Journal of African Development

Introduction

North Africa, encompassing Egypt, Libya, Tunisia, Algeria, Morocco, and Mauritania, stands at the intersection of rich historical tradition and contemporary economic challenges. Among the notable trends shaping the regional economic landscape is the growing interest in Islamic finance—a financial system founded upon Shariah (Islamic law) principles that prohibits interest (riba), emphasizes risk-sharing, and promotes ethical, asset-based transactions. The increasing prominence of Islamic finance presents both opportunities and challenges for North Africa’s development path in terms of financial inclusion, infrastructure growth, and sustainable economic transformation^[1][2].

Foundations of Islamic Finance

Islamic finance is governed by Shariah law, emphasizing the following key principles:

• Prohibition of interest (riba): Loans cannot accrue interest.
• Risk-sharing and equity participation: Profit-and-loss sharing forms the basis of most transactions.
• Asset-backing: All transactions must be linked to tangible assets or productive activity.
• Avoidance of speculative (gharar) and unethical (haram) investments: Transactions involving high uncertainty or forbidden activities are not allowed.

Major instruments within Islamic finance include:

• Murabaha: Cost-plus financing.
• Mudarabah: Profit-sharing partnership.
• Ijara: Lease contracts.
• Sukuk: Islamic bonds.
• Takaful: Islamic insurance^[1][2].

Evolution and Landscape of Islamic Finance in North Africa

Historical Background

• Egypt pioneered modern Islamic finance with the opening of the Mit Ghamr Savings Bank in 1963, experimenting with interest-free banking^[2].
• Over subsequent decades, the region saw the gradual emergence of Islamic banks, particularly in Egypt, Sudan, and more recently, Tunisia and Morocco.

Current State

• All North African countries now host Islamic financial institutions, though market share is generally small outside of Sudan and, more recently, Morocco and Tunisia.
• Egypt, with its long experience, and Sudan, with a fully Islamic banking sector since the 1980s, lead the region in institutional infrastructure and regulatory frameworks.
• Morocco, Algeria, and Tunisia have recently begun implementing supportive legal frameworks, facilitating market entry for new Islamic banks^[1][2].

Economic Contribution and Development Impact

Financial Inclusion and Social Equity

Islamic finance serves as a catalyst for broader financial inclusion by offering alternatives to riba-based (interest-based) banking. This is particularly appealing in North Africa, where large segments of the population remain unbanked, often due to religious or ethical objections to conventional finance^[3][4]. The asset-based and risk-sharing nature of Shariah-compliant products makes them attractive for those seeking ethical investment avenues and can address gaps in inclusive access to credit, microfinance, and savings.

Infrastructure and Project Finance

Islamic finance is well-suited to large-scale infrastructure projects, utilizing sukuk and partnership-based contracts that align debt and equity goals. Major infrastructure and renewable energy projects in Egypt, Tunisia, and Morocco have utilized sukuk and istisna’a (manufacturing contracts), allowing governments and private entities to finance public ventures without resorting to interest-bearing debt^[2][3].

SME Financing and Entrepreneurship

Shariah-compliant financing models, such as mudarabah and musharakah (joint-venture partnership), encourage entrepreneurship and engage investors directly with business projects. North African SMEs have particularly benefited from increased access to Islamic microfinance initiatives and tailored banking solutions, contributing to job creation and economic diversification^[4][1].

Stability, Resilience, and Crisis Response

During periods of global economic turbulence, Islamic banks have demonstrated relative resilience. The focus on real-sector activity, conservative risk profiles, and avoidance of speculative trading has minimized exposure to crisis-driven asset bubbles. This financial stability is a crucial asset for North African economies aiming to build robust economic foundations^[5][1].

Key Instruments and Structures Used in North Africa

Trends and Growth Patterns

Market Share and Asset Growth

Islamic financial assets in North Africa are growing at a steady pace but still represent a modest share of the overall sector (outside Sudan). Market share is highest in Sudan (full conversion), but countries like Morocco and Tunisia have seen double-digit annual growth in participatory/Islamic banking assets since their legal reforms of the 2010s^[1][5][6].

