Sukuk.. A financial tool falls victim to political conflict

By: Ahmed Farahat

The discussion of all things Islamic in the economy suddenly stopped after the Muslim Brotherhood was removed from power on July 3, 2013. The first year of Muslim Brotherhood rule had sensationally seen sukuk, an asset-backed securities structured according to the principles of Islamic sharia, cast as a financing tool that would help achieve large gains. Since the downfall of Mohammed Morsi this tool has fallen to bottom rung on the ladder of government financing alternatives, however. An assistant to the Minister of Finance who did not wish to be named, described sukuk as “not one of our priorities at this time’’ even though throughout last year, it was promoted as the financial tool that would solve the government’s financing deficiency, eliminate under investment in infrastructure and fix Egypt’s declining foreign currency reserves.

Those opposing the Muslim Brotherhood waged widespread campaigns of criticism against the Sukuk Law on the pretext that its promotion was being used for political rather than purely economic reasons. The assistant to the Minister of Finance however, said that it was necessary to look at sukuk as a financial rather than political tool and revealed the minister›s predisposition to amending the law before its implementation. The law would be “gradually” implemented once the date set for it to come into effect arrives, he said, adding that sukuk was a financial tool like any other and had received more than its fair share of interest during Muslim Brotherhood rule.

During the Muslim Brotherhood’s rule, a dispute broke out over sukuk amongst the Islamists themselves after Al Azhar rejected the first draft of the law. The conservative Noor Party said it supported Al Azhar›s point of view that the possibility of selling the asset to repay the sakk violated sharia law whereas the Muslim Brotherhood saw it as a political stance stemming from the desire for state assets and unrelated to sharia law.

“The Muslim Brotherhood had refused to trace the Sukuk Law back to sharia law despite forming a council of leading Muslim scholars to oversee proposals and confirm their accordance with Islamic sharia law, and appointing each of the council members serve its political interests,” the assistant said.

The creation of an Islamic sukuk market was the essential component of the Muslim Brotherhood›s program to strengthen the extremely weak levels of Islamic financing in Egypt. After the Muslim Brotherhood’s constitution transferred legislative powers to the Shura Council, the Sukuk Law was the first law placed on the council›s legislative agenda. Fayyad Abdel Moneim, the former Minister of Finance, said that under President Mohammed Morsi, sukuk did not face opposition because it is a financial tool just like stocks and bonds. He noted that the Financial Market Law had given companies the right to issue sukuk as well. The Sukuk Law had been passed to be implemented rather than postponed and the ministry had worked to conclude its implementing regulations but regime changes had hindered its implementation. He also noted that a sukuk unit had been established in the ministry and staffed with experts in transforming projects into a financial tool in accordance to a specific legal contract which specified the rights of the transacting parties, the manner in which profits and sakk holders› returns were distributed as well as the process through which the sakk was liquidated at the end of its term.

The director of the sukuk unit in the Ministry of Finance said the ministry had not issued its decision regarding the use of sukuk as a financial tool in the coming transition period, noting that to date the minister was yet to release a statement about it. However, although Fayyad called for maintaining the interest in sukuk during the coming period in order to diversify the sources of financing for both the public and private sector, the Ministry of Finance recently merged its sukuk unit with the public debt unit as it considered the former to be a financial tool just like the other government financial tools overseen by the unit.

The campaign to promote sukuk during Muslim Brotherhood rule contained inflated expectations about the size of foreign investments it could bring to the Egyptian market. Hussein Hamed Hissan, a professor of sharia law at Cairo University and one of the most prominent scholars in the field, said that investments in sukuk could generate $100 billion for the state because the market was large in Egypt and the Egyptian economy was in need of sukuk. Fayyad Abdel Moneim said that according to consultations with international and Islamic institutions, it was expected that sukuk issues introduced at $5 billion in the first year would grow to $10 billion the following year. He went on to say that the previous government had also intended to present infrastructure projects to those investing in this tool, which included plans to establish a high-speed train connecting the industrial cities of Al Ubur and 10th of Ramadan to Cairo and to construct silos to store the strategic wheat reserves.

During the first half of this year, the Ministry of Finance had transformed into an international port of call for the major investment banks to search for the opportunities available in this field. International banks like HSBC and JP Morgan sent delegations to check out the plans and projects that the Government would offer up to sukuk financing and to present their experience in managing sukuk projects in international markets. In the same vein, Walid Hejazi, the founding partner of Hejazi & Associates, in cooperation with Crowell & Moring, said that sukuk as a financial tool had developed a poor political reputation due to misinformation and a lack of knowledge about it. He explained that the Sukuk Law contained an article that stipulated the issuing of sukuk for state owned assets in the public domain was not permissible in order to soothe fears of using sukuk as a backdoor to sell off state assets. He added that sukuk were not expected to be put up for sale at the present moment because of the temporary Al Beblawi government and indicated that sukuk and related matters may be studied once an elected government able to make these decisions came into office.

Hejazi continued by saying «sukuk have their own wealth and are not Morsi’s magic wand» noting that sukuk had been implemented in a number of the countries for nearly fifteen years and as such are not a new or novel tool. He added that the Muslim Brotherhood had declared them the only financial tool able to repay the budget deficit despite the existence of other tools like bonds and government treasury bills that help bring about the same purpose. The Muslim Brotherhood’s use of sukuk as a solution to all the economic problems and their foundations was “more than necessary”. Hejazi concluded by pressing home the necessity of using sukuk-funded projects to meet consumption as well as production needs.

Currently, sukuk is not one of the alternatives and financial tools offered by the governmental debt unit to help to control the costs of government borrowing and generate liquidity in the government debt market. Instead, the tools currently studied by the unit include launching investment fund indices in the government debt market and expanding repurchase agreement (repo) procurement to include treasury bonds. In previous times, zero coupon bonds have also been suggested as a means to address the temporal gaps between the current government debt tools.