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Thursday, 23 September 2021

INTERVIEW: Fitch’s Bashar Al-Natoor lists the benefits of Islamic bonds for Egypt’s economy

Egypt is to venture into a $2.7 trillion market through its anticipated sukuk issuance, said Al-Natoor

Doaa A.Moneim , Thursday 24 Jun 2021
Bashar Al-Natoor
Global head of Islamic finance at Fitch Ratings Bashar Al-Natoor.
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Egypt’s House of Representatives approved primarily on 6 June a bill regulating Islamic sukuk. The final approval, however, pends on the voting of two-thirds of the House’s members.

In a virtual interview, Bashar Al-Natoor, the global head of Islamic finance at Fitch Ratings, spoke with Ahram Online about the benefits of Islamic sukuk for the Egyptian economy, particularly amid the repercussions of the coronavirus crisis, and shared his opinion about the expected growth of Islamic finance in the region and  globally.

Ahram Online: What are the estimates of Fitch Ratings for the amount of Islamic finance globally?

Bashar Al-Natoor:Islamic finance is a part of a bigger concept, which is the Islamic economy. The Islamic finance value ranges between $2.5 trillion and $2.7 trillion globally. It covers five key grounds, including Islamic banking, representing 70 percent up to 75 percent of the Islamic finance, and Islamic bonds that account for around 15 percent of the Islamic finance.

The remainder, about 10 percent, is represented by three sectors: takafful (Islamic solidarity); investment funds; and corporates operating under the umbrella of the Islamic Sharia (rules).

More than 40 countries are adopting the Islamic finance, but it is focused significantly in the top 10 countries, which are the six Gulf countries, Malaysia, Pakistan, Indonesia, and Turkey.

Islamic finance is a big industry, concentrated in a number of countries, but there is a number of non-Arab countries that tapped this ground.

This includes the UK, which issued sukuk twice, in addition to Luxemburg, South Africa, and Honk Kong.

Each of these countries issued sukuk for a reason in accordance with their agenda.

AO: What is your estimation for the total Islamic finance in Egypt?

BN:While Islamic finance represents about 82 percent of the total financing operation in Saudi Arabia, 42 percent in Kuwait and 37 percent in Bahrain, the portion in Egypt doesn’t exceed six percent.

Egypt tapped this ground timidly by issuing small amounts of local sukuk on the corporates level.

The anticipated sovereign Islamic bonds issuance in Egypt are the first of their kind in the country.

AO: How did the sukuk trend increase in the past five years?

BN:It witnessed an imminent growth during this period. The amount of the current outstanding Fitch rated sukuk is $120 billion through about 150 sukuk issuances. Over the past 10 years, the Islamic finance industry has doubled. The main driver behind this growth is that so many countries have entered the Islamic finance world through issuing Islamic bonds as sovereign bonds and through corporate issuances.

Also, we noticed that the non-governmental issuance of Islamic bonds has notably grown and we expect the curve to remain on the increase.

We also expect the momentum of this kind of issuances to continue over both the short and medium terms.

AO: How do you see Islamic finance growth over the medium and long terms?

BN:It is difficult to set a rate for this growth. But, the industry shows signs of growth in the countries that had a history of issuance and also in the countries that tap this ground for the first time, such as Egypt.

AO: What are the reasons behind this growth that led Egypt, for example, to seek to be an Islamic sukuk issuer?

BN:In general, the growth of Islamic bonds is supported by three key engines: the existence of policies; strategies and roadmaps that mainly aim to improve Islamic banking and Islamic finance as whole; and the increasing demand on Islamic banking and finance in some countries. That is in addition to the desire to diversify finance resources in other countries and what that implies regarding expanding the investors base. This is what Egypt was seeking when it regulated the sovereign sukuk issuance.

States and corporates each have difference reasons for wanting to issue Islamic bonds.

AO: Islamic bonds function positively with the country’s macroeconomic indices, especially regarding inflation and unemployment. Is this one of the reasons why Egypt tapped the sukuk ground?

BN:Sukuk issuance has two types. The first is the issuance that is supported by the issuer itself and its ability to repay sukuk profits and serve the bonds. This is the expectation in Egypt’s case.

The second type revolves around the asset-backed sukuk. This kind of issuance is supported by the assets, including in infrastructure, investment projects, and real-estate projects.

AO: How do you view Egypt’s action to tap the Islamic finance ground through legislating sovereign Islamic bonds?

BN:It is a very critical action for the country and its economy. As I mentioned earlier, Egypt seeks to diversify its finance resources through attracting new types of investors who are interested in Islamic finance. The real test for this action is when the sovereign sukuk bill is approved and becomes in effect.

Yet, it is premature to assess the experience itself.

AO: Do you have an idea about the issuance ceiling that Egypt will offer?

BN:It is difficult to expect that for a country that issues this kind of sukuk for the first time. The important thing for the country now is to take action, then we can assess the performance.

As a matter of fact, the assessment of the first issuance in this regard is really important because it paves the way for creating a track record for Egypt in this respect.

AO: What are the factors that can contribute to the success of Egypt’s experience?

BN:The key element is having a supportive legislative and political environment that governs the issuance. The two elements are present in Egypt.

AO: Do you think that Egypt’s Sovereign Wealth Fund, as an engine for tapping the country’s state-owned assets, is expected to play a role in this regard?

BN:Tapping state-owned assets offered for investors under sukuk is important. The crux is the type Egypt will offer – issuer-backed or assets-backed.

AO: How did the pandemic affect demand on Islamic finance and its mechanisms?

BN:On the governmental level, the pandemic has placed significant pressure on countries’ economies, especially in relation to budget deficits. This situation pushed the countries to seek external finances and to diversify their investment resources, so a number of them resorted to tap the Islamic finance ground through Islamic bonds. This trend is increasing and we expect it to keep growing under the pressure of the pandemic.

On the banking level, banks are making use of the decrease in interest rates to issue Islamic sukuk.

On the corporate level, we expect companies to tend to issue Islamic bonds to provide finances as the banks have became more selective regarding providing finances for companies amid the coronavirus pressure.

AO: What are your projections for the volume of sukuksglobally by the end of the year?

BN:We project it at $130 billion up to $160 billion by the end of 2021. The drivers I illustrated earlier support the growth of Islamic bond issuance in the region and globally as well.

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