Sharia index is tentative step for Islamic finance in Egypt

Reuters/Mohamed Abd El Ghany

The launch of a sharia compliant stock index in Cairo, to run alongside the conventional stock index, marks another tentative step forward for Egypt’s Islamic finance industry. 

Last year the Egyptian government issued its first ever sovereign sukuk, raising $1.5 billion from regional and international investors. 

Sukuk are sharia-compliant bonds that were developed as an alternative to conventional bonds, which are not considered permissible by many Muslims as they pay interest and may finance businesses involved in activities not allowed under Islamic law.

In August 2022 the Financial Regulatory Authority granted the first Islamic microfinance licence to a local company, Maksab, and in July last year Abu Dhabi Islamic Bank launched what it said was the first wholly sharia-compliant microfinance company.

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The new EGX33 index will list 33 companies that operate in accordance with sharia. All 33 are taken from among the 100 companies that already comprise the EGX100 index, although the possibility exists for other companies, not already listed, to join the EGX33. 

Criteria for inclusion have been pitched low. Interest earnings may account for up to 10 percent of total revenues, rather than the more standard threshold of 5 percent. 

The next step will be for private companies to construct trackers and Exchange Traded Funds that will enable investors to gain exposure to the EGX33 – and through them to a reasonably wide selection of Egyptian companies – without having to pick individual stocks. 

Egypt has for decades been slow to develop its Islamic finance industry and the launch of the EGX33, while a welcome development for certain types of investors, is hardly going to project Egypt into the front rank of sharia-compliant financial systems.

But nor is it intended to. 

The launch of the EGX33 is focused more on attracting overseas investment than on deepening sharia-compliant finance at home. 

Capital market officials in Cairo have made no secret of their desire to draw investment from the GCC where Islamic finance is commonplace and easily available.

GCC fund managers expect to be able to place their clients’ money in sharia-compliant indices and structures quickly and cheaply. 

Gulf governments have invested heavily in Egypt’s real estate developments – including the $35billion Ras al-Hikma investment promised by Abu Dhabi in March – and Gulf banks have taken advantage of the government’s privatisation programmes to acquire or expand existing banking franchises. 

In contrast, the new EGX33 is targeting private portfolio investors. 

Older investors remember the scandals of the so-called Islamic Investment Companies that drew in the life savings of many Egyptians in the late 1980s

In the GCC only the exchanges in Bahrain and in Oman offer Islamic indices, although local companies can create their own Exchange Traded Funds that isolate sharia-compliant companies.

Dow Jones has created seven sharia-compliant indices, though none offer exposure to single markets, as do the EGX and the indices in Bahrain and Oman. 

Egyptian governments and investors, both corporate and retail, have an awkward relationship with Islamic finance. Successive governments have been wary of fostering sharia-compliant finance for fear of empowering Islamic political movements that have so often posed a threat to the political establishment. 

Older investors remember the scandals of the so-called Islamic Investment Companies that drew in the life savings of many Egyptians in the late 1980s before being exposed as corrupt Ponzi schemes. 

Statistics on the size of sharia-compliant finance are notoriously imprecise, but figures issued earlier this month by the Egyptian Islamic Finance Association, assert that sharia compliant assets and liabilities account for only about 5 percent of the total banking market in Egypt. 

Four institutions dominate the Egyptian Islamic banking market with a combined share of more than 90 percent, the Egyptian Islamic Finance Association says.

Of these, three are foreign owned, and only one is Egyptian – Banque Misr – which has long pioneered domestic Islamic banking and has a separately branded Islamic division with more than 40 dedicated branches. 

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Egyptian public finance exists at best in a state of constant uncertainty, and often in states of crisis and imminent insolvency. Issuing sukuk, as the government did last year, was a necessary step to widen the pool of investors willing to place money in a single B-rated economy.

Developing the EGX33 will hopefully bring in more investors who previously found sharia-compliant investing in Egypt too complex. 

But any significant expansion of Egypt’s Islamic finance industry will require a wide-ranging commitment by the Egyptian authorities to develop legal systems to underpin sharia-compliant contracts, and specialised financial supervision to ensure the financial viability of Islamic financial institutions.

It would also entail cultivating a cadre of sharia scholars able to provide authoritative and widely-respected opinions on all aspects of financial services. 

Those major steps are unlikely to happen any time soon. For now, the disciples of Islamic banking in Egypt will have to content themselves with the creation of a sharia-compliant stock exchange. 

Andrew Cunningham writes and consults on risk and governance in Middle East and sharia-compliant banking systems