Why Egypt Can’t Rely On Sukuk

A law that better regulates sukuk issuance has been mooted for several years, but the move to enforce a clear law became a priority after the revolution, especially considering the economic climate is increasingly being shaped by Islamic political parties.

So finally the “troubled passage for a bill” ends, Reuters reports and Egypt’s President Mohamed Morsi has approved a law allowing the state to issue Islamic bonds, or sukuk.  Here’s the full bill in Arabic.

There are high hopes for sukuk to shore up Egypt’s flagging finances.  Officials have thrown out figures to the public that signal these instruments could raise as much as $15 billion from domestic and foreign investors.

Well, I’m sorry to burst your bubble Mr President, but that’s not happening.

Here’s why according to our expert in Islamic finance Emad Mostaque. He’s the strategist at London-based emerging markets stock brokerage, Noah Capital Markets:

Islamic banking is tough in a high interest rate environment [like Egypt] as it is not cost competitive and nobody wants to see their wealth eroded.

It works best in a low rate environment with lots of asset inflation as we’re about to see in the Gulf as the products benefit from asset inflation.

There’s a long way to go until Egypt is ready for this. The first steps probably are asset-based sukuk [rather than asset-backed] and takeful insurance. Further development of waqf institutions would help too.

(If you want a great guide on the mechanics of sukuk and the difference between asset-based and asset-backed, read this FT round-up here.)

The argument against the use of Sukuk as a method of plugging the deficit is growing.

Max Rodenbeck of The Economist published a compelling argument here, and economists left, right and centre have been highly critical.  Timur Kuran, a Turkish economist and professor of Islamic studies at Duke University, told Rebel Economy that “Sharia Law is out of date”, while Issandr El Amrani of the Arabist says: “The Brothers cannot have their cake and eat it, by claiming to implement Sharianomics and then bending these supposedly holy rules.”

But perhaps the most important critic of all was the government itself. According to a statement published by Egypt’s State Information Service:

The Cabinet, under Prime Minister Hisham Qandil, stressed that the now-debated Sukuk (Sharia-compliant bonds) is not an alternative to other financing tools.

In other words, Sukuk is no alternative to the IMF loan and the much-trumpeted report out this morning is meaningless.

One Comment

  • Posted May 12, 2013 at 6:29 pm | Permalink

    Sukuk are certainly not a magic bullet, but they could provide marginally less expensive financing in a properly structured project given the greater liquidity in Islamic markets.

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