Despite having the oldest stock exchange and one of the largest banking sectors in the Middle East and North Africa (MENA), Egypt has not played a significant role in the precipitous expansion of Islamic finance that has shaken up financial sectors across the region and beyond. Just three banks in the country operate in full accordance with sharia-compliant principles, two of them part of Saudi-owned groups and a third owned by an Abu Dhabi-based lender. In an effort to attract more liquidity, the Egyptian Exchange (EGX) chose not to follow the trend of other regional markets introducing Islamic instruments. The reasons behind the market’s secular orientation have also been political rather than economic: the secular regimes that led the nation in the years since the revolution in 1952 were wary of religious currents in public life and expressed little interest in the modern phenomenon of Islamic finance.
NEW ERA: However, with the uprising of 2011, the subsequent parliamentary elections and the election of a new president, the political landscape, and thus the prospects of the Islamic financial sector, have altered. Calls for the adoption of sharia-compliant financial instruments came quickly in the wake of the political unrest of 2011, with both the Freedom and Justice Party (FJP) and the Al Nour Party, which represented the two largest blocs in the new parliament, announcing programmes that would address the issue. In February 2012 the topic gained momentum when the Ministry of Finance announced that it intended to issue $2bn worth of sukuks (Islamic bonds), although at time of press no concrete plans had been carried out. It also stated that the Egyptian Financial Supervisory Authority had been instructed to establish the legal and technical foundation for what will be the first sovereign sukuk issue in Egypt’s history. The FJP has also announced it is working on its own version of a sukuk law.
EXPANDING THE POOL: The reaction of the financial sector to the development has been broadly enthusiastic. Supporters of Islamic bonds point to the rise of a global sukuk market estimated at $85bn in 2011. With Egypt facing a funding crisis, employing an instrument that might entice new investors previously sidelined by religious principles should be a priority for the government. In the proponents’ view, a regional demand for sharia-compliant investment instruments, particularly from the highly liquid Gulf, is of particular interest to those who see sukuk as a channel for fresh capital into Egypt. “We’re finding a new category of investment that meets some investors’ appetite and beliefs, like sharia compliance or ethical investing,” Mohammed Omran, the chairman of the EGX, told the local press in March 2012. “It’s going to attract many Gulf investors to Egypt, boosting liquidity all round.”
FOLLOWING THE TREND: The enthusiasm for Islamic finance extends beyond the possibility of an historic sovereign sukuk issuance and the desired response from the corporate sector. Elected parliamentary officials from the FJP and Al Nour have also focused on the structure of the exchange, calling for the introduction of an Islamic index that would allow investors to ensure that their stock-picking remains sharia-compliant. The concept is not new in Egypt – a number of brokerage firms have already established their own Islamic indices composed of sharia-compliant companies – but the FJP’s public announcement suggests that a more comprehensive classification system might soon be in place, including a new Islamic supervisory authority for the EGX. As with sukuks, the indexing proposal has been promoted as a way to attract investors and liquidity from the Gulf, as well as a way for nationals who wish to comply with the tenets of their faith.
Egypt’s evolving political landscape means that the timetable for the regulatory and structural reform necessary to implement the current proposals is by no means certain. However, the announcements emanating from government ministries and the nation’s largest political parties suggest that Egypt’s self-imposed absence from the rapidly expanding Islamic finance sector will soon come to an end, and that its integration into the system will begin with its capital markets.
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