Al-Ahram Weekly Online   8 - 14 March 2012
Issue No. 1088
Published in Cairo by AL-AHRAM established in 1875

Time for sukuk

Policy-makers are laying the ground rules for a sukuk (Islamic bonds) market in Egypt, writes Niveen Wahish

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This week the Planning and Budget Committee of the People's Assembly discussed the introduction of sukuks, or Islamic bonds, to the Egyptian market. Head of the Egyptian Financial Supervisory Authority (EFSA) said on Monday the process of modifying executive regulations of the capital market law was underway. The aim was to allow for the issuance and trading of sukuk. Sukuks are Sharia-compliant bonds. Since trading in debt is prohibited under Sharia or Islamic law, financing must only be raised for specific assets or projects.

The move to make amendments to the capital market law falls in the framework of the Egyptian government's objective of reverting to issuing sukuks as a means of raising financing. Earlier this year the minister of finance had been quoted earlier as saying that Egypt would issue sukuks. The announcement comes at a time when Egypt is facing a growing need for financing. Egypt's growth rate came to 0.4 per cent during the second quarter of 2011/12, a long way from the 5.6 per cent during the same quarter the previous year. Net international reserves reached $15.7 billion at the end of February 2012, compared to $36 billion in January 2011. Hard currency earnings from the tourism industry are also down. According to Egypt's Central Agency for Public Mobilisation and Statistics (CAPMAS), the number of tourists visiting Egypt in the last quarter of 2011 decreased by 29.2 per cent, compared to the same period in 2010. Foreign direct investments (FDIs) fell by two thirds in fiscal year 2010/11, reaching around $2 billion, compared to $6.7 billion the previous fiscal year.

Sukuks have been a topic of discussion for years, said Mustafa Assal, managing director of fixed income trading at Beltone Securities Brokerage. But with an Islamic party majority in parliament, and with a growing global trend for Islamic finance, the time seems right for their introduction in Egypt, Assal added. He noted that sukuks are most popular in Asian Islamic countries such as Malaysia and Indonesia. More recently they became popular in Gulf Cooperation Council (GCC) countries too.

A report published in 2011 by Standard and Poor's (S&P) rating agency said: "The sukuk market is still heavily weighted towards only a few issuing countries." It showed that "78 per cent of all sovereign and quasi-sovereign issuances in 2010, and 63 per cent of cumulative amounts over 1996-2010, originated from Malaysia." The S&P report added that the issuance of sukuks reached a record high of $51.2 billion in 2010, a 34 per cent increase on a previous peak in 2007.

Mohamed Abdel-Fattah, secretary-general of the Egyptian Association for Finance and Investment (EAFI) and board member of Pioneers Investment Fund, believed sukuks would work well on the Egyptian market. "There are many individuals who do not deposit their money in banks, because they believe the interest rates on banks are ribah or against Islamic Sharia," said Abdel-Fattah. He said studies carried out by EAFI have shown that only 40 per cent of Egyptians place their money with banks. "Others would be ready to invest money in sukuks because they want their investment to be halal even if the return on their investment is not big," he said.

Unlike bonds and bills, sukuks will only be issued against a specific investment. That being the case sukuks must be able to link financing returns and cash flows to assets purchased, or the returns generated from an asset purchased. "The government will not be able to use sukuk funds to cover its budget deficit. And if it fails to abide by the rules, that would be a disaster for the reputation of Egyptian sukuks," said banker Pacinte Fahmi.

Fahmi added returns on sukuks will vary. They might be higher or lower than interest rates paid on government bills and bonds. But she stressed that even if it is high, it will not be a burden on the government, as these returns should be paid up by the project's revenues. She explained that unlike bonds where the government is paying to borrow, with sukuks it is investing and getting a return on its investment, from which it is paying back the financiers.

Fahmi believed sukuks would be an attractive instrument for Egyptians living abroad. "It will be a means of attracting an inflow of money," she said, warning that government credibility will be essential in attracting that inflow. She also said sukuks will be the way to attract funds from areas such as the Gulf.

Once the government ventures into the sukuk market, Assal of Beltone believes the private sector will be encouraged to tap this resource as well. At the moment, the private sector will not take the lead in sukuk financing because with a depressed economy, nobody is interested in looking for finance in the first place.

However, Assal emphasised that the ground rules regulating sukuks have to be laid properly. "Otherwise we could risk triggering new cases similar to the fraud which occurred with money investment companies of the 1980s," Assal said.

To make sukuks popular, Assal believed laws must facilitate the purchasing process for individuals while allowing them to trade in a secondary market. That was not the case with bonds, which also hampered the growth of the bond market. Fahmi agreed, adding that "investors must have an exit strategy, should they be short of liquidity."

Also on the regulatory level, Abdel-Fattah said transparency and disclosure were important to ensure the success of investments financed, and to guard investors' rights. "Individuals must be able to follow on the progress of their investment," he said.

Egypt is not alone in its intention to tap this market. Turkey, South Africa and Nigeria also announced plans to do the same. International banks too want a share of the market. Last year, according to Reuters, HSBC's Middle East unit became the first Western bank to issue sukuks. France's Credit Agricole has said it is considering the move, as is Goldman Sachs. All sukuk issuers, sovereign or corporate, want benefit from this untapped market. According to Reuters, the size of the global sukuk market is estimated at more than $100 billion.

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