positioning There are initiatives undertaken by Islamic Finance Institutions in Corporate Social Responsibility, however, they are still limited. Islamic Finance Institutions may consider in the future the creation of a dedicated foundation for CSR The Best re experience was important for the development of the takaful industry in Tunisia (provided a talent pool) The experience of Zitouna tamkeen is interesting although the cost of assisting entrepreneurs and building industries ecosystems (eg. Dairy products) impacts the profitability of the institution The experience of BTS was successful in Micro and Mesofinance (max 150 000 Tunisian Dinars) between 2015-2020 using Ijara and Mourabaha contracts. Financing was provided by IsDB (USD 50 M) and the program focused on youth employment When building a value proposition around sustainable development, disclosures and impact measurement are important As for Fintech, we need to be proactive and market makers rather than simple consumers Importance of research to develop a strong Fintech Market Maghreb regulators should consider creating a Maghreb fintech task force BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 125
126. Dr . SAID BOUHERAOUA, DIRECTOR OF RESEARCH AFFAIRS DEPARTMENT AT ISRA AND ADVISOR TO SEVERAL IFIs • • • • • • • • Given the urgency of social and environment challenges in Algeria and in the Maghreb, integrating the sustainable development perspective into the activities of Islamic Financial institutions should be of first importance Covid19 pandemic is a great opportunity to align the business of Islamic Financial institutions with sustainable development. Indeed, Islamic Financial institutions should play a leading role in addressing social and economic issues exacerbated by the pandemic For a long period of time, there was no competition within the Algerian Islamic banking market with Al Baraka Bank as the only player. This situation did not create a stimulating environment to foster innovation The Algerian Islamic banking market has experienced long periods of excess liquidity, which is not a favorable environment to develop innovative products on the banks’ liability side The Algerian Islamic banking market today has experienced recently a more active competition dynamic, which will certainly open the door to more innovation and growth There are many issues with Islamic finance and Fintech regulation in Algeria. By and large, the regulatory environment is not supportive The absence of Takaful and Islamic Capital Market Institutions in Algeria weakens the Islamic Finance ecosystem and limits the capacity of the current players to innovate Because of the low level of Fintech performance in Algeria, there is a great potential for Fintech development in the country BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 126
127. Mr . FOUAD HARRAZE, FORMER CEO OF AL AKHDAR BANK • • • • • • • Islamic banks are new entrants into the financial market. Therefore, it should be natural for them to be aligned with sustainable development and to leverage information technology tremendous possibilities Covid19 makes the alignment with sustainable development case even stronger for Islamic banks Covid19 has been an opportunity to rethink the importance of health and education in addition to other pressing social needs. Hence, financial institutions should consider contributing to alleviate social issues through their business models Addressing social and environmental issues through the business model ensures the sustainably of such initiatives One of the main issues for the emergence of Fintech is clients’ preference for cash transactions due to cultural factors Fintech adoption advantages include: i. Lower transaction costs ii. Higher accessibility of services iii. Lower ecological footprint for IFIs as well as for their clients iv. Ease of access to information Relationship between Islamic banks and Fintech companies: i. It makes sense for Islamic finance institutions in the region to be open to Fintech initiatives as they are young and more agile ii. Islamic financial institutions have two options in order to setup Fintech projects - Develop synergies with existing Fintech companies (complementarity) - In House investments iii. It is a case-by-case approach. The choice of the right approach depends on the context and the project BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 127
128. Mr . ANAS HASNAOUI, INTERNATIONAL EXPERT IN ECONOMIC EMPOWERMENT AND ISLAMIC SOCIAL FINANCE • • • • • • • • • • So far, Islamic finance unfortunately has failed to bring a strong value proposition in relation to economic and social development In reality, we moved from conventional finance that focuses on the finance perspective into Islamic finance that brings real economy perspective but only to make the transaction compliant from a sharia standpoint In general, the real economy and social perspectives are secondary in the reality of Islamic finance transactions today Using conventional finance paradigms in the practice of Islamic finance leads to results that are not genuinely different from conventional finance Islamic finance is yet to move to the third phase “development finance” where the central focus is economic development in addition to the financial perspective The value proposition in this third phase is derived chiefly from building the economic ecosystem rather than from financing the transaction. Two examples to illustrate the difference of the two approaches: i. Murabaha Transactions: If the bank is able to build a “market place” and an ecosystem with suppliers, economies of scale will allow the bank to provide a strong value proposition from suppliers’ discounts rather than pure financial intermediation ii. Salam Transactions: In the same way, the bank can add value by leveraging its integration into the supply chain and its ability to better sell salam products rather than acting as a simple intermediary iii. In those two cases, the bank “sells” its market and industry know how rather than its financial resources Zitouna tamkeen is an example of the integration of financial institution into industries’’ ecosystems For Islamic financial institutions, Fintech is not a choice but rather it’s an obligation especially in the current context Should Islamic finance institutions embrace the Fintech route? This question should not be asked because we don’t have the choice In addition, Islamic finance institutions should be not only a user but also a game changer / Innovator. One option to consider is to set up funds to develop Fintech BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 128
