The Ministry of Finance has announced that a prime plot of land in the Red Sea governorate already allocated to the ministry will serve as the underlying asset for this issuance. Unlike traditional bonds, sukuk are backed by tangible assets. Instead of receiving fixed interest payments, investors earn returns from the asset’s use such as rental income or profit from a project.
The decision to issue sukuk builds on the success of Egypt’s first sovereign issuance of these bonds in 2023 and reflects a growing interest in tapping the Islamic finance markets.
The Red Sea land identified for this offering is located in a region of substantial economic and tourism potential. The Ministry of Finance clarified that the land will not be sold or transferred to any other entity. Instead, it will be used through a usufruct arrangement, a legal structure that allows the government to grant rights of use and benefit to investors while maintaining state control.
The planned sukuk issue will ultimately function as a funding tool to refinance existing debt, extend maturities, and potentially lower interest costs. Sukuk are often perceived as a Sharia-compliant alternative to conventional bonds. They are generally structured to avoid interest payments (perceived by many as usury), relying instead on returns derived from underlying assets or services.
However, the extent to which sovereign sukuk adhere to Islamic financial principles remains a matter of contention. While some investors and scholars view the bonds as a genuine form of Islamic finance, others criticise many sukuk structures, particularly those issued by sovereign states, as functionally identical to conventional debt with minor legal differences.
Some interpretations of Islamic finance permit the use of conventional bonds under specific circumstances, particularly for sovereign borrowing that serves development objectives and avoids exploitative interest rates. As such, sukuk are instruments that appeal to certain institutions and investors, particularly those with explicit Sharia mandates, but they are not universally accepted as more ethical or religiously compliant than traditional bonds.
Egypt’s sukuk issuance, therefore, satisfies the preferences of a specific market segment but not all investors or all interpretations of Islamic finance.
While sukuk are structured around assets and often marketed as equity-like investments, in practice they are widely treated as debt by international financial institutions, credit-rating agencies, and sovereign debt analysts. The International Monetary Fund (IMF), World Bank, and leading credit rating agencies include sovereign sukuk as part of the general government debt stock.
This is because sukuk, particularly those structured as ijara (lease-based) or murabaha (cost-plus sale), involve a fixed repayment obligation backed by the sovereign. The underlying asset does not serve as true collateral in the event of default, and investors rely on the government’s ability and willingness to make scheduled payments. As a result, from a credit-risk perspective sukuk are economically equivalent to conventional sovereign bonds. The form may differ, but the substance remains the same.
This equivalency has significant implications. It means that sukuk do not offer an escape from debt sustainability metrics. They must be repaid like any other borrowing and are included in measures of gross public debt. While they may be slightly cheaper in pricing due to strong demand from Islamic investors, they do not reduce the debt burden or generate organic foreign-currency earnings. In Egypt’s case, the issuance of sukuk appears to be a refinancing operation rather than a step toward long-term fiscal consolidation.
Egypt’s public debt exceeds 90 per cent of GDP, while external debt surpassed $155 billion at the end of 2024. Interest payments account for over half of government revenues. Recurrent currency depreciations have inflated the local cost of servicing foreign-denominated debt, placing further strain on the public finances. Moreover, Egypt faces a significant refinancing challenge over the next few years, with large volumes of Eurobonds and syndicated loans maturing and requiring rollover.
Despite multiple currency devaluations and a shift towards a more flexible exchange rate regime, the foreign exchange market also remains tight. The current account is under pressure due to structural factors, mainly the trade deficit and weak non-oil foreign direct investment.
In this context, sukuk offer some temporary advantages. They provide access to US dollar funding, diversify the investor base, and may come at lower interest rates than conventional debt of comparable risk. They also signal goodwill to Gulf partners and demonstrate Egypt’s ability to mobilise Islamic capital. But these benefits are short-term and cosmetic if not accompanied by broader structural reforms. Sukuk do not reduce the stock of debt, and their issuance is not a substitute for fiscal discipline, growth-enhancing reforms, or export diversification.
The use of state-owned land for usufruct-based sukuk also raises some reservations. While legal title is retained, the monetisation of public assets to service debt can gradually erode the government’s fiscal flexibility. With more assets linked to debt structures, the country may find itself constrained in its ability to use or develop these assets for other purposes.
There is also a broader issue of optics and perception. Issuing sukuk allows Egypt to demonstrate that it is not out of options, thereby sending a positive signal to credit markets and international observers. However, this kind of signaling should not be confused with genuine financial strength. Sukuk issuance in this environment appears less like bold financial innovation and more like necessity.
To put things in context, there is nothing inherently wrong with using sukuk as part of a country’s financing toolkit. Sharia-compliant instruments and asset-linked borrowing can play a role in responsible debt management. Sukuk may offer a path to short-term relief, but they are no substitute for sustainable public finance. Their value lies not in their religious branding, but in their disciplined use as part of a broader fiscal adjustment strategy, one Egypt is still trying to fully embrace.
* A version of this article appears in print in the 7 August, 2025 edition of Al-Ahram Weekly
Short link: