Egypt's Financial Regulatory Authority (FRA) is allowing domestic companies to sell traditional and Islamic bonds — known as sukuk — without the need for a credit rating, according to an official statement made on Monday. The move aims to reduce the cost of listing and issuing bonds and sukuk, and encourage more Egyptian companies to access debt instruments to fund their expansion and investment plans.
This comes after Egypt issued its first ever sovereign sukuk on Feb 21. The three-year $1.5 billion Sharia-compliant debt issuance, which offers an annual profit rate of 10.875%, was four times oversubscribed. The issuance is part of a $5 billion three-year sukuk program that the Ministry of Finance established Feb. 14 and is listed on the London Stock Exchange.
Some 250 global investors including asset managers, pension funds, insurance companies and investment banks from the Gulf, Asia, Europe and the United States subscribed to the debt offering, according to a statement by Finance Minister Mohammed Maait.
Fakrizzaki Ghazali, fixed income manager at Riyadh-based SNB Capital, told Al-Monitor that Egypt's sukuk program will be "well-received" given the dearth of US-dollar denominated Sharia assets. "It will give investors more options to pick within the high yield sovereign [sukuk] market, in addition to Turkey, Bahrain, Oman and Sharjah,” he said.
Egypt’s sukuk is its first foray in international bond markets since March 2022. With Egypt’s public finances having deteriorated over the past year, Cairo reportedly used the sukuk to repay a $1.25 billion Eurobond that matured Feb. 21.
The Arab world’s most populous nation is dealing with a severe currency crisis, high inflation and interest rates as well as unsustainable external debt levels. The cash-strapped country signed a new four-year $3 billion rescue package with the International Monetary Fund in December 2022.
Egypt’s debut sukuk will join a larger global Islamic bond market worth around $750 billion, according to some estimates. S&P Global forecasts that global sukuk issuance will be around $150 billion in 2023, compared to $155.8 billion in 2022 and $170.4 billion in 2021.
Mohamed Damak, global head of Islamic Finance at S&P Global Ratings, believes that while Egypt’s first sovereign sukuk may open the door for similar future transactions from the government or other private sector issuers, the material impact may be limited.
“By establishing its sukuk issuance program, the government has diversified its funding sources,” he said. “However, the contribution of Islamic finance to the Egyptian economy is still limited. There are few Islamic banks in Egypt. It remains to be seen if the sovereign sukuk will open the door for private sector sukuk issuances.”
In August 2021, Egypt ratified its sukuk law that enables entities to issue local or international sukuk.
Rania Abdelfattah, associate professor of finance at the British University in Egypt, told A-Monitor, “We have seen local currency corporate sukuk issuances. These issuances have been successfully structured by major investment banks in Egypt such as EFG Hermes. I don’t see a flurry of Egyptian corporates issuing sukuk because these entities — besides the government — rarely issue bonds in the international market."
One Islamic debt origination banker based in the United Arab Emirates (UAE) said that it is highly unlikely that other Egyptian issuers will tap the international sukuk market anytime soon. “There is no market for any level below the sovereign,” he told Al-Monitor on condition of anonymity. "It’s very similar to Turkey. None of the corporations or financial institutions can get a deal done other than the sovereign."
In addition to the sukuk, the Egyptian Exchange (EGX), the country’s stock exchange, is working on developing a new Islamic index. The new index would offer investors and funds access to specific Sharia-compliant stocks on the EGX. Rami El-Dokany, chairman of EGX, reaffirmed this commitment at a recent conference in late February.
A new EGX Sharia index would join a growing number of Islamic indices that track regional and global equities as well as other asset classes. The most notable global Islamic indices include Dow Jones Islamic Market index and MSCI World Islamic Index.
At present, S&P Egypt BMI Shariah offers a Sharia-compliant version of the S&P Egypt BMI, a broad-based benchmark covering large-, mid- and small-cap Egyptian stocks.
“The development of the Sharia index is part of its current initiatives to enhance the financial sector,” Abdelfattah noted. “The EGX is also working on raising financial awareness to the public about investments in the capital market.”
According to Mohamed al-Beltagy, president of the Egyptian Islamic Finance Association, the lack of knowledge and understanding of Islamic products and how they differ from conventional finance is one of the key challenges facing the industry.
He cited the lack of specific Islamic banking legal infrastructure when compared to more mature markets like the UAE, Kuwait, Saudi Arabia, Qatar, Oman and even Sudan as another challenge.