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Wednesday, 5 June 2013

Egypt's first sukuk law: A legal overview

The passing of Egypt's first sukuk law in May 2013 marks a major milestone in the development of the Islamic finance industry at the national and regional levels. However, the actual value that may result from passing the sukuk law will depend on the adequacy of the regulatory framework in which it will be implemented. The first piece of this important framework is the Executive Regulations of the law, which the government plans to issue in the next few weeks.
The law's drafting and passing were met with several political hurdles. It has been argued by the opposition's figures that the mere fact of passing of such law by a Shura Council, dominated by Islamic parties, particularly the Freedom and Justice Party, is a testament to the Islamic parties' reliance on funding sources from the GCC countries, where Shariah-compliant financial instruments are more popular and developed than they are in Egypt.
Such reliance is seen by part of the opposition as opening the door to political influence from the Gulf. It could be argued that the reason for such unpopularity of Shariah-compliant instruments in Egypt is the suppression of Shariah-compliant finance under the regime of Hosni Mubarak, which contributed in part to the creation of a negative attitude towards Islamic finance.
Some of the critical aspects of the new Egyptian sukuk law are: a) the law's drafting process; b) sukuk issuance under the law and its limits; and c) key provisions regarding Shariah supervision over sukuk issuance and settlement of sukuk disputes.
Drafting the law
The initial draft of the law in March 2013 encountered significant resistance from the Salafist Al-Nour party, which demanded the law be approved by Al Azhar, which is the supreme Islamic authority in Egypt. Al-Nour's objections largely centered on nationalist fears that the law would enable foreigners to own Egyptian public property through issuance of sukuk granting its owners portion of ownership of public assets.
Potentially setting a precedent for review of future legislation by religious entities, President Morsi was forced to refer the law back to Al-Azhar for review. The law was ultimately passed after incorporating Al-Azhar's amendments, and now awaits the issuance of its executive regulation, which is due to be completed in the coming months.
In addition to Al-Azhar's comments, other parties contributed to the drafting of the law, such as representatives and experts of the Islamic finance industry, including the Egyptian Islamic Finance Association (EIFA).
EIFA's efforts and discussions with the Shura Council resulted in the broadening of the scope of law to include both corporate and sovereign sukuk rather than exclusively sovereign. The law allows for both asset-based and asset-backed structures despite EIFA's recommendation to restrict asset-backed sukuk, which has been subject to criticism by various Shariah boards and organizations.
In addition, asset-backed sukuk structures could provide a different cost of financing to issuing parties, as the profit rate would be based on the underlying credit quality as well as the expected performance of the sukuk assets.
Geographic scope
Although sukuk issuance can occur within Egypt and internationally through offshore special purpose vehicles (SPVs), the law stipulates that sukuk assets be located within Egypt, which is likely to limit the size and liquidity of the country's sukuk.
Howevergiven the probable need for financing within the Egyptian market, these limits are not likely to be a problem within the next decade. Indeed, the law is expressly written to discourage capital outflows from Egypt and encourage capital inflows.
Shariah supervision and dispute settlement
A central Shariah board established at the cabinet level shall oversee compliance. Corporate issuers will have their own Shariah boards, but the transaction will also be subject to the central Shariah board's approval. The prime minister will appoint the board's members based on nominations from the finance ministry. To be considered for the central board membership, a candidate must have a Ph.D. in in Shariah and to have participated in at least three sukuk issues.
Although the Egyptian Economic Courts have a general jurisdiction over all sukuk disputes, the law allows the transaction parties to agree on arbitration as a dispute resolution mechanism. The law also leaves the door open to interpretations allowing settlement by foreign arbitration tribunals for offshore sukuk.
The new sukuk law constitutes a bold step towards the development of a Shariah-compliant finance industry in Egypt, and may prove to be a viable resource that could be used to address the current gap in the public funding needs.
Dr. Walid Hegazy has more than 15 years of legal experience with a focus on Islamic banking and finance, project financing, corporate restructuring and corporate governance. Before launching Hegazy & Associates, Dr. Hegazy was heading the Islamic Finance Practice Group at the international law firm of Freshfields Bruckhaus Deringer.
(Zawya / 05 June 2013)

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Malaysia: Asia offers big opportunities for Islamic finance, says SC

