After tremendous global success over the past decade, with total assets estimated at about US$1.4 trillion, Islamic finance could develop in North Africa, says Standard & Poor’s Ratings Services in a report titled "Islamic Finance Could Make Inroads Into North Africa."

Large current account deficits and declining conventional financing sources have prompted governments from Arab spring countries to look at opportunities offered by Islamic finance.

Mohamed Damak, credit analyst, Standard & Poor, said: "Sharia-compliant banking previously presented an attractiveness that was at best exotic for regulators and banks active in these markets. Now, the perception is changing and public awareness is increasing."

We have observed this development in the North African countries where we rate banks–Egypt, Tunisia, and Morocco. These sovereigns have recently taken steps to implement policies to support the development of Islamic finance: Tunisia plans to issue sukuk to attract new class of investors; Egypt implemented new regulatory frameworks for sukuk issuance; and Morocco is laying the legal foundation for Islamic banks.

Nevertheless, we believe that Islamic finance in this region has yet to demonstrate its economic added value beyond enabling products abiding with Islamic law. Such added value could materialize through creating access to a new class of investors or by offering Sharia-compliant products at costs comparable with their conventional counterparts.

The stiff price competition in some of the North African markets indicates that customers in these regions are relatively more sensitive to the costs associated with banking products.

Damak added: "Islamic finance in North Africa remains underdeveloped but regulatory changes are laying the groundwork for its growth. However, we believe that success will depend on their ability to offer products at a cost competitive with conventional banking activities."

We also believe that Islamic finance can be a good fit for infrastructure and project finance, as banks lack long-term funding capability required by these projects. Several projects in renewable energy, transport infrastructure, and communication are ongoing or expected to be launched in the future in North African countries. Using sukuk to finance some of these projects could help diversify investor bases and tap additional pools of resources.