Egyptian authorities are eager to develop an active bond market but are counting on the central bank to ensure the participation of commercial banks, the head of the country's financial markets regulator said.
Encouraging trade in bonds is a key part of the Egyptian Financial Supervisory Authority's (EFSA) plan to repair the capital markets after three years of political and economic instability following the revolution of 2011.
Trade in government bonds could make it easier to fund the state budget deficit, while more corporate issuance would give companies an important channel to raise funds for investment. At present, over 90 percent of bond issues in Egypt are by the government.
Bonds were supposed to start trading on the Egyptian Exchange in the third quarter of this year, but that has not happened.
EFSA chairman Sherif Samy said the first step in activating the bond market in Egypt was “for banks to offer portions of their funds to create a bid and offer market...Without that, we as an authority cannot do anything, and neither can the exchange."
In an interview at the Reuters Middle East Investment Summit, Samy said authorities had reached an understanding with the central bank that it would encourage commercial banks to cooperate in developing the market.
"The infrastructure is ready and the latest we have reached is our consensus that the central bank will sponsor agreements with a number of banks, in order to create a market in this area. The ball is in the central bank’s court.”
One potential area of growth in the market is Islamic bonds. The administration of former Islamist president Mohamed Mursi passed a law governing sukuk, but it was shelved after he was deposed in July last year.
Samy said the EFSA was this month sending amendments to Egypt's financial markets law to the prime minister; among other things, the amendments would include 20 articles governing sukuk and replacing the law passed under Mursi.
The new articles will not describe sukuk as being Islamic but will allow issuers to sell them, provided they are approved by a sharia board of scholars who will be specified by one of the articles, Samy said without elaborating.
The EFSA is also trying to streamline regulations to make it easier and quicker for companies to raise funds, while cracking down on what it considers market abuses.
One target is unregulated lending to investors to buy stocks. Samy said the EFSA had simplified the process for brokerages to obtain legal margin trading licenses, replacing their unregulated lending.
Unregulated loans can destabilize the stock market because firms in some cases extend credit equivalent to 100 percent of the value of their clients’ portfolios, then sell stocks without consulting the clients when their portfolios drop.
Such loans “of course will not disappear 100 percent, especially at smaller firms with moderate financial resources, but we are trying to limit the violations,” Samy said.
Planned legal amendments cover mandatory acquisitions by investors as well as the criminal responsibility of financial firms’ managing directors, so that they are not held responsible for errors that occur at their firms without their knowledge.
Five new articles may allow the EFSA to issue rules governing commodities contracts, including which entities are licensed to trade them.
Samy said the EFSA also planned eventually to send proposed rules governing real estate financing and the insurance industry to the prime minister.