KUALA LUMPUR: The Asian economic landscape offers ample opportunities for Islamic finance to flourish, given the region’s favourable economic outlook and growing middle class affluence.
Securities Commission Malaysia (SC) chairman Datuk Ranjit Ajit Singh said infrastructure investment is an important component of economic development.
“The Asian Development Bank has projected that Asean nations would require an average of about US$60bil in infrastructure investment annually between 2010 and 2020.
“This substantial amount provides tremendous potential for financing and capital raising through the issuance of sukuk, as many infrastructure assets are inherently syariah-compliant.
“Furthermore, sukuk will naturally capture a wider subscriber base as they appeal to both conventional and syariah-based investors,” he said in his keynote address at the World Islamic Banking Conference: Asia Summit 2013 in Singapore yesterday.
The text of his speech was released by the SC here.
Ranjit pointed out that the growing affluence of the Asian middle class will also generate increasing demand for investment and savings products, thus, the opportunity for Islamic investments to meet this prospectively strong demand should not be underestimated.
The global sukuk market has registered a total issuance size of US$131.2bil globally in 2012, a 54% increase over 2011.
This year is developing to be another promising one with a total issuance size of US$31.7bil globally in the first quarter.
According to the Ernst & Young World Islamic Banking Competitiveness Report 2013, global Islamic banking assets held by commercial banks amounted to US$1.3 trillion as of 2011.
The top three countries with the largest Islamic banking industry are Saudi Arabia, with an estimated US$207bil of Islamic assets, followed by Malaysia with total assets of US$106bil and the United Arab Emirates at US$75bil.
“This growth momentum is expected to be sustained as global Islamic banking assets are forecast to cross US$1.8 trillion by end-2013,” Ranjit said. 
(The Star Online / 05 June 2013)

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New standard launched for Islamic finance deals

A standard contract template for Islamic inter-bank transactions was launched on Monday as the industry works to diversify the range of liquidity management solutions available.
The latest standard is part of efforts being made to harmonise industry practices by the Bahrain-based International Islamic Financial Market (IIFM), a non-profit industry body which develops specifications for Islamic finance contracts.
It is hoped the standard will displace commodity murabaha, a common cost-plus-profit arrangement in Islamic finance, with a risk-sharing structure called wakala, that is favoured by industry purists.
"The main objective of this documentation standard is to reduce over-reliance by the financial institutions on commodity murabaha and to encourage greater use of unrestricted wakala," the IIFM said in a statement.
Wakala is an agency agreement where an investor authorises an agent to manage a pool of assets following religious principles such as a ban on interest and monetary speculation.
Despite being a well known sharia-compliant structure, the absence of documentation with clear guidance has limited its broader use, although the industry is being urged to diversify its money markets transactions.
"The industry will find this memorandum very useful whereby it explains how the standard is to be used and in addition to that it provides very comprehensive recommendations," said Ijlal Ahmed Alvi, IIFM's chief executive.
Islamic money markets have expanded in the last few years along with sharia-compliant banking asets, which reached $1.55trn worldwide at the end of 2012 and are projected to exceed $2trn by 2015, according to Ernst & Young.
Commodity murabaha dwarfs other money market instruments used, but it also faces opposition from some Islamic scholars on the boards which oversee banks' activities.
The practice is criticised as not sufficiently based on real economic activity, a key principle in Islamic finance.
Discontent has even prompted Oman's regulator to go so far as to ban commodity murabaha altogether, when the Sultanate released its Islamic banking framework in December of last year.
The wakala standard could also speed-up the convergence of Islamic finance practices across its various regions, according to Khalid Hamad Abdul-Rahman Hamad, executive director-banking supervision at the Central Bank of Bahrain and IIFM chairman.
"This much-awaited documentation standard is another milestone in the standardisation and harmonisation of the Islamic finance industry."
The new documentation would encourage the industry to address accounting and regulatory requirements in their respective jurisdictions, he added.
The Islamic finance industry has its main centres in the Middle East and southeast Asia, but the regions have for the most part developed independently of each other.
While this is not the first wakala standard in the market - a template was launched by Malaysia's association of Islamic banks in 2009 - the IIFM could benefit from wider geographical backing.
The IIFM started operations in 2002, founded by the Jeddah-based Islamic Development Bank and the central banks and monetary authorities of Bahrain, Brunei, Indonesia, Malaysia and Sudan. Additional members include the State Bank of Pakistan and the Dubai International Financial Centre.
Last year IIFM launched a standard contract template for Islamic profit rate swaps, and is currently working on others including cross-currency swaps and foreign exchange forwards.
(Arabian Business.Com / 04 June 2013)

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