For the First Time — Egypt Debuts Islamic Finance Market

Sovereign Sukuks to Help Attract New Local, Foreign Investors
Egypt's Minister of Finance Mohamed Maait at the 2019 Russia-Africa Summit and Economic Forum, at the Sirius Park of Science and Art. (Getty)

As the Egyptian parliament has approved a sovereign sukuk law this month, Egypt is now officially entering the Islamic finance market for the first time, with the volume of sukuk issuances reaching $2.7 trillion.

These sukuk issuances are made in accordance with the principles of Islamic Sharia, according to Minister of Finance Mohamed Maait.

In a statement on June 7, Maait said that the “sovereign sukuk” will help attract new Egyptian and foreign investors who will pump investments with both local and hard currency in accordance with the principles of Islamic Sharia, provided that the sukuk issued in the local market are listed in the stock exchange.

The minister added that sukuk issued in international markets and in foreign currencies will be listed on international stock exchanges in accordance with the rules followed for intergovernmental issuances.

“That would contribute to providing additional cash to the Egyptian economy and reducing the cost of financing investments, especially since these sukuk are issued in accordance with formulas compatible with the principles of Islamic Sharia,” the minister said in the statement.

WHAT IS SOVEREIGN SUKUK?

Along with bonds and treasury bills, sukuk is one of the recognized types of government securities to finance the needs of the general budget.

The issuance of sovereign sukuk is based on the usufruct of state-owned assets as private property, by selling or leasing the usufruct of these assets, or by any other method consistent with the issuance contract and the guarantee of the owner’s share of the instrument in accordance with the principles of Islamic Sharia.

Sovereign sukuk is defined as nominal government securities of equal and negotiable value, issued for a specific period, not exceeding thirty years.

Sovereign sukuk differ from other government securities such as bonds and treasury bills in that they are subject to speculation and are subject to loss or profit.

Sukuk have common shares in the usufruct rights of assets owned by the state privately as the investor is a partner in the usufruct rights of the said assets.

Bonds and treasury bills are fixed-term securities that are guaranteed with an additional interest return for their value that is disbursed at the end of their term.

The sovereign sukuk issuances are similar to ordinary securities in their tradability in the stock market, but sukuk is characterized by a high return due to their high percentage of risk.

With bonds and bills, the low interest rate is the distinguishing element as there is no risk in their trading.

Compiled photos of major Egyptian national project of medical facilities inaugurated recently. (Courtesy of Presidency website).

ECONOMISTS WELCOME MOVE

Ahmed el-Shami, an economist and a professor teaching feasibility studies at Ain Shams University, said that the issuance of the Sovereign Sukuk Law would help Egypt achieve its financial, economic and developmental goals by diversifying the sources of financing the state's general budget deficit and providing the necessary financial allocations for investment projects.

“It would also help the state reduce its debt service bill and stimulate demand for government issuances of securities and debt instruments issued in local currency and in foreign currencies as well,” el-Shami told Majalla.

Egypt has been attaching great importance to investing in major national developmental projects in various sectors, with the aim of creating job opportunities for young people and reducing unemployment rates, which contributes to raising economic growth rates.

Ahmed Samir, a member of the Egyptian senate, said that these sukuk issuances will be a key tool that provides flexibility for financing national projects.

“They have important dimensions for Egypt’s economic reform process and are considered a new tool for foreign investors and will be available to individuals, unlike bonds,” he added.

Samir also described sukuk as one of the instruments that are in great demand in several countries such as Malaysia, Britain, Saudi Arabia and the UAE.

“Therefore, Egypt is targeting this market with a new law that aims to achieve several things, including attracting foreign investors to sovereign instruments,” he added.

According to data released by the Central Bank of Egypt, net foreign direct investments decreased by 31.8 percent to stand at $1.6 billion, during the first quarter of the current fiscal year (July/September 2020), compared to $2.4 billion in the corresponding period.