Last week, the Egyptian Stock Exchange (EGX) launched an index of Sharia-compliant companies under the supervision of Al-Azhar in Cairo. The EGX33 includes 33 local firms, all of which are already listed in the EGX100, one of the Egyptian Stock Market’s main indices.

According to Mohamed Maher, president of the Egyptian Securities Association and vice chairman and chief executive officer at Prime Holding, discussions on the Sharia-compliant index began a year ago and an agreement was reached with a specialised Sharia committee some four or five months ago.  

The committee, which included three Sharia experts who are independent of the EGX management, drew up a list of 100 companies that complied with eligibility criteria based on whether a firm’s profits depend on activities that violate Islamic Law, such as the sale of alcohol, pork, or cigarettes, or revenues that may be associated with practices that are regarded as usurious.

An EGX statement noted that no company can be included in the new index if more than 10 per cent of its revenues derive from non-Sharia compliant activities such as the sale of alcohol or if a company’s interest-bearing investments (such as treasuries, including long- and short-term) come to more than 33 per cent of its assets.

The ratio of a company’s liquid assets to its total assets should not exceed 70 per cent. Companies not listed in the EGX100 but having a Sharia supervisory board can be added to the index if they meet the liquidity criteria.

“Based on these criteria, 33 out of the 100 companies listed were selected,” Maher said.

He believes that there was a need for the new index, which “is expected to attract local and Arab investors unwilling to invest in others where companies do not comply with Islamic Law.”

According to Ahmed Al-Sheikh, head of the Egyptian Stock Exchange, the new index was introduced to bring the EGX into line with other Arab and international capital markets that feature this kind of index.

It also came in response to requests made by organisations eager to invest in firms that conform to the laws and principles of Sharia.

The 33 companies listed on EGX33 represent 16 different sectors, and the relative weight of any company cannot exceed 15 per cent of the index.

With a relative weight of 15 per cent, the Talaat Moustafa Group, a leading real-estate developer as well as an investor in the hospitality sector, is the largest component of the index.

It is followed by Elsewedy Electric with a 10.3 per cent weighting and Abu Qir Fertilisers with a relative weighting of 9.1 cent. 

Al-Sheikh said that setting a 15 per cent maximum relative weighting limit for listed companies aligns with the requirements of market stakeholders, especially investment fund managers who want a benchmark index that complies with the fund’s investment criteria.

The EGX33 includes Fawry Payments Technology, Telecom Egypt, Raya Call Centre Services, Edita, Juhayna, Obour Land, the Al-Baraka Bank, the Faisal Islamic Bank, the Abu Dhabi Islamic Bank, MM Group, EGYTRANS, Taaleem Management Services, Raya Holding, GB Corporation, Ibn Sina Pharmaceuticals, and Cleopatra Hospitals, in addition to companies mentioned earlier.

Maher predicts that the new index will not only draw a large contingent of new customers to the Stock Exchange, especially if promoted in the framework of Sharia-compliant investment funds but will also outperform other indexes on the exchange.

As Al-Sheikh noted in a statement upon the launch of the new index “even before the launch there were repeated requests from a large number of local, regional, and international investors” for a Sharia-compliant index.

The index will undergo a semi-annual review at the end of January and July each year. Any changes introduced will go into effect the following February and August.

Eissa Fathy, chairman of the Board of Directors of a Cairo-based securities firm, told the Al-Ahram Weekly that issuing tradable paper representative of the index so that investors can buy in all the companies forming it had been suggested.

Analysing the performance of this will offer a gauge of the potential popularity and success of the new index.

The outlook for the index seems positive. For many years, Egypt has seen considerable interest in Islamic investment instruments and a significant increase in the number of Islamic banks. Many companies have also begun to issue Islamic bonds (sukuk), which are a Sharia-compliant means to increase a company’s liquidity.

Moreover, in 2021, Egypt ratified the Sovereign Sukuk Law, after which it issued its first sovereign Islamic sukuk bonds with a total value of $1.5 billion.

* A version of this article appears in print in the 27 June, 2024 edition of Al-Ahram Weekly