The Egyptian Islamic finance market witnessed slight, yet steady growth over the past year. The Egyptian Islamic Finance Association noted that the Shariah compliant banking industry had expanded 17.4% since 2020. The rate of corporate Sukuk issuances has stabilized at approximately two to three issuances per year.
Once again, the Ministry of Finance has postponed Egypt’s first sovereign Sukuk issuance until next year. Inflationary pressures, a progressively weaker Egyptian pound, and the aftershocks of the COVID-19 and Ukrainian conflict crises have affected the development of the Egyptian Islamic finance industry. Even so, the Financial Regulatory Authority (FRA) continues to establish the legislative framework that will allow Shariah compliant financial alternatives to flourish in the future.
Review of 2022
2022 was distinguished by a couple of major Sukuk issuances, new FRA regulations and the issuance of Egypt’s first Islamic microfinance license. To date, approximately EGP5.25 billion (US$226.46 million)-worth of Sukuk were issued this year. The most active company in the Sukuk market is Tharwa Capital, a subsidiary of Contact Financial Holdings. Its most recent issuance was EGP2 billion (US$86.27 million) in Sukuk Mudarabah.
This year, Tharwa Capital concluded a cooperation protocol with the IsDB to target an increase in Egyptian Sukuk issuances. Egypt’s regulations permit foreign currency-denominated Sukuk, which is beneficial for a country that is in dire need of such currencies, particularly US dollars, to meet infrastructure and import needs.
Palm Hills Developments, a leading real estate company, used Tharwa to underwrite its EGP3.25 billion (US$140.19 million) issuance for the development of its Badya compound on the 6th October. Real estate developers are often in search of unique financing initiatives, as it is no longer feasible to use deposits on future projects to finance existing developments that have yet to be completed. Furthermore, the inflationary effect on construction supplies’ pricing has created unforeseen budgetary shortfalls.
In contrast, the Ministry of Finance had announced in January that the first sovereign Sukuk issuance would occur this summer. Although the Egyptian cabinet issued the executive regulations to Sovereign Sukuk Law No 138/2021, the anticipated Sukuk issuance never materialized.
The reasons cited for the delay were myriad: disruptions in global markets, interest rate uncertainty and inflation rates. It may also be because the government’s efforts in privatizing publicly held companies through IPOs are the Ministry of Finance’s priority, and the sovereign Sukuk issuance will not be a pressing concern until the government can steer a clear way out of the current economic crisis.
Notwithstanding, the FRA is preparing for a more favorable economic climate. It issued the first Islamic microfinance license to Maksab, specifically for investment financing. In the future, the FRA is expected to issue similar licenses to non-banking entities for Musharakah and Murabahah microfinancing, financing which is typically extended to SMEs.
Preview of 2023
Next year, the International Conference on Islamic Finance and Financing Methods will take place in Cairo. By then, Egypt will have received an IMF loan that will reduce the government’s funding deficits, even if the accompanying monetary and fiscal policy recommendations lead to a sharp currency devaluation and an ensuing rise in consumer inflation. In such circumstances, Shariah compliant financing may present itself as a superior solution to traditional methods.
Once the Egyptian pound is accurately priced, and the fog of uncertainty has lifted, originators may feel more confident issuing Sukuk in foreign currencies. While 2022’s Sukuk issuances were denominated entirely in Egyptian pounds, yuan- or dollar-denominated corporate Sukuk issuances are not unlikely. The
Sukuk market will expand when more companies apply for, and are granted, SPV licenses by the FRA. Currently, EFG Hermes and Tharwa Capital have hegemonized the Sukuk issuance market, which is an acceptable situation for the short term, but may be inimical to the market’s long-term evolution.
Egypt’s ability to use Shariah compliant financial products as it seeks to emerge from its economic doldrums will greatly influence Islamic finance markets in other African countries. Egypt is not alone in experiencing a weakened currency. As the US Federal Reserve periodically raises interest rates to combat domestic inflation, most African currencies are declining in relation to the US dollar.
Egypt has the potential to become a regional Islamic finance leader, especially if its first sovereign Sukuk issuance really does occur before the end of the 2022–23 fiscal year next June.
Conclusion
Egypt’s Shariah compliant banking sector is probably the strongest element of its Islamic finance industry. It has proven able to withstand external shocks and pressures, and a slowed growth rate is unlikely to impede its overall trajectory. Hopefully, Sukuk issuances will expand beyond the real estate and financial services industries to encompass Egypt’s energy and transportation sectors.
Egypt’s exponential population growth has led to an imbalance between available facilities and current and projected need. Although the Ministry of Finance has indicated that the first sovereign Sukuk issuance will be used to finance Egypt’s debt repayments, subsequent issuances could be used to fund Egypt’s healthcare and educational infrastructure. The overall outlook is positive for the upcoming year.
Dr Walid Hegazy is the managing partner at Hegazy & Partners. He can be contacted at [email protected].