After weeks of discussion and preparation of a new sukuk, or Islamic bonds law, the Islamic Research Academy of Al-Azhar (IRA) has refused the Ministry of Finance’s draft law on sukuk during its meeting last week.
The decision was later supported by the Shura Council’s Economic Committee, which has also refused the law.
The ministry’s rejected bill only included sovereign sukuks, issued by governments. Meanwhile, there is another draft law prepared by the Egyptian Financial Supervisory Authority that regulates sukuk offered by private companies and banks.
The idea of two separate sukuk laws proposed by the government was rejected by the Nour and the Freedom and Justice parties.
Abdel Hafez Al-Sawi, member of the economic committee of the ruling Freedom and Justice Party (FJP), stated that the government invited members of the Nour Party, the FJP, and Dar Al-Ifta (the Institute of Islamic Jurisprudence) to discuss the new draft law.
The members voiced their reservations on the draft law, so as to be considered. However, “we found that the government ignored all our remarks and presented the draft without any amendments,” Al-Sawi said.
Al-Sawi stated that members of the FJP and Nour Party wanted to include all types of sukuk in one law, as is the case worldwide, but the government insisted on financing sovereign projects only.
Meanwhile, the Ministry of Finance has denied assertions made by the FJP that the government’s sukuk law is defective. A source at the ministry said in a press statement this week that the law protects state properties as it has only allowed the utilisation of these assets and restricted the selling and mortgaging of any public property on which sukuk bonds have been issued.
Al-Sawi is hopeful that the new finance minister will understand and resolve the sukuk problem. This is indeed likely, given the fact that the new finance minister, Al-Morsi Al-Sayed Hegazi, is an academic professor of Islamic finance.
The Ministry of Finance is working on amending the law and is trying to reach a consensus on its controversial articles, said Ahmed Rizkallah, country manager at Ridge Capital, a Sharia-compliant investment bank.
According to Rizkallah, the debate around sukuk bonds in Egypt is not related to its mechanism, but to the lack of sukuk and Islamic finance culture in the country.
Rizkallah explained that sukuk is a mere equity instrument where a foreign investor can buy and own a share in a certain government project. “The problem is that this did not happen in Egypt before and we have particular concerns on national security issues,” he told Al-Ahram Weekly.
Rizkallah stated that objections to the sovereign sukuk law stem from political and economic reasons, and not legal aspects. “There is a consensus among all fiqh schools, schools of Islamic jurisprudence, that the state can issue sovereign bonds.”
He further pointed out that the timing of the law in addition to the lack of a sukuk culture contributed to public fear and rejection of the law. But he said these concerns are justified as Egypt is issuing sukuk bonds for the first time. As a result, he added, the Ministry of Finance is amending the law to assuage those fears.
Rizkallah added that the sukuk industry is not an old one, emerging globally only 10 years ago. He said that sukuk bonds were first born in Malaysia in 2001 and it was sovereign sukuk. Afterwards sukuk issuances expanded and also included corporate sukuk.
IRA members stated that they rejected the law on grounds that the law violates Sharia, or Islamic law, and that it poses a threat to state sovereignty.
Professor of international law Ali Al-Ghateet, who attended the IRA meeting, said in a television interview that the sukuk law contradicts Sharia for two main reasons. First, the law allows state entities to deal in public or state assets, which is forbidden. Second, that it permits foreigners to own these assets.
However, Rizkallah said that the state is using public assets for the welfare of the people and not for its own interest. “Besides, there is a People’s Assembly, that represents the people, which can decide on these issues.”
According to the proposed sukuk law, the government, public entities as well as local administration units are allowed to issue Islamic sovereign bonds. The president is the one who will define the public assets on which sukuk bonds would be issued. Public assets would be only utilised by sukuk holders for no longer than 60 years, according to the law.
A Ministry of Finance source denied that sukuk would be used to rein in the budget deficit, saying that the aim of issuing the bonds is to establish substantial projects such as new hospitals and schools. The source further added that the ministry did not exclusively draft the law, but consulted with representatives from the FJP and Nour Party as well as representatives from Dar Al-Ifta, in addition to local and international experts on sukuk bonds.
During his speech on January 8, 2013, moving the second reading in the Legislative Council of the bill to give tax and stamp duty relief for Islamic bond (sukuk) products, the Secretary for Financial Services and the Treasury, Professor K C Chan, emphasized how well placed Hong Kong is in its efforts to promote a sukuk market.
The Inland Revenue and Stamp Duty Legislation (Alternative Bond Schemes) (Amendment) Bill 2012 seeks principally to amend the Inland Revenue Ordinance (IRO) and Stamp Duty Ordinance (SDO) to provide a comparable taxation framework for some common types of sukuk bonds, in comparison with conventional bonds.
He pointed out that Islamic finance is amongst the fastest growing segments in the international financial system, with a presence in both Muslim and non-Muslim communities. Globally speaking, Islamic finance assets have expanded from USD150bn in the mid-1990s to USD1.3 trillion in 2011.
Sukuk are one of the most prominent instruments used in Islamic finance, and have been commonly issued by debt issuers for raising funds in some domestic and international capital markets. The first half of 2012 saw an impressive 40% annual growth for global sukuk issuances, while the global volume of outstanding sukuk is estimated to have exceeded USD220bn by the end of last year.
With Hong Kong having a highly liquid capital market, well-established market infrastructure, sound legal system and transparent regulatory framework, Chan said that Hong Kong has the advantage of matching the needs of fund raisers and investors from China, the Middle East, and other parts of the world interested in Islamic financial products. The bill should positively enhance the competitiveness of Hong Kong’s financial services industry and promote its asset management business.
However, as sukuk have more complex product structures than their conventional bond counterparts (often using special purpose vehicles and multiple asset transfers), their issuance may therefore attract additional profits or property tax exposures, or stamp duty charges. The government has observed that major jurisdictions such as Malaysia, the United Kingdom, Singapore, Japan and France, have amended their tax laws to facilitate sukuk issuance.
Chan stressed that the proposed legislation will not confer special tax favors on sukuk - classified as an "alternative bond scheme" (ABS) - but should ensure that financial instruments of similar economic substance are afforded similar tax treatments.
The government has prescribed in the bill a set of qualifying conditions for the proposed tax treatments of an ABS, to ensure that a prospective ABS is economically equivalent to a typical conventional bond structure and eligible for the proposed tax treatments, and also to ensure that reasonable safeguards are put in place to minimize tax avoidance.
In respect of the proposed tax treatments, the bill provides for certainty of the tax position of relevant bond and investment arrangements under an ABS. The underlying principle is to treat those arrangements in an ABS that meet the qualifying conditions as "debt arrangements" for the purposes of the IRO and SDO, and to apply to those arrangements the tax treatments as in the comparable case of conventional bonds.
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