CAIRO — Prime Minister Hashem Qandil announced last month his government’s intention to issue one or two rounds of sukuk, a type of Islamic financial product, before the end of 2012.
He offered few particulars, but the reaction of the business community has been largely positive, and the Egyptian government is now occupied with fleshing out the details of the proposal.
Qandil’s Freedom and Justice Party (FJP) is meeting this week with representatives of the financial industry and other political parties to discuss the establishment of rules governing the issuance of sukuk.
The idea to expand Islamic finance in Egypt became popular soon after the January 25 revolution, but it was delayed by the paralysis of political institutions and President Morsi’s prioritization of other issues during the first 100 days of his administration.
With the swelling of the government budget deficit and the continued deterioration of economic conditions across the country, the sukuk issuance is one key instrument for recovery.
“Sukuk is part of the strategy to increase the amount of Islamic instruments from 5 percent to 55 percent by the end of the president’s first term,” Abdullah Shehatta, an economic advisor to the president, told the Egypt Independent.
Islamic banks offer products that seek to spread risk and profit more equitably between the creditor and the debtor.
“Sharing the gain without sharing the risks is regarded as inefficient and unstable,” wrote Tarek El-Ghamrawy, an economist at the Egyptian Center for Economic Studies, in a recent working paper. “Inefficient because it affects the system of incentives negatively, and unstable because there is always the threat of bank runs in case of losses.”
The Islamic banking system offers several alternatives to traditional interest-based products.
Sukuk, though commonly cited as the Islamic equivalent of bonds, refers in fact to the certificates of ownership for a broad range of financial products (e.g., mudaraba, mushtaraka, murabaha) by which the financier becomes a partner in a debt, an asset or an enterprise. Profits are shared by the financier and the borrower, while losses are either incurred entirely by the financer or shared by both according to the details of the agreement. — Agencies