129. Mr . NASSER HIDEUR, CEO OF AL SALAM BANK ALGERIA • • • • • • • Al Baraka Bank in Algeria undertook many CSR initiatives that sought to address the needs of vulnerable populations by creating jobs, setting up zakat funds and distributing Qard Hassan loans Examples of CSR programs developed by Al Baraka Algeria include: i. Zakat fund with the Ministry of Religious Affairs and Awqaf: Qard Hassan for micro projects with profitable business models ii. Partnership with GIZ (Germany) to finance small business projects (100 projects) as well as1000 women activity in their houses - Issue: Banking business model is not designed to follow-up on microfinance projects iii. Setting up Cash Waqf with the Ministry of Religious Affairs and Awqaf - Establishing a company with shares as Waqf. The company owns taxis, the proceeds from the company activities support teaching Quran activities - The idea behind the project is to make waqf accessible to everyone - Legal issues related to making shares as waqf Examples of CSR programs developed by Al Salam Bank Algeria i. Setting up a Cash Waqf (ongoing) - The fund will own shares from companies and is managed is by an asset manager - Proceeds with be channeled to social causes ii. Micro finance with the support of local associations - Recycling - Leather producing These experiences showed the need to align these initiatives with the bank business model to make these activities more sustainable Recommendation: In Algeria, it is important to have a special regulatory framework for microfinance. Today, it can be done under the banking regulation but this regulation is not meant specifically for that purpose as the banking regulation poses several constraints On Fintech: i. Technology is not leveraged enough especially in the context of Covid-19 ii. Generalized Internet access is important iii. Awareness about the use of technology (clients’ behavior) iv. Lack of supporting institutions on the ground for microfinance (it is a key success factor). Having a supportive ecosystem is important v. Financial inclusion is a big challenge in Algeria. Mobile banking and mobile payment can play an important role in limiting financial exclusion vi. Technology in itself is not enough if the prerequisites are not there On sustainable development: i. More than even stakeholders give an importance to social and environmental issues. It is important for the reputation and image of the bank ii. Sustainable development is aligned with the principles of Islamic finance iii. The fact that conventional banks are more active in aligning their business model with sustainability forces Islamic banks to do at least the same iv. Religiosity is more important for retail customers. It is not the case for @ corporate customers. Therefore, it is important for IFI to develop a strong value proposition that goes beyond Sharia compliance BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 129
130. Mr . MOHAMED MAAROUF, FORMER CEO OF BTI BANK MOROCCO • • • • • • • Sustainable development is aligned with the principles and with the DNA of Islamic finance: i. Islamic finance avoids activities with negatives externalities i. Islamic finance puts strong emphasis on ethics i. Islamic finance is genuinely embedded into economic activities Aligning the business model of Islamic Finance Institutions with sustainable development: i. Improves IFIs image among stakeholders (including clients). Indeed, there is a change in customers’ behavior that are looking for ethical companies that care about customers’ relationships i. Benefits from the Return / Risk profile of the portfolio and raise fund from development finance institutions Challenges when aligning Islamic banking business model with sustainable development: i. Escaping the conventional banking mindset i. Downscaling: Dealing with Mesofinance & microfinance projects i. Impact measurement and disclosures are important to avoid green & social washing Prerequisites to transition to sustainability finance: i. Financial institutions need to be coherent. Claiming a sustainability positioning supposes a positive internal social climate - Caring about employees well being - No discrimination and fairness On Fintech situation Morocco: i. There is potential (mobile infrastructure, internet, youth…), however, the results are still below expectations i. Reasons: - Low levels of competition in the finance sector which makes new business model forms less appealing - Conservatism: Current digitizing initiative are usually within the current business model and does not radically change this business model - Legal framework: Technology is changing swiftly whereas laws and regulations move with a slower pace On Fintech and Islamic banking: i. Covid19 is an accelerator of the transition to Fintech i. It is definitely an opportunity for Islamic banks because they cannot have the same brick and mortar model as compared to conventional banks i. Islamic banking is new in the region: Important efforts were directed towards raising awareness about the products and the business model i. Issues: Many products were not available at the beginning of Islamic banking activity i. Fintech requires important investments. Many Islamic banks have not reached the breakeven point and have small sizes and financial capabilities Going forward: i. Fintech can play an important role in financial inclusion i. Open banking is important - Innovation cannot be done in-house exclusively - Collaboration is key - Fintech companies are partners rather than competitors BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 130
