Sunday, March 18, 2012

Egypt working on sukuk laws

In this week's newsletter (sign up on the right side of the blog), I discussed the Tunisian working group that was established to determine how the country will change its laws to facilitate Islamic finance generally and sukuk specifically.  Egypt appears much farther down the road to having a sukuk law that will facilitate issuance. 

As I mentioned with regards to Tunisia holds true in Egypt as well.  The first sukuk will likely be sovereign issuance to finance large post-revolutionary budget deficits.  However, in contrast with Tunisia, there are three Islamic banks (two of which have ties in the GCC) that can issue sukuk and more easily tap Gulf liquidity. 

That being said, Egypt is unlikely to jump to the "hub of Islamic finance" that is expressed as a hope in some of the quotes in the article any time soon.  There is still a challenging economic situation (as with any post-revolutionary country) and that will limit the appeal to international investors of any sukuk, sovereign or corporate.  There are also domestic challenges since many people distrust Islamic finance due to failed investment funds in the 1980s that were supposedly Shari'ah-compliant. 

However, it appears that there is not a movement to totally Islamize the banking system (as Sudan and Iran did, at least nominally), which is a positive.  There may be support for that in some quarters, but it would be detrimental because the government (in particular) will have a continuing need for financing to cover budget deficits into the foreseeable future and cannot be too picky about where the financing will come from (i.e. conventional bonds or sukuk).  Egypt has one of the more active government bond markets in the GCC.  It does not have the same level of oil and gas reserves as many GCC countries do that let them pick and choose when and whether to issue debt (either conventional or Islamic).

However, given the need for funds from the government and the nascent Islamic banking sector, as well as the other areas of the economy, Egypt should not avoid facilitating Islamic finance.  There is a sizable amount of liquidity in the GCC that can be tapped if the regulations and economic policies are done correctly.  It should move to attract this financing without letting the work needed to do so distract the government from the most important job, which is to help the economy recover.  Economic recovery (with some facilitative legislation in place) will do the most to attract investors' funds, something which would be necessary if the hopes for Egypt to become a hub for Islamic finance can even be discussed seriously. 

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