Despite the difficult national situation at both an economic and political level, there has been a surge in the frequency of Shariah compliant syndicated financing in Egypt, as it becomes one of the most common tools for the financing of import projects. With the increasing participation of conventional Egyptian financial institutions in this field, HUSSEIN M AZMY discusses the potential for Shariah compliant syndicated finance to flourish in Egypt’s Islamic finance market.
The forms of Shariah compliant syndicated financing in Egypt are diverse, and with the increase of financial institutional experience in this field, contractual structures have become increasingly innovative, reaching a high level of sophistication. The true beginning of the innovation in new Shariah compliant financing schemes took place in 2013, with the introduction of syndicated Ijarah and syndicated Istisnah-Ijarah structures.
The new structures have proven themselves an attractive option for investors, as evidenced by a number of high-worth deals that took place last year. Among these major transactions, characterized by their innovative structures, were the following:
-
Syndicated Ijarah: Among the first syndicated Ijarah transactions in the country was the deal entered into in May 2013 between Abu Dhabi Islamic Bank (ADIB), as lead arranger, with Maridive & Oil Services, in an agreement valued at US$150 million. The list of syndicated financiers included some of the largest banks in Egypt such as the Arab African International Bank, Banque du Caire and the Arab International Bank.
-
Syndicated Istisnah-Ijarah: Two major transactions took place in 2013. The first was the financing of the Egyptian Steel Group, with a value that exceeded EGP1 billion (US$143.27 million), by a syndicate of financiers: the list of which included the Bank of Egypt, Bank Audi Egypt, and the Egyptian Arab Land Bank, for the construction of an Egyptian steel factory in the governorate of Beni Suef. The second was the syndicated Istisnah-Ijarah transaction, valued at EGP1.5 billion (US$214.91 million), between Al-Nouran Sugar Company and a syndicated group that included Banque Misr, Audi and ADIB, for the financing of construction of a new sugar manufacturing plant in the governorate of Al-Sharqeya.
As can be seen from the above, conventional banks such as Banque Misr have become heavily involved in the field in spite of their relatively limited Islamic finance knowledge and capabilities. This limited experience is, however, compensated for by the conventional banks’ significant financial and investment capacities compared to Shariah compliant banks, which in the end complements the Shariah compliant syndicated financing deals in which the Islamic financial institutions often play the role of lead arranger.
This involvement by conventional banks, while a major factor in boosting and flourishing the Islamic finance market as a whole, can sometimes have a negative impact on the degree of compliance with Shariah.
The conventional banks’ lack of familiarity with Islamic law may in some cases become a hurdle to the full compliance of the transaction to Shariah, since conventional banks usually do not fully comprehend the reasoning behind the impossibility of insertion of conventional terms and conditions into the transaction documentation due to their conflict with Shariah. In such a scenario, intensive negotiation between conventional and Shariah compliant financiers is detrimental to the success of the transaction.
However, it is expected that with the development and increase of conventional banks’ Islamic finance knowledge and experience, they will occupy a leading role in Shariah compliant syndicated financing in the coming years. This is evidenced by the Egyptian Steel Group transaction as mentioned above, in which the syndicated financing group was exclusively limited to conventional banks.
It is noteworthy that this increase in Shariah compliant syndicated financing has occurred despite the absence of legislation in the field of Islamic finance and despite the absence of governmental support. The Islamic finance industry in general has not yet been regulated in Egypt, although Shariah compliant banks and corporations function regularly. This legislative vacuum has delayed the transformation of Egypt into a regional Islamic financial hub, capable of competing with the GCC countries, which have taken the leading role in the field.
The public perception of Islamic finance in general has not been very good since the failed experiment of Shariah investment funds in the 1980s. Furthermore, the confusion between Islamic finance as an investment market and the political ambitions of political Islam groups has contributed to the unwillingness of the government to develop the Islamic finance market, despite its significant potential.
The flourishing of the syndicated Islamic finance market and the innovation of new financing schemes is a good indicator that the Islamic finance market has managed to a certain extent to overcome the absence of a legal framework and the lack of public and governmental support. However, official involvement is essential to take this market to the next level.
Hussein M Azmy is an associate at Hegazy & Associates in association with Crowell & Moring in Cairo. He can be contacted at
[email protected]
.