Egypt Turns to Sukuk to Save Economy
Egypt is preparing to raise about $2 billion sukuk in an effort to save its crumbling economy.
CAIRO – Grappling with a deep funding crisis and a large budget deficit, Egypt is preparing to issue its first sukuk (Islamic bonds), seizing on the booming Islamic finance industry.
“The Egyptian government is convinced that a foreign currency sukuk will fund the country’s development projects and can also bridge the gap in its currency reserves,” Sheikh Hussein Hamid Hassan told Reuters on Tuesday, February 14.
Sheikh Hussein, a leading scholar in the Islamic banking industry, said the Egyptian government is preparing to raise about $2 billion sukuk.
“The sukuk will be in dollars or euros or maybe a combination,” he said.
“It will be around $2 billion, issued in several tranches targeting mainly Egyptians living outside Egypt.”
Egypt has been facing a deep funding crisis since a popular revolution that ousted long-standing president Hosni Mubarak last year.
Egypt’s foreign reserves fell $1.77 billion to $16.35 billion in January and are down by more than half since the uprising.
That threatens a sharp slide in the value of Egypt’s currency.
The Egyptian government is also grappling with a large budget deficit that it is financing at high cost by issuing short-term Treasury bills to local banks at yields above 15 percent.
Last month, Egypt said it was asking the International Monetary Fund for $3.2 billion in emergency loans; a deal could encourage other foreign donors to aid Cairo. But the IMF said it expected talks on an agreement to take two or three months.
A Saudi Arabian newspaper, Asharq Al-Awsat, reported this week that Egypt’s finance ministry had asked National Bank of Egypt, the country’s largest bank, to study ways in which a sovereign sukuk could be issued in the near future.
Marketing could start as soon as next week if the government approves, the newspaper said.
Sheikh Hussein said he had proposed four structures for the sukuk and the government would choose one.
“The date of issue is not final yet but Egypt is in urgent need of funding,” he said.
Islamic finance was not encouraged under Mubarak’s secular government but it is expected to grow in Egypt after Islamist parties won well over half of the seats in parliamentary elections last month.
The government has drafted legislation that would facilitate issues of sukuk.
The sukuk issuance might be an effective way to attract some of the savings of millions of Egyptians living abroad. They might also be bought by Islamic investment funds in the wealthy Arab Gulf.
Sukuk, which conforms to Islam’s prohibition of usury, typically work as profit-sharing vehicles.
Firms that issue Sukuk make payments to investors using profits from the underlying business, instead of paying interest.
The money, however, can’t be invested in alcohol, gambling, tobacco, weapons or pork.
Sukuk have often proved to be more stable than conventional bonds during the global financial crisis.
The sukuk market has reached $111.9 billion in the eight years to 2008, according to the International Islamic Financial Market.
Global sales of sukuk have reached $6.6bn in 2012, from $2bn a year earlier, according to data compiled by Bloomberg.
Starting almost three decades ago, the Islamic banking industry has made substantial growth and attracted the attention of investors and bankers across the world.
A long list of international institutions, including Citigroup, HSBC and Deutsche Bank, are going into the Islamic banking business.
Currently, there are nearly 300 Islamic banks and financial institutions worldwide whose assets are predicted to grow to $1 trillion by 2013.