Egypt sovereign sukuk law still mired in uncertainty

DUBAI/CAIRO - Development of Egypt's Islamic economy continues to be hampered by ambiguity surrounding sukuk, and greater legislative and political clarity is required for the country to tap into the Islamic bonds market, banking industry officials and experts said.

They said new financial instruments were needed to fund mega projects that would help revive an economy hammered by three years of turmoil while keeping the budget deficit and government debt under control.

"The solution lies in Islamic bonds, which are still facing obstacles in the Egyptian market. The (sukuk) file should be revived and projects that can be financed by sukuk should be identified," Mohamed Ashmawi, chairman of The United Bank, which is 99% state-owned, told Zawya.

The government of President Mohamed Mursi had approved a draft bill authorizing issues of sovereign Islamic bonds, but the legislation was deactivated after Mursi's ouster last year.

Religious scholars have raised concern over possible government abuse of public assets under the bill. Sharia law bans payment of interest, and sukuk must be underpinned by physical assets, with investors receiving revenue from assets.

The draft law is now under review by the finance ministry ahead of submittal to a new parliament, for which elections are expected to be held at the end of 2014.

"The law has been stalled due to differences over formation of the legislative committee; how many members, whether to include sharia scholars from outside Egypt, whether there will be a single authority to oversee all projects or whether each project should have a legislative committee," Ashmawi said.

Lack of clarity

Basant Fahmy, professor of banking and finance at the French University, said the controversy surrounding public assets was still an issue due to lack of clarity from the government on how much it sought to raise from sukuk issues, how the funds would be invested, and how investors could exit from assets.

"The biggest hurdle is lack of clarity from the government in specifying suitable entry and exit (of investors) for those sukuk," she told Zawya, adding that projects financed by sukuk should be listed on the stock market.

"The Egyptian government needs to define the purpose of sukuk issues. Are they investment tools or debt instruments? If the aim is to increase liquidity, then it would be better to issue (conventional) bonds," she added. "Egypt's credit ratings cannot serve as a guarantee for large investments."

Western consultants helping Egypt with its economic reform plan have estimated that the country will need at least USD 60 billion of investment to reach GDP growth of 5% by 2018 and the same amount again to bolster foreign reserves, Reuters quoted senior officials as saying on Wednesday.

Egypt's budget for the 2014/2015 fiscal year projects a deficit of around EGP 240 billion, or 10% of gross domestic product. Gross domestic debt rose 17% to reach EGP 1.7 trillion, or 83% of GDP, in March from a year earlier, according to central bank data released in June.

"In Egypt's case, public debt can be reduced if sukuk issues are used to finance infrastructure projects, which are sukuk friendly because they are backed by a physical asset. The role of the government would then be to manage the sukuk program and oversee and coordinate between investors and the project without burdening the state budget," said Bassel Nadim of Tanmia Capital.

Ashmawi said one viable option was the renewable energy sector, particularly solar energy projects that would help address frequent power shortages in the Arab world's most populous country.

The governor of Faisal Islamic Bank of Egypt, Abdel Hamid Abu Mousa, said the sukuk law would boost the market and that FIB was among banks prepared to participate in financing projects launched under a state sukuk program

Corporate sukuk

The Egyptian Financial Supervisory Authority (EFSA) has submitted a separate corporate sukuk law to the finance ministry.

The sovereign sukuk law aims to organize financing of the state budget, national projects and public institutions, while the corporate sukuk law was put forward for the financing of firms and private institutions, EFSA head Ashraf ElSharkawy said in remarks published in local media in January.

He said parliament could decide to merge the two proposed laws. "Current stock market law regulations allow the trading of sovereign and corporate sukuk as ordinary financial instruments. If their trading required any modifications to the registry rules, we would do that," he was quoted as saying.

A senior official at Emaar Misr for Development told Zawya earlier this year that the firm would like to consider sukuk to develop projects in Egypt, because availability of funds from commercial banks was limited. But he said that lack of clear legislation had made it difficult to reach agreement on a sukuk issue.

Analysts said development of a sukuk industry would help broaden investment for both the public and private sector by attracting Gulf Arab investment.

"European states are racing to enact sukuk legislation to attract Gulf and Arab capital to finance big projects," Fahmy said.

Malaysia, the United Arab Emirates and Saudi Arabia still dominate the global sukuk market.

KFH Research Ltd, a unit of Kuwait Finance House, said sukuk issues by sovereign entities accounted for 68.6% of new issues worth USD 31.2 billion in the first quarter of 2014.

(Zawya / 17 July 2014)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com