Islamic Finance in Post-Revolution Tunisia and Egypt

Tunisia sets up Islamic finance working group

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By Bernardo Vizcaino

(Reuters) – The Tunisian government has set up a working group that will study how to develop Islamic finance in the country, a finance ministry official said.

The group, which includes representatives from the central bank, stock exchange and private sector institutions including Bahrain-based Al Baraka Banking Group, will look at the country’s legal framework, said Karima Rezk, a director at the ministry.

Before last year’s uprisings, authoritarian governments in Tunisia and other North African countries restricted or refused to promote Islamic finance for ideological reasons. A moderate Islamist party dominates the government which took power through last October’s elections.

Islamic finance, which operates according to religious principles such as a ban on paying interest, is seen as “an important initiative that is accepted by all major political parties”, Rezk told Reuters in a telephone interview this week.

She added that the government did not intend to inhibit conventional banking in the country, but merely wanted to “make the market more dynamic and add choice to consumers”.

The working group aims to meet weekly and come up with proposals for action within a few months, Rezk said. It is under the purview of the finance ministry’s director-general Chaker Soltani, whose responsibilities include debt management and financial cooperation.

The group has been studying the Islamic banking experience of countries where the industry is well-developed, including Malaysia and Bahrain, as well as Jordan and Oman, which are more recent entrants into the industry.

“We need more details,” Rezk said, on both the structures of Islamic financial products and how to regulate them.

Soltani told Reuters earlier that the Tunisian government hoped eventually to issue sukuk (Islamic bonds), but did not expect to make an issue this year since the legal framework to support it was not yet in place.

“Before issuing Islamic bonds, or sukuk, we must put a law in place,” he said.

Egypt lays sukuk foundations

By Farah Halime Available at:

Egypt is solidifying rules and regulations that will allow companies to issue Islamic bonds, or sukuk, in an early sign it is positioning itself to tap into a boom in Islamic finance.

What rules and regulations does Egypt have for issuing sukuk, or Islamic bonds? Egypt has not sold sovereign or corporate bonds that comply with Islam’s ban on interest, although companies have sold conventional bonds. The executive regulation governing sukuk issuance in the country’s capital-market law is being redefined to make it easier for companies to push forward with sukuk issues. Ashraf Sharkawi, the head of the Egyptian Financial Supervisory Authority, said this would be enforced by June, but until now companies have opted to steer clear of any issuance because of the lack of clarity in the law.

What will Egypt gain, considering it will compete with Islamic finance hubs such as nearby Bahrain? Analysts say demand for Sharia-compliant products alongside conventional banking products is on the increase, and with Egypt’s strategic position in North Africa and near the Middle East, it should tap into an ever-growing market. It is also a timely development because it fits in with the ideologies of what will be an Islamist-led government. The Freedom and Justice Party, the political arm of the Muslim Brotherhood, has been advocating Islamic banking alongside its conventional counterpart and has seen an opportunity to promote sukuk in a country where the population regards many conventional banks with caution.

Outside of the Middle East and North Africa, what is the appetite for sukuk? Although Malaysia remains a dominant force in the sukuk market, new entrants are emerging from the Asia-Pacific region including South Korea, Hong Kong and Japan, and some African countries such as Senegal and Nigeria.

The North African nation will “by the end of June” finalise the executive regulations to allow companies to issue Islamic corporate bonds, or bonds that comply with the Islamic ban on interest, said Ashraf Sharkawi, the head of the Egyptian Financial Supervisory Authority.

Alongside a sovereign sukuk worth US$2 billion (Dh7.34bn) announced by the Egyptian ministry of finance last month, analysts say the regulator’s move is ahead of the formation of an Islamist-dominated government expected to take office this year and an attempt to get a slice of the global sukuk market estimated to be valued at about $85bn.

Mr Sharkawi said the sukuk rules and regulations, which are still subject to approval from the prime minister, Kamal El Ganzouri, will help to boost liquidity on the Egyptian Exchange. The benchmark EGX 30 has gained almost 45 per cent in the year to date, making it the world’s best-performing stock market after a tumultuous performance last year.

A law that better regulates sukuk issuance has been mooted for several years, but analysts say the move to enforce a clear law has become a priority after the revolution, considering an economic climate likely to be shaped by Islamic political parties.

The Freedom and Justice Party has been outspoken about its ambitions to promote Islamic banking alongside conventional banking, and in May last year, Ashraf Badr El Din, the head of the party’s economic committee, first proposed the idea of selling Islamic bonds to plug the country’s budget deficit.

At the time, Mr Badr El Din said that a high percentage of Egyptians had reservations about the charging of interest and that such a financing tool would encourage them to invest. “The Muslim Brotherhood are eager to expedite the emergence of Islamic products such as sukuk law issuance to attract Arab investors and close the country’s deficit,” said Shahinaz Rashad, the general manager and director of global Islamic finance at Metropolitan Consulting. “There is a growing trend towards the revival of Islamic finance in light of the prominence of Islamic parties.”

Tapping into strong regional appetite for sukuk issuance, especially from the Gulf, is also a big driver for Egypt, said Mohammed Omran, the chairman of the Egyptian Exchange.

“We’re finding a new category of investment that meets some investors’ appetite or some investors’ beliefs like Sharia compliance or ethical investing,” Mr Omran said. “It’s going to attract a lot of Gulf investors to Egypt boosting liquidity all round.” A record volume of Sharia-compliant debt was sold globally last year, according to Zawya data. Sukuk totalling $84.4bn were sold in the period, an increase of 62 per cent from 2010. From that, $19bn, nearly 23 per cent of the total, was sold in the Gulf.

However, Egypt’s Islamic finance sector is still in its infancy, with just three listed Sharia-compliant banks – Al Baraka Egypt bank, Faisal Islamic Bank of Egypt and National Bank for Development. Combined with the absence of enforced laws and regulations governing some Islamic financial instruments such as sukuk, analysts say it will be difficult for the country to forge a hub comparable to Bahrain and Malaysia, two of the world’s most successful Islamic banking centres.

“Egypt could become one of the largest Islamic banking markets, but I’m not so sure if it will become a hub,” said Abdul Kadir Hussain, the chief executive of Mashreq Capital, the investment and brokerage arm of Mashreq in Dubai. “In order to successfully become a hub you need infrastructure like tried and tested laws, settlement mechanisms and service providers, and Egypt has a long way to go before that,” Mr Hussain said, although he added the country was likely to play a “major role as a user and provider of Islamic capital” in the coming years.

A skeleton sukuk law has kept investors and companies that have considered issuing the bond at bay, but early investor appetite suggests Egypt could be well on its way by the end of the year.

Adnan Ahmed Yousif, the president and chief executive of Al Baraka banking group, Bahrain’s biggest publicly traded Islamic lender, which has a subsidiary in Egypt, said Egypt had potential for a vibrant sukuk market.

“We are trying to strengthen our relationship in the Egyptian market specially in Islamic products,” he said, adding the government would do well to use the sukuk market for future borrowing needs.

He said the bank’s Egyptian unit may sell dollar-denominated Islamic bonds, in the region of $200 million, in the fourth quarter of this year.

“If things go smoothly after June [when a president is expected to be elected], yes we will think about something in the fourth quarter,” Mr Yousif said.


Brussel, Belgium


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