Egypt's government is using an ingenious stratagem to try to push a bill authorising issues of sovereign sukuk past Islamic scholars, but even if it passes, the bill may not shield authorities from controversy that could slow issuance.The cabinet last week approved a draft law that would allow the government to issue Islamic bonds; the bill will now be presented for review to the upper house of parliament and religious scholars at Cairo's prestigious Al-Azhar university.
The government is keen to issue sukuk internationally to help finance the country's budget and external deficits, and finance minister Al-Mursi Al-Sayed Hegazy said this week that sukuk could eventually raise $10 billion for the state.
An initial attempt to draft the bill foundered in controversy when the Islamic Research Academy, a group of scholars affiliated to Al-Azhar, denounced a clause under which the government could lease out its assets for sukuk issues.
Because Islam bans interest payments, sukuk are based on real assets and are supposed to pay investors with revenue from those assets. But the Islamic Research Academy said the draft might allow authorities to abuse their control of public assets or conceivably expose those assets to seizure by private investors in case of default.
The version of the bill passed by the cabinet seeks to get around this problem by dividing government assets into two types: those "publicly owned by the state" and those "privately owned by the state". The bill bans use of the first type of asset for sukuk while allowing use of the second type.
The trouble, analysts said, is that it will be difficult to define the difference between the two types clearly; the bill itself does not describe the types. This may be a recipe for controversy down the line.
"The first part of the article is a response to the controversy against the law in its initial form," former finance minister Sameer Radwan told Reuters. "But the second part is vague enough to open a back door and negate the first part."
He added, "The second part allows the use of public assets in issuing sukuk. That is the same thing that happened in the era of Khedive Ismael."
His comment referred to the historical chord struck by the sukuk bill. Khedive Ismael, a 19th century ruler, borrowed excessively from abroad, falling into debt that eventually forced the sale of Egypt's shares in the Suez Canal Company to Britain. The sale launched the era of direct colonial intervention in Egypt.
The controversy also reflects memories of the official corruption that flourished under the rule of Hosni Mubarak, who was deposed in 2011.
Prime Minister Hisham Qandil has said the Suez Canal is an example of an asset that could not be used in sukuk issues.
Gaber Nassar, a Cairo-based constitutional expert, said he believed the excluded type of asset should be defined as "public assets that people use at first hand, such as roads, bridges, canals".
The second, permissible type would include agricultural land, housing units and some public companies. The bill entitles the cabinet to specify in which category an asset belongs, after a report by the finance ministry.
Usama Murad, a Cairo-based stock market analyst, said he had inferred from the bill that assets partly but not wholly owned by the government, such as a power plant in which the state might own a 20 percent stake, would count as "privately owned by the state" and therefore permissible for use in sukuk.
But he added that the bill's wording was loose, so the government might be able to claim strategic companies such as Telecom Egypt or EgyptAir were in the permissible class. Even the Suez Canal might move into the permissible class if its operations were restructured, he added.
Decisions on classifying assets could lead to disputes with Al-Azhar. Egypt's new constitution, approved in December, states that Al-Azhar is the ultimate reference for matters related to religious law.
Experts including Nassar said its opinion would not necessarily be binding on the government. But in practice, it could be hard for the government of President Mohamed Mursi, who is backed by the Muslim Brotherhood, to override any objection by Al-Azhar.
Another sign of the delicate path the government is treading with the sukuk bill is the fact that the bill does not use the word "Islamic", though it explicitly lists permissible Islamic structures for sukuk such as murabaha, musharaka and ijara.
The government hopes its future sukuk issues will attract large Islamic investment funds from the Gulf and southeast Asia. But Murad said that regardless of the controversy over use of state assets, Egypt would find it harder to conduct sukuk issues than countries in those regions.
"The most successful sukuk issuers are Malaysia and the United Arab Emirates. Both issued sukuk from a strong position...In our situation default is possible and, in turn, the waste of national assets."
The bill describes the possibility of Egypt issuing sukuk to fund specific development projects, but Murad said there were larger obstacles to the projects than access to finance.
"The investment climate, issues of licences, the quality of infrastructure and litigation...These are problems to tackle."