Sukuk To Replace Foreign Borrowing: Banking Experts

A number of Egyptian bankers affirmed on the importance of approving sukuk (Islamic bond) draft law in the current period so as to overcome the budget deficit crisis that registered EGP 140 billion in Egypt’s estimated budget for 2012/2013 and to decrease the country’s need for foreign borrowing.

Banking experts described sukuk as the sharia-compliant alternative to treasury bills, expecting the Islamic instruments to provide high liquidity for the Egyptian market especially from Arab Gulf countries and to substitute the need for foreign borrowing in case loans’ negotiations with international financial institutions stopped.

Mahmoud Rashwan, deputy head of Islamic financial transactions department at National Bank of Egypt, said launching sukuk will provide high liquidity and will fill Egypt’s need for borrowing from foreign financial institutions. Rashwan expected that sukuk will witness a high demand as many Egyptians refuse to invest in treasury bills as a result of their fixed interest which is prohibited by some Islamists.

Rashwan confirmed that sukuk will compete with treasury bills as the increased liquidity and high supply will contribute in decreasing interest rates on government debt instruments (bonds and bills), noting that there are many kinds of sukuk; Musharaka (profit sharing) , Ijara ( Islamic lease) and Murabaha (Islamic finance).

In sukuk, the contract and the financed project are the determiners of the return. Rashwan called on the government to use the return on sukuk to finance the budget deficit, stressing on the importance of supporting national economy together with rationing expenditures in the upcoming period.

Rashwan affirmed on the importance of launching sukuk in the current period to attract the funds sent by Egyptians living abroad especially those in Arab Gulf countries.

The Islamist-dominated parliament does not innovate the idea of launching sukuk in Egypt as many bankers and experts demanded lunching sukuk, but the former regime imposed tough restrictions on Islamic banking transactions.

Bassant Fahmy, banking expert and former consultant at Al Baraka Bank, said launching sukuk will contribute in providing high liquidity and boosting economy especially that sukuk invests in economic and developing projects that will benefit both the economy and society.

“Sukuk is an alternative for bonds, bond is a debt instrumental, though sukuk is an investment instrument which will attractmore investors,” Fahmy.

Fahmy predicted there will be high demand from investors on sukuk especially Egyptians living in Arab Gulf countries, as many of them are investing in Islamic sharia-compliant products. When launched, sukuk will boost investment and production, unlike bonds as their returns are allocated for salaries and wages.

Banking sector was delayed in launching sukuk as Islamic economy has proved a success in many countries in the world. Sukuk will not reduce interest rate on treasury bills as the later are short-term instruments that is financing budget deficit, unlike sukuk which boost economy in general.

Mohamed El-Beltagy, head of Islamic financial transactions at Banque Misr and head of Egyptian Society for Islamic Finance, said launching sukuk by Central bank of Egypt is the optimal choice to provide the needed liquidity as the Islamic economic experience has succeeded in Malaysia, England and UAE.

This step will boost national economy and investment as the return on sukuk is used to finance developmental and economic project, El-Beltagy added.

The Islamist-dominated parliament is not the drive towards launching the sharia-compliant product; however, the deteriorated economy and the need for liquidity are the reason behind launching such products, El-Beltagay added. Sukuk will substitute bonds as the former is more effective instrument, El-Beltagay concluded.