2020 has been a landmark year for the Sukuk industry in Egypt and for the Islamic finance market. Last year, although the legislative framework had finally been codified and the Financial Regulatory Authority (FRA) was given full powers to grant Sukuk issuance licenses, neither the private nor the public sector had shown any enthusiasm for the Shariah compliant financing method. The legitimacy of Islamic finance, as compared with traditional finance, was a significant barrier that the market needed to confront before unlocking the niche industry’s economic potential.
This year, Egypt experienced its first corporate Sukuk issuance in 2020, and there are at least two more in the pipeline. The prime minister expanded the scope of possible Sukuk structures to encourage foreign investment. During 2021, the Egyptian government will take the next steps to grow the Islamic finance industry and establish the country as an African Islamic finance hub.
Review of 2020
Despite the effect of the COVID-19 pandemic on the global economy, Egypt is poised to see a growth rate of 3% by the end of the year. The real estate sector is one of the country’s most active investment pools. Talaat Mostafa Group (TMG), Egypt’s largest real estate conglomerate, took a courageous step and initiated the first Sukuk issuance, valued at EGP2 billion (US$127.81 million) to contribute toward funding the EGP8.5 billion (US$543.19 million) Open Air Mall in Madinaty.
The originator was a TMG subsidiary, the Arab Company for Projects and Urban Development, while the issuer was EFG Hermes, one of two companies which obtained an FRA license for issuing Sukuk. The Ijarah-structured Sukuk facility was approved by the FRA in April and the maturity date is in 2024, 57 months from the date of issuance. Both the Sukuk and the issuer were given ‘A+’ ratings with a stable outlook by MERIS.
Similarly, Amer Group, another real estate company, is also planning its own Sukuk issuance to finance the development of a project in New Minya City in Upper Egypt. While the value of the offering was initially estimated to be EGP2 billion (US$127.81 million), like the TMG issuance, Amer Group has not formally announced the value of its Sukuk because of the downward market trend in the light of a potential second COVID-19 wave.
Sarwa Capital is also expected to launch its EGP2.5 billion (US$159.76 million) issuance with a seven-year tenor.
While CIAF Leasing had announced last year that it planned to issue EGP50 million (US$3.2 million) in Sukuk to finance the purchase of new aircraft to be leased to tourist companies for charter flights, the company recently confirmed that it will cancel the issuance and instead pursue other means of financing. The company’s decision emphasizes that the Islamic finance industry in Egypt is not yet strong enough as an independent sector and that its relative viability is still dependent on the creditworthiness of the obligors and the resilience of the industry toward which funds are being directed.
From the legislative angle, the Executive Regulations of the Capital Markets Law have been amended via a ministerial decree to include agricultural Sukuk, irrigation Sukuk, forward sale Sukuk, project financing Sukuk and investment agency Sukuk. Previously, only four Sukuk structures were permissible in Egypt: Ijarah, Mudarabah, Musharakah and Murabahah.
Preview of 2021
Egypt’s Ministry of Finance has been promising a sovereign Sukuk issuance since 2018. The government is currently in the midst of an infrastructural push to fundamentally transform Egypt in a way that has not been seen since the reign of Khedive Ismail. Once the seat of Egypt’s government moves from Cairo to the new administrative capital, the futuristic supercity will host up to seven million residents who will be connected with the old capital, the suburbs of New Cairo and the 6th of October, and a scattering of satellite cities via a network of highways, bridges and a monorail.
It is a reasonable prediction that the government will issue Sukuk to help fund infrastructure projects, and that the tenor of such an issuance will be from five to seven years. Although the value of the issuance has not yet been confirmed, it would be a signal of strength and confidence in Shariah compliant financing if the value of the sovereign issuance exceeded that of this year’s TMG issuance. At this stage, the Ministry of Finance is still gauging market interest and quietly consulting with investors to determine the likely subscription rate and adjusting the draft prospectus to ensure at least 100% subscription if not oversubscription.
From a legislative standpoint, Egypt would be able to attract more foreign direct investment if new regulations were drafted allowing foreign issuers to operate in Egypt without establishing an Egyptian company as the SPV.
The overall economic decline in the international bond market only seems to have partially affected Islamic finance in Egypt. By the end of 2020, the FRA will have authorized the issuance of a combined EGP6.5 billion (US$415.38 million) in Sukuk. 2021’s sovereign Sukuk issuances will further raise the profile of Shariah compliant financing in Egypt.