Egypt’s parliament — the House of Representatives — approved on Sunday a new bill that will open the door for the government to issue Islamic Sharia-compliant sovereign bonds (Sukuk) on local and foreign markets.

Parliament Speaker Hanafy Gebaly said a final vote on the new bill will be postponed until a two third majority of MPs is available.

Minister of Finance Mohamed Maait told MPs that the new bill reflects the government’s new policy of diversifying sources of finance, attracting investors, and boosting cash liquidity on the local market.

According to Maait, the new sukuk bill is also a new financial tool that could help cover the budget deficit.

“The government is doing its best to cut the budget deficit, and so this bill comes to generate income and raise capital without exerting pressure on the state’s coffers,” said Maait, adding that “the proceeds of the sovereign bonds will be used to spend on development projects that can generate new job opportunities and improve the lives of citizens.”

Speaker Gebaly said the sovereign bonds are a source of finance, but they are different from treasury bills and bonds.

“All can be traded on the stock market, but the returns on sukuk are much higher because they are high-risk and do not have a fixed interest rate,” said Gebaly.

Gebaly revealed that the sovereign bonds bill got an initial approval from the Islamic institution of Al-Azhar, the Central Bank of Egypt, and the Financial Control Authority.

Soliman Wahdan, the parliamentary spokesperson of Al-Wafd party, approved the bill, arguing that sovereign bonds are a new window for attracting investments and raising capital necessary to close the budget deficit and spend on development projects.

Ali Gomaa, head of the House’s Religious Affairs Committee, said the new bill on Sovereign Bonds goes in line with Islamic Sharia.

“It also got the approval of Al-Azhar’s grand clerics after a four-month study of its articles,” said Gomaa.

MP Amr Darwish said sovereign bonds markets are dominant in most Islamic countries.

“So, there is no fear from Egypt resorting to this new tool of finance that goes in line with Islamic Sharia,” said Darwish.

Ayman Abu El-Ela, the parliamentary spokesperson of the Reform and Development Party, proposed that the proceeds of sovereign bonds be exempted from taxes.

“Article 6 of the bill should be amended to exempt returns on trading in sovereign bonds from taxes, which are currently imposed on government treasury bills,” said Abu El-Ela, adding that “exemption from taxes will stimulate investors to tap this market.”

Abu El-Ela’s proposal, however, was rejected by Minister of Finance Mohamed Maait, who insisted that “exempting sukuk from taxes will strip the government of billions of pounds in revenues.”

The bill was rejected by Spokesman of the Modern Egypt party Hehsam Hilal, who argued that the investment environment in Egypt is not yet favourable for such a kind of financial securities.

Ahmed Samir, the chairperson of the Economic Affairs Committee, said the new government-drafted bill sets the legal framework for Egypt to tap into the sovereign bonds market for the first time.

“Sukuk have become an internationally-recognised tool for raising capital on world markets, and so the time has come for Egypt to join these markets to generate money that can be used for spending on development projects and investment programmes,” said Samir.

Samir said that sukuk will be attractive because they are compliant with Islamic Sharia.

“Due to this fact, investments in sovereign bonds are now everywhere on Islamic markets like Saudi Arabia, Malaysia, Indonesia, the United Arab Emirates, Bahrain, and Turkey, and they have generated as much as USD 2.7 trillion in recent years,” said Samir.

Ahmed Diab, secretary-general of the Economic Committee, said the capital generated by sukuk could also be used by the Finance Ministry to improve the state’s financial performance and achieve the short and long-term objectives of covering the budget deficit.

A government explanatory report on the law said, “the sovereign bonds are a new kind of government financial securities that go in line with Islamic Sharia and aim to attract Egyptian and foreign investors, particularly those who refrain from investing in traditional financial and debt servicing securities currently available on the market.”

The report laments that “sovereign bonds are almost non-existent on the Egyptian market, though there is no reason for not tapping this investment field as long as the economic environment is friendly and they can serve the state’s economic objectives.”

Article three of the draft law states that “sovereign bonds will be issued in the form of both paper and electronic securities and in accordance with the conditions set by the law’s executive regulations.”

The Economic Committee decreed that the bill’s executive regulations be issued within three months from the date of application.

Article three also says that “sovereign bonds will be denominated in both Egyptian pounds and foreign currency and on local and foreign markets.”

Article five states that “a watchdog committee” comprising financial, economic, legal, and Islamic Sharia experts will be in charge of supervising the sovereign sukuk-issuance process.

“This committee will also supervise the handling of sukuk on the market, beginning with the issuance process and ending with the restoration of their value,” said Article five, adding that “the committee will be also tasked with preparing an annual report on the sukuk market.”

Article 6 states that taxes imposed on current financial securities will be also levied on the proceeds and returns of sukuk.

Article 15 states that sovereign bonds can be issued by Egyptian joint-stock companies.

The company, on behalf of holders of sukuk, will be authorised to follow its investments and make sure they are used in the correct channels.

The issued and paid-up capital of a sovereign bond company should not be less than one million Egyptian pounds.

Article 16 states that the General Authority for Financial Control will be responsible for licensing sovereign bonds companies.

The Authority will be also tasked with preparing annual reports on the activities of sukuk companies to be submitted to the president of the republic, the prime minister, and the House of Representatives.