Egypt will issue its first Islamic debt guidelines and amend its capital market law in a drive to spur Arab investment and open itself to investment from the Persian Gulf and Southeast Asia.
The move will allow oil-rich countries to invest in the roughly 180 companies listed on the Egyptian stock market.
“The Board of Directors for the Egyptian Financial Supervisory Authority (EFSA) has issued today its initial approval of the amendment proposal to the Capital Market Law No. 95 of 1992 that involves issuance and organising Islamic Bonds [sukuk],” says a statement published by the financial watchdog's website today.
According to the statement, the proposal will be discussed by experts and other involved parties before being floated for final approval by Egypt's cabinet.
The statement did not specify any timeline for these changes.
"Although I dont see any difference between Islamic and non-Islamic bonds, the move will help attract Arab investors to the Egyptian market," says Walaa Hazem, asset manager at HC Securities.
"The thing is, you're trying to provide a broad diversity of services that will cover potential investors from different backgrounds, including those who worry about investment and think it is haram [forbidden]," adds Hazem, who was part of a May tour of the Gulf by the Bourse chairman Mohamed Abdel Salam aiming to promote the Egyptian market.
Last month, Prime Minister Essam Sharaf and Finance Minister Samir Radwan also made a promotional tour of the Gulf, visiting Saudi Arabia, Qatar, the United Arab Emirates and Kuwait, looking to raise both private investment and loans.
Egypt's market has three listed Sharia-compliant banks: Al Baraka, Faisal Islamic Bank of Egypt and National Bank for Development.
In May, the Freedom and Justice Party, set up by the Muslim Brotherhood (MB) to contest up to half the seats in a parliamentary election scheduled for September, proposed the government sell Islamic bonds for the first time to help plug the country’s deficit.
According to the group’s official website Ikhwan Online, Ashraf Badr El-Din, a member of the MB committee which wrote the economic platform for the new party, argued that a high percentage of Egyptians have reservations about charging interest and that such a financing tool would encourage these people to invest their money.
The global market for Islamic financial services was estimated to have reached US$729bn at the end of 2007, a 37 per cent increase year-on-year, according to a 2009 paper by the Egyptian British Chamber of Commerce titled ‘Report on Islamic Banking in the UK and Egypt’.
The logic behind introducing Sukuk in the Islamic world is that any form of interest [riba] derived from investments is forbidden [haram].
Islamic finance works from the premise that both the individual customer and bank should be at equal risk upon investment; any possible profits or losses should be equally divided between them.
Conventional financial services, as well as finance for activities related to alcohol, gambling and tobacco are incompatible with the principles set out in Sharia law and therefore prohibited in the Islamic banking system.