Recent Developments

• The legal recognition of participatory banks in Morocco (2017) sparked the entrance of new institutions and introduced Islamic home finance and sukuk products.
• Tunisia and Egypt have expanded their product range and issued sovereign sukuk for infrastructure finance.
• There has been a marked increase in digital Islamic finance solutions, including mobile banking and fintech platforms focused on Shariah compliance^[7][1][4].

Benefits of Islamic Finance for North African Development

• Attracts international capital: Especially from Gulf Cooperation Council (GCC) countries and Southeast Asia.
• Encourages long-term, asset-based investment: Supports sustainable infrastructure and social welfare projects.
• Improves financial inclusion: Reaches unbanked populations with Shariah-compliant microfinance.
• Promotes ethical investments: Avoids sectors deemed harmful, fostering environmental, social, and governance (ESG) alignment.
• Builds resilience: Relatively lower exposure to speculation, fostering macroeconomic stability^[1][3][8].

Challenges to Islamic Finance Growth

Policy Recommendations and Roadmap

To maximize the potential of Islamic finance for North African development, the following actions are vital:

• Strengthen Regulatory Frameworks: Harmonize Shariah governance, supervision, and product standards across countries.
• Enhance Public Awareness: Launch education campaigns and outreach programs for consumers and businesses.
• Foster Innovation: Encourage Islamic fintech, digital products, and partnerships with international Islamic finance hubs.
• Support Market Infrastructure: Develop sukuk markets, Islamic indices, and specialized funds to deepen capital markets.
• Promote Regional Coordination: Facilitate cross-border investment and knowledge-sharing among North African nations^[1][9][10].

Graphs and Data

Islamic Finance Asset Growth in Selected North African Countries (2015–2024)

Values approximate, for illustrative purposes based on sector trends.

Key Barriers to Islamic Finance Adoption in North Africa (% Share of Survey Respondents, 2024)

Illustrative Image: Growth of Sukuk in North Africa

Islamic bonds (sukuk) have enabled governments to diversify funding for major public sector projects, including energy, housing, and infrastructure. This is particularly visible in Morocco and Tunisia, where sovereign and municipal sukuk have been issued since 2018.

Case Study: Morocco's Participatory Banking Reforms

Morocco's 2017 legal reforms introduced a full legal framework for participatory (Islamic) banking, resulting in:

• Five major participatory banks established in partnership with Gulf and European institutions.
• Introduction of new mortgage, auto finance, and SME lending products.
• Successful issuance of the country’s first sovereign sukuk in 2018, used for financing public infrastructure.

This reform led to a surge in market share for participatory banks, reaching over 5% of total banking assets by 2024, and introduced innovative fintech services to unbanked communities, with further growth projected.

Conclusion

Islamic finance, long a niche component in North African economies, is transitioning into a vital pillar of the region’s development strategy. By promoting risk sharing, financial inclusion, and ethical investment, it facilitates infrastructure growth, economic diversification, and social sustainability. While growth has been impressive—particularly in Morocco, Tunisia, and Egypt—significant challenges remain. These include the need for robust regulation, talent development, product innovation, and broader market awareness.

With continued reform and regional cooperation, Islamic finance holds the promise not only to deepen financial systems in North Africa but also to serve as a model for sustainable, inclusive development in comparable emerging markets.

References:

1. https://journals.smartinsight.id/index.php/EII/article/view/617
2. https://www.afdb.org/fileadmin/uploads/afdb/Documents/Project-and-Operations/Montage Islamic Banking Anglais_ENERGY mpa ENG Power Sector Emer....pdf
3. https://www.weforum.org/stories/2017/10/islamic-finance-could-be-the-answer-to-africas-growth-problems/
4. http://journals.smartinsight.id/index.php/EII/article/download/617/555
5. https://www.ifsb.org/wp-content/uploads/2025/05/IFSI-Stability-Report-2025.pdf
6. https://www.islamicfinancenews.com/supplements/ifn-annual-guide-2025
7. https://www.insightturkey.com/book-reviews/islamic-finance-in-africa-the-prospects-for-sustainable-development
8. https://www.tandfonline.com/doi/full/10.1080/23322039.2025.2490819
9. https://www.mfw4a.org/publication/islamic-banking-and-finance-north-africa-past-development-and-future-potential
10. https://www.jerseyfinance.com/news/trends-in-islamic-investment-and-finance-structuring-in-focus/