An announcement made recently by Deputy Prime Minister Ziad Bahaa El-Din that a currently-suspended law implementing Islamic bonds (sukuk) will be amended and reactivated has reignited controversy around the subject.
The sukuk legislation was approved by the government of ousted president Mohamed Morsi in May, but deactivated after his July ouster.
Bahaa El-Din has not given specific details about the amendments he is proposing.
The deactivation of the law comes at a time when sharia-compliant bonds are gaining ground worldwide.
Reuters recently conducted a survey that forecast that global sukuk issuance would reach $237 billion by 2018, and international investors who had participated in the survey are expected to allocate half of their portfolios to Islamic finance investments, around a third of which would be invested in sukuk. Investors in the Middle East and north African region overwhelmingly prefer dollar-based sukuk.
In October, British Prime Minister David Cameron made a bid to position London as a leading hub for Islamic finance, announcing plans for Britain to become the first Western country to issue sovereign sukuk.
Bahaa El-Din’s statements regarding adjusting the sukuk law reflected a different emphasis to that of the finance ministry.
Mesbah Qotb, the media advisor to the minister of finance, told Ahram Online that the ministry had been rearranging its priorities to focus on "social justice" and stimulating the economy.
"Sukuk are merely a financial instrument that we would use if we needed to," Qotb said.
“For now, the finance ministry has no suggestions for any amendments to the sukuk law.”
The law includes mudaraba bonds based on equity partnerships which entitle the investor to a proportion of profits, and murabha bonds in which investors pay the cost of an asset in exchange for an agreed-upon profit margin.
The bill would also allow for ijara bonds, which are lease-based, implying that the bondholders are owners of the asset and are entitled to receive revenues when the asset is leased.
Regular bonds, on the contrary, are always profitable for their owners as the issuer is obliged to repay bondholders the amount they have previously credited, and holders benefit from yearly interest unrelated to the company's profit rates.
Sovereign sukuk and privatisation
Abdel-Khalek Farouq, an economist and advisor to the minister of manpower, told Ahram Online that the concern was never with the sukuk as a measure but rather with the fact that the law was prepared by the Muslim Brotherhood's political arm, the Freedom and Justice Party, headed by Morsi.
“We have to separate politics from economy. Sukuk could be a backbone of the Egyptian economy. The current government should implement the project, even if it was proposed up by the Muslim Brotherhood,” Reda El-Meghawry, an Islamic finance expert from the United Bank added.
Farouq believes that sukuk are a healthier debt instrument for the government, as they do not rely on preset interest rates to be paid to the bondholders, but he raises fears in relation to public assets privatisation through sovereign sukuk.
Article 3 of the law explicitly prohibits issuing sukuk for state or public assets. However, the same article goes on to allow issuance for state's private assets through usufruct
Usufruct is a legal right accorded to a person or party that confers the temporary right to use and derive income or benefit from else's property. Usufruct is usually conferred for a limited time period or until death.
"The distinction between state's private ownership and state's public ownership is how the law allows for privatisation. For example, the Suez Canal, Telecom Egypt and all the holding companies created in the 1990s are privately owned by the state, according to Law 203 of 1991, so issuing sukuk on them will permit privatisation," explained Farouq.
In March, Standard & Poor's published a report showing that sovereign sukuk reached a record $115 billion globally in 2012 making up 80 percent of total sukuk issuance; adding that they expect "sovereign and sovereign-related issuance will continue to dominate, shape, and underpin the sukuk market."
The report went on to argue that "sovereign sukuk enable the gradual creation of reference prices over time, to which private-sector entities can benchmark themselves."
In that sense, corporate sukuk are rarely used in the absence of sovereign sukuk.