A debate on Wednesday hosted by the American University in Cairo on the Egyptian government's issuance of Islamic bonds – or sukuk – pitted supporters of controversial draft legislation permitting sukuk against its opponents.

The law was approved by the Shura Council (the upper house of Egypt's parliament, currently endowed with legislative powers) in what was meant to be a decisive vote on 19 March. The step was taken, however, without the endorsement of Al-Azhar, Egypt's highest Islamic authority, in an alleged violation of the country's new constitution.

The law, therefore, remains until now in a legal limbo.

In 2012, the global market for Islamic bonds reached a total value of $140 billion, having grown by 65 percent for the second consecutive year, according to Ashraf El-Khatib, an organiser of Wednesday's debate.

El-Khatib also pointed out that sovereign sukuk currently account for 80 percent of the global Islamic bond market.

Defending the notion that sukuk represented a viable means of supporting Egypt's economic growth were panellists Reda El-Meghawry, an Islamic finance expert from the United Bank, and Mohamed Hashem Rashwan, assistant professor of Islamic studies at the UAE's Zayed University.

Arguing against the proposition, meanwhile, were Hani Sarie El-Din, head of the opposition Constitution Party's economic committee and former head of the Egyptian Financial Supervisory Authority (EFSA), and Ahmed Ozalp, founder and managing director of corporate advisory firm Akanar Partners.

El-Meghawry argued that the issuance of sovereign Islamic bonds was a better way out of Egypt's economic crisis than foreign borrowing. She cited a proposed $4.8 billion IMF loan to Egypt, the terms of which are currently being negotiated, saying that such loans only add to the country's debt burden. 

Sarie El-Din responded by condemning the notion that sukuk in themselves could resolve Egypt's economic woes. "The idea that simply introducing a new debt instrument is the way forward for an economy runs counter to logic," he said. "Economies don't achieve growth through debt, but through investment."

"The issuance of sovereign sukuk would be a positive step, in that this would add to the range of instruments available to investors," Sarie El-Din conceded. "But the problem lies in the draft law governing sukuk, the provisions of which are inadequate to successfully regulate their issuance."  

He went on to say that the draft legislation also failed to address fears regarding the state budget and public assets. 

Notably, according to Sari El-Din, the draft law allows the government to issue Islamic bonds without limitations or parliamentary oversight, counter to standard international practice. He cited the case of Malaysia, which issues two thirds of the world's sovereign Islamic bonds.

"Such half-baked legislation, devoid of economic or social vision, can only be counter-productive," he asserted.

The former EFSA head also lamented the lack of transparency in the proposed law's drafting and discussion phases, which, he said, was "unconstitutional" – particularly given the government's right, under the terms of the draft law, to issue sukuk in the absence of parliamentary approval.

In his rebuttal, Rashwan held that the legal technicalities surrounding the issuance of sovereign sukuk were less important than the fact that Egypt was, in his estimation, 15 years late in introducing the instruments. Sovereign Islamic bonds, he believes, will lead to the integration of a large segment of the Egyptian public – who shun non-Islamic investments – into the economy.

"It's better to embark on a trial-and-error process now than to wait," said Rashwan, adding that Egypt should start issuing government sukuk "urgently" in light of its deteriorating credit rating. 

Ozalp, for his part, stressed that sukuk "are not a magic solution to Egypt's economic crisis." For the economy to recover, he said, Egypt must "attract foreign investment by creating the right investment climate."

The crux of the issue, according to Ozalp, was what kind of projects ought to be financed via sukuk. "The question isn't the sukuk themselves, but the projects that we will finance with them," he said. "Will they be used to finance the budget deficit or used to finance projects?" 

During the debate's question-and-answer period, Mohamed El-Beltagy, head of the Egyptian Islamic Finance Association, stated that the bonds would not go towards financing the budget deficit but rather towards specific projects. This way, he asserted, Egypt's public debt would not be affected.

El-Beltagy, who helped draft the current law, also stressed that the law did not permit the government to issue Islamic bonds on any state assets.

Article 4 of the law states that Islamic bonds cannot be issued on any state-owned assets, fixed or movable, that operate in the public interest or provide a public service. 

Opponents of the proposition were thought to have won the debate, with 64 percent of attendees voting against the motion.