Time for Egypt to Take a Lead on Islamic Finance

Plans by Egypt to draft regulations to permit the issuance of sukuk in Egypt should be welcomed and encouraged. A bigger role for Egypt in the Islamic finance industry will bring benefits not just to the industry and also to the Egyptian political regime.

Dr. Ziyad Behaa al-Din, the Chairman of the Egyptian Financial Supervisory Authority (which regulates non-bank financial activity) said in early October that his Authority would draft regulations to enable local companies to issue sukuk. He had previously made a similar statement in April.

The Central Bank of Egypt has been exploring Islamic finance in recent years but so far no new regulations have been issued.

Three banks in Egypt operate on “Islamic” (or, “Shari’ah-compliant”) principles – Al-Baraka Bank Egypt and Faisal Islamic Bank of Egypt (both parts of Saudi-owned groups), and National Bank for Development (owned by Abu Dhabi Islamic Bank). In 2007, Islamic International Bank for Investment and Development was merged with two other banks to form United Bank of Egypt.

Egypt accounts for about 9% the Arab world’s GDP and its banking system is one of the largest in the region, yet Egypt has hardly been involved in the recent expansion of Islamic finance, the most exciting development in Middle East financial markets for decades. Recent estimates suggest that Islamic banking accounts for no more than 4% of all banking activity inEgypt.

It is easy to understand the reluctance of the authorities to foster the growth of Islamic finance in Egypt. For decades, the Muslim Brotherhood has posed the greatest internal threat to regime founded by Gamal Abd al-Nasser in the early 1950s, which continues today by President Mubarak. In the late 1970s, the Brotherhood started to take control of significant areas of civil society, such as trade unions and local heath care. In the 1990s, it mounted terrorist attacks which killed many, undermined Egypt’s tourist industry, and challenged the authority and competency of the security services. It had significant successes in the early stages of the 2005 parliamentary elections. And of course, it was Islamic extremists who in 1981 assassinated President Sadat and organized uprisings in various parts of Egypt.

But why should Islamic finance present a threat to the ruling regime?

The Middle East is awash with angst, frustration and disappointment: why does economic growth and prosperity in the Middle East lag that of other emerging regions; why have dictatorships and family dynasties continued to rule the region while democracy has flourished across the globe; why so many Middle Eastern governments supine in the face of American pressure or Israeli attack; why are Muslims so widely stereotyped as terrorists and their beliefs so frequently denigrated?

Amid this sea of angst, the Islamic finance stands as a shining success. Islamic finance has not only achieved extraordinary growth and sophistication, but it has also has also become part of the global financial system. Islamic finance is an expression of Muslim identity with which the west has chosen to engage. Every major law firm in New York and London has highly-paid specialists in Islamic finance. All the major international banks offer Islamic products to their customers. Western investors buy Islamic bonds and some western companies even issue Shari’ah-compliant debt.

The Egyptian government brands the Muslim Brotherhood as politically naïve, lacking in experience and propagating unworkable solutions to Egypt’s problems. The worldwide success of Shari’ah finance shows how at least one aspect of strictly-interpreted Islam can be successful.

So what should the Egyptian government do?

In permitting the issuance of sukuk, Egypt is opening the way for companies and institutional investors to use one of the tools of Shari’ah-compliant finance. The Egyptian corporate sector gets access to a new pool of investors; Egyptian financial institutions capture some market share in the Shari’ah-compliant industry; and the Egyptian government is seen to be sympathetic to Islamic finance. A logical follow-up step would be for the government to issue short-term sukuk as part of its routine debt management programme.

The impact of such steps on Egyptian society and politics as a whole will be limited.

The more difficult question is whether to permit, or even encourage, a large expansion of retail financial services which are Shari’ah-compliant. Such a step would embed Islamic finance into the fabric of society, putting on display a successful aspect of the alternative Shari’ah-led vision of society which the current government is so keen to obscure.

But by discouraging the growth of Shari’ah-compliant finance in Egypt, the Egyptian government does a disservice not only to its own financial system but also to the Islamic finance industry. Islamic finance needs Egypt. It needs Egypt’s economy as a platform for the launch and trading of Shari’ah-compliant financial products, it needs Egypt’s banks and brokerage houses, which are among the biggest and most experienced in the region; and it needs the new generation of Egyptian bankers. It needs al-Azhar and Egyptian religious scholars.

The so-called distinction between Islamic banking as sanctioned and practiced in the Gulf as opposed that in Malaysia may be exaggerated, but there can be no doubt that a third center of gravity would enrich Islamic banking. No one except Egypt has the size and stature to be that third center of gravity.

The relationship between the current Egyptian regime and the forces of traditional Islam is an existential one for those in power in Egypt today. Get it wrong, and at best the regime will be embattled, and at worst at risk being overthrown. Get it right, and the regime will survive, renewed, with enhanced legitimacy in the eyes of its citizens.

Both Egypt and the Islamic finance industry will have much to gain if the Egyptian government finds a way to increase its engagement with Islamic finance.