Betting on Sharia-compliant investments

Nahla Abul-Ezz, Thursday 5 Oct 2023

A recent conference shed light on the potential of sukuk investments in Egypt. Al-Ahram Weekly was in the audience

Betting on Sharia-compliant investments
Betting on Sharia-compliant investments


In February this year, Egypt issued its first sovereign sukuk (Islamic bonds) to the tune of LE60 billion ($1.5 billion). It thereby joined the global sovereign and private sector sukuk market whose volume currently stands at $3.6 trillion and is growing by 16 per cent annually, according to Mohamed Al-Beltagui, chairman of the board of directors of the Egyptian Association for Islamic Finance, in a speech last week to the first regional conference for sukuk launched by the Al-Baraka Islamic Forum.

The first corporate sukuk in Egypt was issued by the Talaat Moustafa Group in 2020. Corporations have raised LE12.9 billion from the sale of these Sharia-compliant bonds, although so far, there have been no new corporate sukuk issuances in 2023.

Sukuk are Sharia-compliant securities which give the holder ownership of a share in an existing or emerging project. The operative principle here is that the bonds are linked to assets. Companies issue sukuk with the aim of financing projects while enabling sukuk holders to share in the company’s profits and losses, in keeping with the Islamic jurisprudential injunction al-ghunm bil-ghurm which means that sukuk certificate holders are entitled to a share of the profits and bear a share of losses, if any.

Mohamed Hegazi, advisor to the minister of finance, said that a “social dialogue” was held before the issuance of the sovereign sukuk in February in order to shed light on the importance of the measure. Hegazi said the decision boosted the Egyptian economy’s entry into the global sukuk market and that the first sovereign sukuk issue, which offers an indicative return rate of 10.875 per  cent, was four times oversubscribed, receiving more than $8.6 billion in subscriptions. The sovereign sukuk issue is part of a $5 billion three-year sukuk programme that the Ministry of Finance launched in February and is listed on the London Stock Exchange.

Hegazi added that the offering’s success made it more likely that Egypt would adopt a programme to offer $5 billion worth of sukuk annually with an eye to increasing the amount later.

Sukuk have a vital role to play as a financial instrument that can make a significant contribution to the attainment of the sustainable development goals (SDGs), said Nasser Al-Qahtani, director-general of the Arab Administrative Development Organisation. “The world today is going through a time of immense economic, environmental and social challenges. To overcome them and ensure a sustainable future, financial innovations related to sustainable development are essential,” Al-Qahtani said.

He said that most big powers, including the US and UK, issue sukuk and that many Arab countries have had considerable success with the sukuk they have issued to meet their financial needs.

Participants at the first regional conference for sukuk held that Egyptian sovereign sukuk Law 138/2021 marked a breakthrough in the diversification of funding sources in the Egyptian economy. They pointed to the success of the Egyptian sovereign sukuk offering as proof of the ability of the Egyptian economy to withstand unfavourable global and regional circumstances. This, they said, is more reason why the current law should be broadened to include all types of sukuk. In this context, they urged drawing on the experiences of Malaysia, Saudi Arabia, the UAE and Indonesia in using sovereign sukuk to finance major infrastructure projects.

A short documentary Sukuk: Green Investment was screened during the conference’s opening session, recounting the origin of the sukuk, its development globally, and international efforts to increase their use as a funding tool, especially for sustainable development projects. The film also highlighted Egypt’s success in issuing sovereign sukuk to finance infrastructure projects and support economic growth.

The Egyptian National Bank and Abu Dhabi Capital, which is a subsidiary of Abu Dhabi Islamic Bank, will establish sukuk-issuing companies to meet growing demand in the market for such firms. They have obtained approval in principle from the Egyptian Financial Regulatory Authority (FRA), according to Daily News Egypt.

Earlier this year, the FRA reported that it was studying the possibility of allowing companies to sell sukuk without the need for a credit rating.

The amendment to the capital market law has also cleared the way for another funding vehicle. Sustainable Development Investment Funds will be created to finance green projects and other environmentally friendly activities.

The closing statement read by Yousef Khalawi, secretary-general of the Al-Baraka Forum for Islamic Economy, presented the recommendations reached by participants. Generally, they underscored the need to study the sources of success in international sukuk issuances, the need to diversify sukuk issuances to meet different economic sectors and SDG goals, and the need to develop a sukuk investment database to gain a clearer picture of the market.

The participants, in their recommendations, called for the development of an integrated plan to train human resources for this market, and to equip them with the necessary economic, financial and accounting knowledge and expertise related to sukuk, as well as the relevant Islamic jurisprudence. They also stressed the need to promote and ensure transparency and good governance in the development of a financial Islamic market that is efficient and effective in mobilising financial resources and optimising their allocation.

The importance of a robust market that invites new investors cannot be overstated. The succession of shocks in financial markets in recent years, such as that delivered by the Covid-19 pandemic, has thrown into relief the need to be able to make high-quality liquid assets available quickly and inexpensively in times of crisis and liquidity shortages. This requires developing a broad range of instruments, not least of which are the short-term sukuk.

* A version of this article appears in print in the 5 October, 2023 edition of Al-Ahram Weekly

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