Most recently, draft legislation for an Islamic bond, or sukuk, was finalised and presented to the prime minister as well as the president, Mohamed Morsi. There are also plans to introduce sovereign sukuk.
Experts have for years lamented Egypt’s sluggishness in creating the proper environment to foster Islamic finance. Despite being home to some of the oldest financial institutions in the region, the Arab world’s most populous nation can hardly be compared with Gulf countries, where the speedy uptake has turned the area into a global hub for the industry.
The Middle East and north Africa Islamic (Mena) banking industry is projected to grow to $990bn by 2015, according to Ernst & Young.
“While most Islamic banks remain localised to their GCC [Gulf Co-operation Council] base, there is potential demand for an estimated 100 new Islamic financial institutions across Mena by 2020,” says E&Y’s World Islamic Banking Competitiveness Report. In Egypt, the industry is valued at about E£100bn ($16bn), with the potential to expand from 9 per cent to 15 per cent in three years, according to Mohamed al-Beltagy, head of the Egyptian Islamic Finance Association.
Hussain H Hassan, a law professor at Cairo University, is part of the team working on the regulatory framework and legislation needed to put the industry on the right track.
“Egypt was outside the whole system because there was no regulatory framework and no political will under the former regime,” says Prof Hassan, who is also the head of the United Supreme Sharia Board for Banks and Islamic Finance Institutions.
He says that, before the revolution, he “tried several times to engage with the related entities and numerous banks, but then there was no desire to promote Islamic finance”.
The politics have changed, however, and the Muslim Brotherhood’s Freedom and Justice party, as well as the Salafi Nour party, are leading the push for more focus on the sector.
“We discussed these laws with FJP and Nour and took their proposed legislation into consideration. The result was presented to President Morsi and the prime minister,” says Prof Hassan, who is also chairman of the sharia board of Ridge Islamic Capital.
He says planned changes to the central banking law will allow “Islamic finance to operate freely, lifting restrictions on banks”, thus opening Islamic banking opportunities, and bank branches. Mechanisms will also be introduced to allow traditional banks to transform themselves into Islamic financial institutions.
Previously, Islamic banks were only allowed to provide personal finance products, even though they were investment and development banks, says Prof Hassan. The goal of the sukuk law is to attract sharia-compliant investment in the country’s infrastructure projects. Prof Hassan says that, through sukuk, investors can put their money into a project that grants them ownership rights for a set term and gives them a percentage of the profits. At the end of this time, ownership rights return fully to the government or company, he says, so it is quite unlike taking a loan that carries interest.
In this way, he says, Islamic finance functions as a risk-sharing mechanism, while traditional finance is risk-shifting. Islamic finance, Mr al-Beltagy says, is about investing in products, commodities, construction and infrastructure, “not financing debt”, he adds, citing this as one of the main reasons the industry gained prominence after the global economic crisis. “We are trying to pass these laws to promote Islamic finance and combat the funding deficit facing Egypt,” he adds.
Since the 2011 uprising, Egypt has suffered dwindling foreign reserves, a widening budget deficit and a funding crisis. Protracted negotiations with the International Monetary Fund for a $4.8bn loan have hit another snag after a staff-level agreement was finally reached in November.
Egypt requested a month-long delay on the IMF’s final approval after a bevy of tax laws passed by a presidential decree faced almost instant opposition and were suspended until further notice.
The delay threatens to derail prospects of economic recovery because, analysts say, failure to secure the loan imperils another $10bn of external funding that is conditional on a deal with the IMF.
Prof Hassan, however, argues that if a sukuk law were in place Egypt could get the financing it needs. He says a significant number of institutions would want to invest in projects if the instruments of Islamic finance were quickly adopted.
source: Financial Times