Egypts Islamist government is making preparations for the countrys first sovereign sukuk, as foreign-currency reserves and the credit rating rapidly decline because of continued political turmoil. On January 16, the cabinet of ministers approved a new draft sukuk bill after Shariah scholars rejected a previous version.
Sukuk laws exist in many other countries, including ones without a Muslim majority, such as the UK. But in Egypt, the proposed law has been controversial. Secularist opposition figures say it represents an encroaching Islamist influence over state institutions partly because the Muslim Brotherhood, the party from which president Mohamed Morsi hails, has stated partly religious reasons for promoting sukuk.
Others in Egypt have raised concerns about the fact that physical assets must underpin sukuk. A rumour began to circulate that the Suez Canal or other state assets would be used. Prime minister Hisham Qandil denied this in January on Facebook.
Some of the Islamic scholars objections to the previous bill were more technical. The first draft enabled the government to lease out assets for up to 60 years in order to underpin sukuk, although the Islamic Research Academy, a powerful Shariah body linked to Egypts Al-Azhar University, voiced concerns that this would allow authorities to abuse their control of public assets.
Outside Egypt, even some respected Shariah scholars reckon Islamic finance might be of dubious urgency in a country with so much else to deal with after the 2011 uprising and the toppling of Hosni Mubarak as president. "I would have thought the first priority is to feed hungry mouths," says Mohamed Ali Elgari, a Saudi Arabian Shariah scholar who this month wins Euromoneys award for outstanding contribution to Islamic finance.
But there is equally a sense that Egypt needs the legislation to expand its available avenues for funding. The country has a widening budget deficit, declining foreign-currency reserves ($15 billion in January compared with $36 billion before the uprising), a deteriorating currency, and a credit rating that has fallen in several stages from a pre-revolution double-B to B minus in December 2012.
The government, in any case, appears determined that the bill should be passed, and the new drafts approval by the cabinet was clearly a big moment for the new finance minister, El-Morsi Hegazy. Hegazys appointment, just 10 days previously, raised eyebrows among some secularists, as he was until then an Islamic finance and economics professor.
According to comments reported by Reuters, Hegazy reckons the law might ultimately raise an additional $10 billion for the sovereign. But any sukuk issue is going to be costly to get away. Yields on Egypts 364-day treasury bills hit 14.4% in mid-January.
Even wide pricing might not guarantee the success of a deal. Investors, by and large, do not yet sound ready to bite. "Its too early for Egypt," says the Middle East head of an international fund manager. "Theres probably another revolution to come. Lets not get stuck in the middle of it."
Bringing to fruition a planned $4.8 billion IMF loan will be Hegazys next big challenge. It remains stalled despite the fact that what the IMF calls a "preliminary, staff-level agreement" was reached on November 20.
In the meantime the country has been receiving aid and investment from elsewhere. Turkey has so far lent $1 billion, the last $500 million of it in January. Qatar has put $2.5 billion into Egypts central bank, part of what the Qatari finance minister has described as a total $5 billion aid package.
There are early signs of private-sector interest too. Qatar National Bank is buying Société Générales Egyptian operation and Emirates NDB is buying the Egyptian unit of BNP Paribas. There was also news last month that Bill Gates would join a group of US investors putting $1 billion into construction and fertilizer group OCI. That, though, comes as part of OCIs move from Cairo to Amsterdam.
"[OCIs move] is another negative as it will cut trading on the market," says Angus Blair, president of the Signet Institute, a regional think-tank. OCI accounts for over 20% of the Egyptian stock market index.
Last year the government said it intended to boost the Shariah-compliant share of total banking assets from 5% to 35% within five years. But these are ambitious plans.
As an Islamic finance market, Egypt has considerable potential: a population of 80 million, mainly Muslims, of whom only 10% have bank accounts. International comparisons are apposite. Malaysia is considered the gold standard for the prudent and successful adoption of a new Islamic finance industry, yet after a decade of hard work Islamic finance accounts for just 22% of banking deposits there.