Policy BriefSukuk Policy Brief

Published: March 2013

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Summary

Sukuk are financial instruments issued based on Shariah-compliant financing contracts and principles, mainly non guaranteed rate of return. The growth of Islamic financial services in the eastern and western hemisphere paved the way for the issuance of Shariah-compliant financial instruments, namely Sukuk which can have many types. In international markets, Ijarah and Mudarabah Sukuk constitute 57% of international issuances; whereas for sukuk issued in local markets Murabaha and Musharakah sukuk represent more than 60% of all domestic issuances. Asian nations dominate issuance of international and domestic sukuk with almost 72% followed only by GCC countries with issuances reaching 25% of all sukuk issuances.

The Egyptian government embarked on drafting and ratifying a new law governing sukuk issuance and trading by sovereign, quasi-sovereign, international institutions and corporations in the Egyptian market. The new law was issued in March 2013 after significant controversies regarding the potential usage of sukuk. Additionally, Alazhar refuted several articles in the law, however, the government and Shura council did not incorporate the proposed amendments suggested by Alazhar. The law is composed of three issuing articles in addition to 31 articles governing the institutional buildup requirements, timing guidelines for issuing supporting regulations including the executive regulations, accounting and auditing standards for the SPVs. Additionally, it includes the issuance and trading requirements and finally the appealing methodology and sanctions for any breach for the articles of the law.

We believe at Dcode EFC, that there was indeed a need for a regulatory framework governing the issuance of Sukuk in the local market. Sukuk is another financing tool that could facilitate the process of raising capital for new investments. Given the significant institutional buildup requirements and the supporting regulations that needs to be published, we do not project any imminent short-term improvement in the amount of funds available to the government and hence in its ability to finance FY 2013/2014 budget deficit as sukuk cannot be used directly to finance the general budget deficit and need to be backed by assets, projects, and/or services. We project that sizable sukuk issuance will not take place before the first half of 2014. Additionally, we do not project an immediate reliance by corporations on the sukuk issuance to raise the required funding until all related regulations are issued. Furthermore, if the political tensions are not resolved, we do not expect investors demand for any sukuk issuance to be sufficient given the significant amount of economic and political uncertainty and rivalry, which would render the successful issuance of any sukuk to be very difficult.


Table of Contents

  • Executive Summary
  • Concept and Development of Sukuk
  • Main Sukuk Structures
  • Market Status
  • Egypt and Sukuk
  • Al-Azhar and the Sukuk Law
  • Supporting Regulations and Institutional Setup Requirements
  • Issuers and Size of Issuance
  • Project, prospectus and listing/trading requirements
  • Dcode EFC’s Assessment
    • Potential Timing of Issuance
    • Potential Implications on the Deficit and Economic Growth
    • Potential Risks
  • Frequently Asked Questions
  • Annex (1): Sukuk Structures Stated in the Law and Potential Usage

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