“The target of issuing these regulations is to help companies that want to issue sukuk,” Ziad Bahaa El-Din, chairman of the Cairo-based Egyptian Financial Supervisory Authority, said in a telephone interview in Cairo Oct. 7. “Right now, we don’t have a framework to help anybody who wants to issue sukuk.”
Global assets held by financial institutions that comply with Shariah law may climb to $1.6 trillion in 2012 from about $1 trillion, the Islamic Financial Services Board said in April. Egypt, where one of the world’s first Islamic financial institutions was established in 1963, has struggled to develop the Islamic debt market because of political and economic reasons, said Samer Sulaiman, professor of political economy at the American University in Cairo.
The Muslim Brotherhood, Egypt’s largest opposition group, has been officially banned since 1954 when it was accused by the government of involvement in an assassination attempt against then Prime Minister Gamal Abdel Nasser. He became president in 1956. Egyptian law bans political parties based on religion, which means that the brotherhood has to register its candidates as independents in election.
The group “is well organized and of course they would also be part of a financial system based on Shariah,” Volker Nienhaus, member of the governing council of the Kuala Lumpur- based International Centre for Education in Islamic Finance and consultant to the Islamic financial Services Board, said in an interview in Dubai Oct. 5. “If you want to create obstacles you shouldn’t give licenses” to Islamic financial institutions, he said.
The development of Islamic debt in Egypt also was undermined in the 1980s and early 1990s by the collapse of investment companies such as El Rayan and El Saad, which failed after setting up ponzi schemes that claimed to invest in Shariah-compliant assets, Sulaiman said.
Shariah forbids gambling, payment of interest and alcohol, so fund managers have to select investments deemed halal, or permissible. Islamic bonds are typically backed by assets or cash flow because of the ban on interest. Investors earn any profit from the assets instead.
Global sales of Islamic debt declined 16 percent to $11.8 billion this year, according to data compiled by Bloomberg. Shariah-compliant bonds returned 12 percent, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index, while debt in developing markets gained 16 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.
Issuance is rebounding after Dubai World, one of Dubai’s three main state-controlled holding companies, reached an agreement last month with creditors to change terms on $24.9 billion of debt.
The spread between the average yield for global sukuk and the London interbank offered rate shrank 115 basis points, or 1.15 percentage point, to 353 this year, according to the HSBC/NASDAQ index.
The extra yield investors demand to hold Dubai’s dollar sukuk rather than Malaysia’s 3.928 percent Islamic note due June 2015 has narrowed 22 basis points to 347 this month, according to data compiled by Bloomberg. The yield on Dubai’s 6.396 percent sukuk maturing in November 2014 fell 3 basis points to 6 percent Oct. 8, the data show.
Egypt, where more than 70 million Muslims live, hasn’t sold sovereign or corporate bonds that comply with Islam’s ban on interest, according to data compiled by Bloomberg.
Egypt is rated BB+ by Standard & Poor’s and Ba1 by Moody’s Investors Service, the highest non-investment grade. The country’s economy expanded 5.3 percent in the fiscal year through June, up from 4.7 percent in the previous 12 months. The central bank kept its benchmark overnight deposit interest rate at a four-year low of 8.25 percent in September.
Egypt’s pound-denominated bond maturing in August 2020 was unchanged on Oct. 7, yielding 13 percent.
Nothing would preclude me from considering a sukuk offering from Egypt, in fact the economic drivers in Egypt are strong, which makes it very attractive from a macro point of view,” Ahmad Alanani, the Dubai-based director of fixed-income sales at investment bank Exotix Ltd., said in an e-mailed response to questions on Oct. 3. “The yield would presumably be attractive seeing as the local treasury market yields between 8.5 to 11 percent in local currency terms.”