Sukuk in Egypt unleashed

At the end of 2012, the Egyptian economy is in a shambles, having worsened considerably over recent months. With a budget deficit expected to reach some LE200 billion and dwindling foreign reserves of $15 billion, the government is exploring all the options available to bridge the financing gap, including a $4.8 billion IMF loan that is currently on hold.

One such option is the issuing of sukuk, or Sharia-compliant Islamic bonds, and the country's Islamist forces have been throwing their weight behind the issuing of these bonds, claiming that they offer the country a way out of its economic plight.

As a result, the Shura Council, which now holds full legislative powers, is currently looking into a draft law regulating the issuing of such bonds following its finalisation by the government in late December.

Sukuk are essentially Islamic bonds in which the creditors buy shares in an investment or project, meaning that the holder of a sukuk bond is technically a partner in the enterprise and not a creditor.

Hopes are high that sukuk bonds can help reduce the yawning budget deficit. According to Shura Council and ruling Freedom and Justice Party (FJP) member Ashraf Badreddin sukuk do not have the associated costs of regular treasury bills used by the government to borrow on the capital markets with interest rates now reaching 16 per cent and thereby increasing the government's debt bill further.

Badreddin said that the state was now paying LE140 billion in interest on the country's debt, meaning that "25-30 per cent of state expenditure goes to servicing the debt."