Since the establishment of the Mit Ghamr Savings Bank in 1963, the Egyptian Islamic finance sector has grown in fits and starts. Egypt has over 90 million people, and over 90% of those people are Muslims.
As seen most recently with ENI’s discovery of massive offshore natural gas fields, Egypt has substantial natural resources. This combination of a large Muslim population and natural resources suggests that Egypt should be a leading market for Islamic finance. However, the volume of Islamic banking in Egypt is currently estimated at less than 10% of the market.
In 2013, Egypt passed a law on Sukuk, but this law had minimal market impact as the ouster of president Muhammad Morsi led other governmental authorities into not implementing regulations. This delay in turning the Sukuk law into any Sukuk issuances is indicative of how Egypt remains the Islamic finance market of the future instead of the present.
Review of 2015
The first notable event in the Egyptian Islamic finance market in 2015 was the March 2015 Economic Development Conference in Sharm el Shiekh. At this conference, Egypt secured sizable investment deals worth US$36 billion, external financing worth US$24 billion and announced a new Gulf support package worth US$12.5 billion. This surge of investment into Egypt from across the world was primarily conventional, but increased funding by GCC countries, which have larger Islamic finance sectors than Egypt in both relative and absolute terms, should translate into increased Islamic finance.
Egypt’s economy grew 5.6% in the first half of 2015, its highest growth rate in nearly a decade. Investors seem more confident in Egypt’s ability to sustain this heightened growth, as shown when Egypt successfully raised US$1.5 billion in conventional external bonds in June. This offering drew over US$4.5 billion of investor orders, which indicates that investors are willing to contribute capital to Egypt’s development.
Gains in the Egyptian Islamic finance sector, while material, have been quieter. In August, the Egyptian Islamic Finance Association (EIFA) obtained a license from Bahrain-based AAOIFI. This license allows EIFA, led by Dr Mohamed Al-Beltagy, to conduct accreditation tests for bankers and auditors of Islamic banking on behalf of AAOIFI in Egypt. This license, and the work that EIFA has begun under the license, is an important step in bringing Egypt’s Islamic banking capacity up to international standards.
Tourism in Egypt has declined precipitously since 2011, and the Egyptian army’s attack on Mexican tourists in September 2015 will likely continue to keep tourism in decline. Tourism is an important source of foreign currency, and reduced tourism translates into reduced foreign reserves. During the September 2015 Euromoney conference, multiple Egyptian officials stated that sovereign Sukuk would provide a sensible channel for partially alleviating Egypt’s foreign reserve issues.
Preview of 2016
When discussing AAOIFI certification for EIFA, Mohamed Al-Beltagy stated that he expects the volume of Islamic banking to grow from its current almost 10% to 15% by 2020. 2016 is a pivotal year in ensuring that sector growth stays on pace for that ambitious goal. It is anticipated that there will be two main pathways for the Islamic finance industry to develop in Egypt in 2016.
Firstly, there needs to be action on Sukuk. In September, finance minister Hany Kadry Dimian stated that Sukuk regulations will be introduced in 2016. Egypt’s financial regulatory structure is fractured between multiple competing authorities, and these authorities need to coordinate to develop reasonable regulations. Outside of inter-ministry cooperation, the Egyptian government needs to consult informed parties in ensuring that Sukuk regulations are responsive to market demands. A sovereign Sukuk issuance in 2016 would be a useful as a gesture alongside Egypt’s 2015 conventional external bond offering, but it is not as important as issuing Sukuk regulations.
Secondly, Islamic finance should be used as a tool for inclusive growth. One of the main factors behind the 2011 revolution was inequality under the Mubarak regime. Now, president Sisi has committed the Egyptian government to fighting poverty. Generally, Islamic financial tools such as Takaful, Mudarabah, and Qard Hasan can provide people with access to insurance, financing for small enterprises, and beneficial loans. One example of Islamic finance for inclusive growth is a recent set of social housing proposals from Faisal Islamic Bank of Egypt to the Central Bank of Egypt.
Conclusion
Egypt’s location, size, and large Muslim population mean that it has massive potential for Islamic finance. The Islamic finance industry in Egypt needs clear regulations from the Egyptian government, with support from both its political and regulatory branches, to turn this potential into progress. Without sensible regulation, Egypt will continue to be the Islamic finance market of the future.
Dr Walid Hegazy is the managing partner of the Islamic finance division while Phil Zager is an associate at Hegazy & Associates. They can be contacted at [email protected] and [email protected] respectively.