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Friday, 18 July 2014

Egypt sovereign sukuk law still mired in uncertainty

DUBAI/CAIRO - Development of Egypt's Islamic economy continues to be hampered by ambiguity surrounding sukuk, and greater legislative and political clarity is required for the country to tap into the Islamic bonds market, banking industry officials and experts said.
They said new financial instruments were needed to fund mega projects that would help revive an economy hammered by three years of turmoil while keeping the budget deficit and government debt under control.
"The solution lies in Islamic bonds, which are still facing obstacles in the Egyptian market. The (sukuk) file should be revived and projects that can be financed by sukuk should be identified," Mohamed Ashmawi, chairman of The United Bank, which is 99% state-owned, told Zawya.
The government of President Mohamed Mursi had approved a draft bill authorizing issues of sovereign Islamic bonds, but the legislation was deactivated after Mursi's ouster last year.
Religious scholars have raised concern over possible government abuse of public assets under the bill. Sharia law bans payment of interest, and sukuk must be underpinned by physical assets, with investors receiving revenue from assets.
The draft law is now under review by the finance ministry ahead of submittal to a new parliament, for which elections are expected to be held at the end of 2014.
"The law has been stalled due to differences over formation of the legislative committee; how many members, whether to include sharia scholars from outside Egypt, whether there will be a single authority to oversee all projects or whether each project should have a legislative committee," Ashmawi said.
Lack of clarity
Basant Fahmy, professor of banking and finance at the French University, said the controversy surrounding public assets was still an issue due to lack of clarity from the government on how much it sought to raise from sukuk issues, how the funds would be invested, and how investors could exit from assets.
"The biggest hurdle is lack of clarity from the government in specifying suitable entry and exit (of investors) for those sukuk," she told Zawya, adding that projects financed by sukuk should be listed on the stock market.
"The Egyptian government needs to define the purpose of sukuk issues. Are they investment tools or debt instruments? If the aim is to increase liquidity, then it would be better to issue (conventional) bonds," she added. "Egypt's credit ratings cannot serve as a guarantee for large investments."
Western consultants helping Egypt with its economic reform plan have estimated that the country will need at least USD 60 billion of investment to reach GDP growth of 5% by 2018 and the same amount again to bolster foreign reserves, Reuters quoted senior officials as saying on Wednesday.
Egypt's budget for the 2014/2015 fiscal year projects a deficit of around EGP 240 billion, or 10% of gross domestic product. Gross domestic debt rose 17% to reach EGP 1.7 trillion, or 83% of GDP, in March from a year earlier, according to central bank data released in June.
"In Egypt's case, public debt can be reduced if sukuk issues are used to finance infrastructure projects, which are sukuk friendly because they are backed by a physical asset. The role of the government would then be to manage the sukuk program and oversee and coordinate between investors and the project without burdening the state budget," said Bassel Nadim of Tanmia Capital.
Ashmawi said one viable option was the renewable energy sector, particularly solar energy projects that would help address frequent power shortages in the Arab world's most populous country.
The governor of Faisal Islamic Bank of Egypt, Abdel Hamid Abu Mousa, said the sukuk law would boost the market and that FIB was among banks prepared to participate in financing projects launched under a state sukuk program
Corporate sukuk
The Egyptian Financial Supervisory Authority (EFSA) has submitted a separate corporate sukuk law to the finance ministry.
The sovereign sukuk law aims to organize financing of the state budget, national projects and public institutions, while the corporate sukuk law was put forward for the financing of firms and private institutions, EFSA head Ashraf ElSharkawy said in remarks published in local media in January.
He said parliament could decide to merge the two proposed laws. "Current stock market law regulations allow the trading of sovereign and corporate sukuk as ordinary financial instruments. If their trading required any modifications to the registry rules, we would do that," he was quoted as saying.
A senior official at Emaar Misr for Development told Zawya earlier this year that the firm would like to consider sukuk to develop projects in Egypt, because availability of funds from commercial banks was limited. But he said that lack of clear legislation had made it difficult to reach agreement on a sukuk issue.
Analysts said development of a sukuk industry would help broaden investment for both the public and private sector by attracting Gulf Arab investment.
"European states are racing to enact sukuk legislation to attract Gulf and Arab capital to finance big projects," Fahmy said.
Malaysia, the United Arab Emirates and Saudi Arabia still dominate the global sukuk market.
KFH Research Ltd, a unit of Kuwait Finance House, said sukuk issues by sovereign entities accounted for 68.6% of new issues worth USD 31.2 billion in the first quarter of 2014.
(Zawya / 17 July 2014)
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India: Islamic financial institutes beneficial to infra

AHMEDABAD: Infrastructure is at the top of the newly appointed Prime Minister's priority list, and it can get a facelift from various Islamic financial services due to features likes avoidance of charging interest on principal (Riba), according to a study undertaken at Cept University. 

Yash Majeethia, MTech, infrastructure engineering and management, faculty of technology, Cept University, and Tushar Bose, assistant professor, faculty of technology, Cept, have authored a study, 'Islamic Financial Instruments an Opportunity for Financing Infrastructure in India' that has been published in 'Journal of Business Management and Social Sciences Research' recently. 

According to the study, introduction of Islamic finance can play a crucial role in order to bridge the gap and support India in achieving anticipated growth projections, especially in infrastructure sector; as operations in Islamic financial system are characterized by avoidance of Riba, the money invested cannot be channelized in other areas. 

India has an estimated infrastructure funding deficit of Rs 14,60,784 crore for the twelfth five year plan (2012-2017). "Islamic finance services can be banking or non-banking in nature. It is not limited to any community and can be benefited from irrespective of religion. One can see it as participatory banking," Majeethia said. 

Kerela is the first state that has come up with an Islamic non banking financial services company in the country in 2013. It has already received clearances from the Reserve Bank of India, Security and Exchanges Board of India and the Waqf board. Similar models can be run in other parts of the country too. 

Why Islamic financial institutions? 

Islamic financial institutions rest their objectives and operations on the Shari'a law, Islamic law, based on a verse of the Holy Quran that says "Allah has allowed only legitimate trade and prohibits interest". It is based on the philosophy of risk sharing; both lender and the borrower share the risks as well as the returns that are incurred from a project. This discourages fixed returns in terms of predetermined interest rates known as Riba. 

Secondly, it emphasizes on socially responsible investment, characterized by avoidance of Riba, avoidance of Gharar (involving in activities relating to uncertainty or speculation), avoidance of Zulm (oppression of one party by the other), avoidance of Haram (discouragement of services and goods which contradict the Islamic value), introduction of Zakat (laying a specific predetermined Islamic tax on various activities) and focusing on Halal (activities that are religiously permissible).

(The Times Of India / 17 July 2014)
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