March 20, 2013 - Egypt’s Shura Council has approved a law providing for the regulation of sukuk, Islamic bonds.
The law, riding on the back of Arab Spring-fueled anticipation of a resurgence of Islamic finance in the MENA region, opens the door for all forms of sukuk issuances, including sukuk to finance debt, assets, projects, businesses, and investments. C&M partner Walid Hegazy advised in the drafting of the law in his capacity as secretary general of the Egyptian Islamic Finance Association.
The wide-reaching law allows for both corporate and sovereign sukuk and asset-backed as well as asset-based sukuk structures- issuances may be in foreign currency or Egyptian pounds. A provision is included for setting up a central government Shariah entity to monitor compliance, the members of which will be appointed by the Prime Minister. The new law allows for arbitration to regulate its application, and includes restrictions regarding the use of publicly held state-owned assets, if classified as public domain.
The law is expected to decrease the financial burden on the government by helping it finance the reform and infrastructure projects that Egypt badly needs. Funding derived through sukuk issuance is expected to back a number of projects in healthcare, transportation and infrastructure.
US$2 Billion Sovereign Sukuk for Egypt
The government is reportedly preparing to raise around US$2 billion through its first sovereign Sukuk issuance as it seeks to build up declining public funds.
According to Islamic scholar Sheikh Hussein Hamid Hassan, the Egyptian government is convinced that a foreign currency Sukuk will fund the country’s development projects and plug a leak in its foreign reserves, which fell US$1.77 billion to US$16.35 billion in January. The reserves are down by more than 50% since its political revolution a year ago.
“The Sukuk will be in US dollars or Euros; or maybe a combination. It will be around US$2 billion, issued in several tranches targeting mainly Egyptians living outside Egypt,” said Sheikh Hussein.
S&P downgraded Egypt’s ratings to ‘B’ from ‘B+’ on the 10th February as a result of its sharp decline in foreign exchange reserves and its ongoing political uncertainty. “There would be a further downgrade if the Egyptian government failed to stem the decline in reserves, or an uncertain policy environment and weak institutions emerge from the ongoing political transition,” said the ratings agency.
The country’s anxiety over funding has led it to seek US$1 billion from the World Bank and the African Development Bank. According to Momtaz al-Saeed, its finance minister, the country needs US$11 billion to finance economic reform.
Its potential sovereign Sukuk could make up some of the US$2.5 billion-worth of US dollar-denominated bonds said to be for sale by the end of this month.
With the country’s dire need of funds and the Islamist Freedom and Justice Party and the Nour Party set to make up its national coalition government, could Islamic funding emerge as the answer for Egypt’s shrinking coffers?
The United States, which sends Egypt a $1.3 billion annually, has not sent any money to Egypt since the new fiscal year due to a new Congressional restriction which requires the State Department to verify that the Egyptian government is committed to democracy.
After Europe and the United States condemned the raids on the NGOs, Egypt’s Field Marshal Tantawi, the de facto head of state, vowed to end the crackdown and allow the organizations to reopen and resume work.
The third round of voting in Egypt’s lower house of parliament elections is scheduled to take place on January 3 and end on January 11. In an announcement on January 2, 2012, Field Marshal Tantawi stated, via decree, that the voting for the upper house of parliament, the Shura Council, would be shortened to two stages rather than three, and will take place between January 29 and February 22. Consequently, the Shura Council’s first session will be moved up by three weeks to February 28.
Candidates for Egypt’s presidential elections, scheduled for June 2012, will begin submitting their applications for the presidency in April after the public referendum on the new constitution. The new constitution of Egypt will be drafted by a constituent assembly created by both houses of parliament, which shall be seated by the end of March.