CAIRO - 26 November 2020: Seeking to attract a new segment of investments, Egypt is preparing to issue a sovereign sukuk bill, which was approved by the Cabinet in November, and will be officially issued once approved by the House of Representatives and ratified by President Abdel Fattah El-Sisi.
“The move will usher Egypt into the Islamic finance world,” Minister of Finance Mohamed Maait said in an official statement, noting that the volume of sukuk issued globally until the end of June 2020 amounted to $2.7 trillion.
The minister further explained that Egypt’s issuance of sovereign sukuk would contribute to attracting a new segment of investors in accordance with the principles of Islamic Shari’a law, thus providing additional financing and liquidity to government financial markets, reducing the cost of financing the state’s budget deficit, and prolonging the average life of the debt portfolio.
Generally known by their Arabic name, sukuk are financial products compliant with Shari’a law. According to Maait, the issuance of sovereign sukuk is based on the usufruct of the assets owned by the state in private ownership, by selling the right to usufruct these assets without the right of the title, by leasing them, or by any other method consistent with the issuance contract without guaranteeing the owner of the sukuk in the assets in accordance with the principles of Islamic Shari’a law.
The minister confirmed that the final form of the bill was approved after referring to all ministries and agencies concerned with financial control, some Islamic banks with experience in the field of issuing sovereign sukuk, and Al-Azhar, in order to reach the best formula for the articles of the law.
Hailing the decision and its prospects for the Egyptian economy, economic expert Shimaa Emara tells Egypt Today that the “movement towards issuing sovereign or Islamic sukuk is a step to attract a segment of investors that choose to distance themselves from banking financial transactions which depend on obtaining a specific interest regardless of the gain or loss.” Pointing out that the number of dealers with the banking sector in Egypt does not exceed 30 million people, Emara notes that this number can be multiplied according to the demographic distribution of the population in Egypt for those belonging to the age group above 15 years and even older than 65 years.
“Also, Islamic bonds could be an element of attraction to increase the number of those dealing with the stock market; and thus, it could be an influential factor in the recovery of the Egyptian Stock Exchange due to the possibility of attracting [new] segments of dealers, whether Egyptians or foreigners,” Emara says.
Moreover, economic expert Khaled El Shafei explains that the Egyptian government is seeking to diversify its sources of financing, and to find wider tools for financing methods, provided that they are less expensive. He notes that resorting to introducing sukuk is one of the new mechanisms for financing the state’s general budget.
El-Shafei indicates that since the beginning of the Coronavirus pandemic, Egypt has been seeking to find funds in new and varied ways, in order to meet the needs of the budget. Recently, green bonds were offered, as well as other funds with the aim of containing the economic and financial impact of the pandemic, which has affected major global economies.
Egypt issued sovereign governmental green bonds, the first of their kind in the Middle East and North Africa, at a value of $750 million, domestically and in the London exchange stock market, in September and October.
“Financing packages, whether sukuk or bonds, support the state’s efforts to confront the repercussions of the Coronavirus and to help the Egyptian economy to preserve the success gains of the economic reform program,” El Shafei says.
More about sukuk
The principle of sharing in profit and loss is what distinguishes the sukuk Islamic bonds from other investment tools. The sukuk holder is given ownership of a share in the assets of a specific project or investment activity, which is negotiable according to the terms of the Islamic financing formulas. Companies of all kinds can issue sukuk as means of obtaining financing; and shareholders share profit and loss with the company, as they get a percentage of the profits, which is determined upon contracting; and they bear losses according to that specified percentage.
Sukuk are nominal securities of equal value, issued for a specified period, each of which represents a common share in the ownership of assets, benefits, rights, a specific project, its rights or cash flows, according to what is specified in the IPO or information memorandum as the case may be.
Sukuk and shares are similar in that both represent a common share in the ownership of assets that generates return, or participation in the capital of a profitable project.
The types of sukuk issuance are divided into general issuance, whereby the sukuk are offered to natural or legal persons who are not predetermined; and private issuance that includes offering the sukuk to natural persons or legal persons of financial solvency or predetermined financial institutions.