131. Mr . HAMID RASHID, CEO OF FINTERRA • • • • Islamic finance diversity of instruments: IF has been positioned as something that can do much more than cater to the commercial economy of a country. It has tools included in them that allows any profit made by commercial financial institutions to be redistributed to those who are in need within the community. This can actually be achieved through the Islamic social finance tools such as Zakat, Sadaqah and Waqf which are all tools specifically designed to cater to this matter. In addition, Islamic microfinance can cater to cushioning this crisis as well A positioning focused on sustainable development improve IFIs competitiveness: Such an approach will create a very healthy, competitive atmosphere that specifically caters to developing the society. Since the approach will not be about who makes more money, but who contributes more to the society and its sustainability. In a market that gives importance to sustainable development, customers will look for institutions that offer such contracts rather than just being profit-minded. This forces the institutions to become more creative, and creates a healthy, competitive atmosphere. This approach is actually being set up in matured Islamic finance industries such as Malaysia Challenges in the roll-out of such an approach: i. The aspect of Islamic social finance is not necessarily embedded within most Islamic financial institutions. So to change these established operations to a more socially focused approach could be faced with challenges and resistance, from practitioners and even regulators ii. The lack of human resources. While Islamic finance experts have rapidly increased over the years, there are very few who are specialized in Islamic social finance. Islamic finance experts are mostly commercially minded and profit-driven iii. There is also the area of regulation that can create some hindrances. Most of Islamic finance laws are written with “commerce” in mind. And social aspects within society are governed through separate laws that does not relate to Islamic finance. So, putting Islamic social finance into the operations of a commercial Islamic financial institutions becomes a bit complicated. Assessment of the current development of Fintech in the Maghreb i. There is development of Fintech in the Maghreb, but it is not as rapid as the rest of the countries in the region ii. There is interest in using Fintech for Islamic financial institutions in the region. However, the use of Fintech seems to be quite low. It is more in the research phase to understand how Fintech can be integrated into the operations of the Islamic financial institutions. Regulators are also looking as to how new technologies like Blockchain can be a better alternative than traditional systems iii. Most of the Fintech development seems to be in the area of commercial finance, meaning there is a lack of Fintech products developed to cater to social finance. Any development seen in the Maghreb comes from Banks or are financed by Banks that wants to stand out in the market and cater to the young population BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 131
132. • • • • Constraints impacting the development of Fintechs in the Maghreb i. Since penetration of internet is lower in the Maghreb, especially within the older customer base and poorer regions, awareness programs would be much needed before Fintech development can reach maturity. ii. Funding: very small amount is invested into the North African Fintech. So, unless there are local VCs willing to contribute to the development of Fintech, this may be a huge constraint as the development of the hardware and applications can be costly Role that Covid19 could play in the development of Fintech in the Maghreb i. Covid19 could play a big role to develop Fintechs in the Maghreb as well since it allows an unaware market to look into alternatives to traditional financing activities ii. Give light to the need to development Fintech in the area of social finance Fintech operators as partners or rather as competitors of incumbent players i. They are seen as partners, and opportunities for growth. Fintech operators are also experts in the area so being able to utilize their knowledge base and expertise seems more of a partnership than competitors Leveraging Fintech for sustainable development i. Islamic financial institutions are to use tools such as Waqf, Sadaqah and Zakat in order to achieve sustainable development goals. But if you look at the current operations of these tools, there are so many issues that revolves around trust, transparency and traceability. Therefore, the most ideal solution to solve this dilemma is through Fintech and new technology. Fintech solutions such as blockchain offers institutions to raise their customer’s level of confidence in them, and see them as transparent. ii. Fintech also increases the reach of Islamic financial institutions to cater to these goals iii. The biggest difficulty in achieving sustainable development goals is that there is a lack of funding. Through Fintech, Islamic financial institutions can either offer a platform to raise funds for these goals that adds value to their own business operations. Or the institution can contribute to goals through Fintech platforms that are developed and made available by private institutions, thus contributing to said goals as well. BRIDGING ISLAMIC FINANCE AND SUSTAINABILITY THROUGH FINTECH FOCUS MAGHREB COUNTRIES 132
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