As a new administration finds its feet and looks to foreign investment as a driver for Egypt’s growth, could the country’s Islamic finance sector use this as a kick-start for development of the industry that was cut short with the abrupt end to Mohamed Morsi’s tenure? REBECCA SIMMONDS explores the progress of Islamic finance in Egypt.
Legal and regulatory
With a mixed legal system incorporating elements of Islamic law, in 1977 a law was passed in Egypt allowing the establishment of Islamic banks, with regulation by the Central Bank of Egypt, however no accompanying regulatory framework was put in place leaving a void that remained unfilled. Most recently, a law relating to Sukuk was passed in April 2013 while the country was under the leadership of Mohamed Morsi.
In July 2013 a military coup removed Morsi from power and in January 2014, as part of a move away from a perceived increase in the influence of Islam over the country, the financial regulatory body, the Egyptian Financial Supervisory Authority (EFSA) announced plans to downgrade the Sukuk law, replacing it with a chapter in the securities law. In May this year, it was reported that the Sukuk law would again be reconsidered by the regulator and the central bank, with the possibility of technical revisions put forward.
Banking and finance
Egypt has three fully-fledged Islamic banks: Faisal Islamic Bank of Egypt, Al Baraka Bank of Egypt and Al Watany Bank of Egypt, and 11 conventional banks licensed to provide Shariah compliant products. According to central bank data, Islamic banking accounts for 8.1% of total financing in Egypt. Figures from the Egyptian Islamic Finance Association (EIFA) value Islamic banking assets at EGP114 billion (US$15.9 billion) in 2013, an increase of 11% from 2012, with Islamic financing by banks growing by 6% to EGP76.4 billion (US$10.66 billion). According to industry predictions, Islamic banking assets in Egypt are expected to grow between 10 -12% in 2014, catching up to that of the conventional banking sector. The central bank owns 99.9% of The United Bank (Egypt), which accounts for about 20% of the market for Islamic financial transactions in Egypt.
A plan for Egypt to issue sovereign Sukuk in early 2014 was announced shortly after the introduction of the Sukuk law, during the one-year presidency of Mohamed Morsi, with infrastructure and developmental projects targeted for funds raised by the issuance as the country sought to diversify its investment base.
In June 2013, the country’s first Islamic index was launched at the fourth annual EIFA conference. The Index’s Shariah screening parameters are founded on AAOIFI Shariah standard 21, indicating regulations related to the trading of securities.
Despite a lack of legislation relating to Islamic financing transactions, a number of large deals have been signed by corporates in the last year. In May 2013, Abu Dhabi Islamic Bank acted as lead arranger for a syndicated Ijarah transaction of US$150 million Maridive & Oil Services. Also in 2013 Egyptian Steel Group obtained Shariah compliant syndicated financing of over EGP1 billion (US$ 139.49 million) for the construction of a factory. This was topped in April 2014, by an Islamic financing of EGP1.5 billion (US$209.23 million) obtained by Al Nouran Sugar Company to build a manufacturing facility, with the ICD extending a financing package including equity investment, mezzanine financing and standby guarantees of up to US$46 million. Banque Misr, Bank Audi and Abu Dhabi Islamic Bank (ADIB) were the lead arrangers for the deal, with 13 banks in total involved in the syndicated loan.
In June, Banque Misr, which offers Islamic products, announced that it is currently in the initial phase of talks with the Social Fund for Development, to sign the first Islamic contract for small projects up to EGP100 million (US$13.94 million), with a contract projected to be signed in the third quarter of the year.
Egypt has been a recipient of a wealth of aid from its allies in the GCC, with aid reportedly worth US$20 billion provided by Saudi Arabia, Kuwait and the UAE since the ousting of Morsi in 2013 as well as a number of corporate agreements made between companies in the relevant countries. According to Ashraf Salman, the country’s newly appointed finance minister, Egypt is expecting to attract up to US$10 billion in foreign direct investment for the coming fiscal year and US$14 billion over the next three years.
Egypt has also benefited from financing from the Islamic Development Bank (IDB) and the Islamic Corporation for the Development of the Private Sector (ICD), a member of the IDB Group. The IDB in June announced financing worth SAR2.82 billion (US$751.75 million) for the country’s development projects, bringing the total IDB finance for the country to US$9.6 billion. Also in June, the ICD signed an MoU with the Saudi-Egyptian Business Council reinforcing the cooperation between the two institutions and companies in Saudi Arabia willing to invest in Egypt.
Challenges and opportunities
Perception is one of the largest challenges for Islamic finance in the current climate, although, as the country courts investment from its neighbors in the Gulf, the prospect of Islamic investments is heightened. The lack of a clear regulatory framework for Islamic finance is also a hindrance for the development of the sector and an obstacle to innovation within the sector, which could also be acting as a potential inhibitor of growth within the industry.