Wires

Tunisia's Islamic finance push has political echoes

* Ennahda says Islamic banking will boost economy

* Bill covering Islamic banks may be ready in weeks

* Tunisia plans to issue first sovereign sukuk next year

* But secular critics say Ennahda using election ploy

* Focus on Islamic finance could hurt conventional banking

By Tarek Amara

TUNIS, Oct 10 (Reuters) - After decades of secular rule,Tunisia's government aims to develop Islamic banking in thecountry, but some suspect the government's motives are morepolitical than economic: it wants to win the support of voters.

Governments across North Africa are promoting Islamicfinance in the wake of last year's Arab Spring uprisings, whichousted regimes that neglected or discouraged the business forideological reasons.

The change of policy could bring economic benefits, givingthe countries more access to a huge pool of Islamic investmentfunds from the Gulf. But as the controversy in Tunisia shows,there are political complications.

"Tunisia is looking to become a regional center for Islamicfinance," Tunisian Prime Minister�������������������������Hamadi Jbeli declared in June.

Jbeli, a member of the moderate Islamist Ennahda movementwhich leads Tunisia's government after the overthrow ofpresident Zine al-Abidine Ben Ali last year, said authoritieswould ensure that Islamic banks were able to compete on a levelplaying field with conventional banks.

But some of Ennahda's political rivals accuse the movementof using the issue to attract fresh support and head off anychallenge from hardline Islamists in parliamentary electionsexpected next year, regardless of economic considerations.

Ploughing scarce resources into Islamic banking could end uphurting the economy if it dilutes state support for conventionalbanks, and creates new Islamic lenders that increase competitionwhile not being fully viable themselves, critics argue.

"The focus on talking about Islamic finance over the pastfew months is only political propaganda before the nextelection," said Adel Chaouch, an official in the Nida Touns, asecular party. "Talking about Islamic banks may increasedivisions among Tunisians."

ECONOMY

Ennahda says Islamic finance, which obeys religiousprinciples such as bans on the payment of interest and puremonetary speculation, will help the economy recover from thedamage it suffered during Ben Ali's overthrow.

Nearby countries have similar hopes. Egypt's MuslimBrotherhood wants to promote Islamic finance and Morocco, alsoled by a moderate Islamist party, says it plans to become aregional hub for the business.

Morocco's General Affairs and Governance Minister, NajibBoulif, told Reuters in March that the government was drafting abill that would include regulations covering Islamic financialproducts.

In Tunisia, there are currently only two Islamic banksbecause of the Ben Ali regime's coolness towards theindustry.�������������Their assets total 1.4 billion dinars($893 million), or just 2.5 percent of the combined assets ofall Tunisian banks, according to the central bank; in Gulf Arabcountries, Islamic banks are estimated to hold about a quarterof banking assets.

������������������������Committees

set up by the financeministry, religious affairs ministry and the central bank arenow working on a law that would facilitate the creation of moreIslamic banks.

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Kamha, director-general of thecentral bank, said the bill would be ready "within weeks" andthat it would then be presented to the government for approval.

"Islamic finance can accomodate large groups of Tunisianpeople who have not been absorbed by traditional banks," saidcentral bank governor Chadli Ayari.��������� ��������������Tunisia plans to issue its firstsovereign Islamic bond early next year as it diversifies itssources of funding, Ayari told Reuters late last month.

Access to another pool of capital would be welcome;��������������

��������������Tunisia

expects to run a budgetdeficit of 5.9 percent of gross domestic product nextyear�����������������������, when the government will need toraise an officially estimated 4-4.3 billion dinars. POLITICS

But sceptics argue the government's vision of an Islamicbanking boom in Tunisia is fanciful. Fethi Jerbi, an economicsprofessor at the University of Tunis, said it was unclearwhether the economy could support more Islamic banks.

"The conditions for success in the Gulf countries are notavailable in Tunisia for Islamic banking products," becauseTunisia is not as rich as Gulf economies and its financialsystem is not as well developed, he said.

He also said authorities' focus on promoting Islamic bankingrisked neglecting conventional banks, which could have seriousconsequences for the banking sector and the economy.

In a report last month, credit rating agency Standard &Poor's said Tunisia's banking sector faced "very high risk" inareas such as funding of the system.

It added that although the government had been supportive ofbanks, it had limited capacity to provide emergency aid to thesector in the event of a major crisis.

Noureddine Bhiri, Minister of Justice and an Ennahda leader,strongly denied that the Islamic banking drive was a politicalploy.

"Turning to Islamic finance does not fall within politicalpropaganda. The Tunisian revolutionary government does not needpropaganda to attract voters," he told a seminar.

Kamha said that while there was disagreement over whetherconventional banks should be allowed to offer Islamic products,the central bank was inclining towards allowing this, bypermitting the banks to operate "Islamic windows" which wouldsegregate the money from conventional operations.

"This would increase the spread of Islamic finance in thecountry and make the banking sector more competitive."

(Editing by Andrew Torchia)

((tarek.amara@thomsonreuters.com))

Keywords: TUNISIA ISLAMIC/FINANCE