This week the House of Representatives, the lower house of Egypt’s parliament, gave its preliminary approval on a new bill allowing the government to issue sovereign sukuk, or Sharia-compliant, bonds.
Egypt will issue its first sovereign sukuk as soon as a law goes into effect, Minister of Finance Mohamed Maait said in a statement on Monday. This will contribute to achieving the state’s financial, economic, and development goals by diversifying sources of financing and providing financial allocations for investment projects, the statement added.
Following parliamentary approval, the law will go to the presidency to be signed into law.
The sukuk bonds will help Egypt diversify its funding sources and attract a broader investor base, Bashar Al-Natoor, global head of Islamic finance at Fitch Ratings in Dubai, told the Weekly.
“Sovereigns typically issue sukuk because they either want to develop the Islamic finance market or because they have a significant Islamic banking sector and want to ensure banks have access to short- and long-term debt or to attract the wider Islamic investor,” he said.
“With Egypt, the intention is clearly to unlock the potential of Islamic finance and to further diversify its funding sources.”
The sukuk will help finance the country’s deficit, the statement said. The budget for the new fiscal year which begins next July forecasts a budget deficit of 6.7 per cent, down from 7.7 per cent in the current fiscal year. The government has been reverting to borrowing from international financial institutions and international debt markets to bridge the gap in the deficit. Egypt’s external debt rose to around $129 billion in the second quarter of fiscal year 2020-21.
Egypt has already issued green bonds and has activity in the general bond market. The new law is intended to attract regional Islamic investors. Al-Natoor noted that by issuing sukuk, Egypt could attract investors who would otherwise not seek its regular bonds. By issuing sukuk, depending on the type and structure, Egypt could attract conventional as well as Islamic investors, he said.
“It’s not restrictive; it’s inclusive,” he said, adding that this usually translates to a broader investor base and often results in oversubscription.
Total global outstanding sukuk bonds stood at $720 billion in t he first quarter of 2021, Al-Natoor said. The volume of Fitch-rated sukuk bonds stood at around $120 billion at the end of the same quarter.
Sukuk represent between 22 and 25 per cent of the issuances of the Gulf Cooperation Council (GCC) countries, plus Malaysia, Indonesia, Turkey and Pakistan, Al-Natoor said. The type of investors that buy sukuk are usually Islamic investors, mostly Islamic banks. This is a significant banking industry, specifically in the GCC, he added.
Once the sukuk bonds are on the market and there is a track record and yield curve established for them, this will open the market for the private sector as well on a large scale, al-Natoor said. Currently less than a handful of Egyptian private sector companies have issued sukuk bonds, among them the Talaat Mostafa Group and Sarwa Capital.
Sukuk are divided into two main categories; obligor-backed-asset based means the sukuk structure will have an underlying Sharia-compliant asset or activity, but the credit risk is with the issuer; in this case Egypt.
Meanwhile, with the asset-backed sukuks, the ability to pay the sukuk and service the debt depends on the performance of that specific asset.
According to Al-Natoor, sukuk bonds are not necessarily cheaper than regular ones. The yields for sukuk and regular bonds for a comparable issuer are highly correlated, and the differential between them is not that high, he said.
Sukuk have a short maturity of between three to seven years, he said, but there have been issuances of longer maturity reaching up to 30 years. Because most investors choosing sukuk are Islamic banks, they prefer a shorter period.
It is not clear how soon or how much Egypt intends to tap the sukuk market for, as no dates or amounts were mentioned in the minister’s statement.
Al-Natoor said that it was too early to tell, especially since Egypt is at an early stage of rolling out a regulatory framework. Sukuk are more complex than regular bonds because they have a Sharia-compliance element that is not found in regular bond issues.
“It is usually, specifically for first-time issuers, more time-consuming and a bit more complex,” he said.
There is no cap on how much of a country’s debt can be in sukuk, since this will depend on the appetite of investors and the will of the government, Al-Natoor said, noting that regionally only Saudi Arabia issues sukuk.
Sukuk bonds are part of Islamic finance, which also includes Islamic banks, takaful, or Islamic insurance, and fund managers that operate under Sharia Law and corporates that operate under Sharia.
Islamic banks account for 70 to 75 per cent of the Islamic-finance industry, while sukuk account for 15 per cent.
According to the minister, Egypt will issue sukuk in both local and foreign currencies. Locally, the sukuk will be listed on the Egyptian Stock Exchange, while international sukuk will be listed on international stock exchanges as per international sovereign issuances.
*A version of this article appears in print in the 10 June, 2021 edition of Al-Ahram Weekly