Sukuk.. A financial tool falls victim to political conflict

By: Ahmed Farahat

The discussion of all things Islamic in the economy suddenly stopped after the Muslim Brotherhood was removed from power on July 3, 2013.

Sukuk.. A financial tool falls victim to political conflict

Sukuk.. A financial tool falls victim to political conflict


The first year of Muslim Brotherhood rule had sensationally seen sukuk, an asset-backed securities structured according to the principles of Islamic sharia, cast as a financing tool that would help achieve large gains. Since the downfall of Mohammed Morsi this tool has fallen to bottom rung on the ladder of government financing alternatives, however.

An assistant to the Minister of Finance who did not wish to be named, described sukuk as “not one of our priorities at this time’’ even though throughout last year, it was promoted as the financial tool that would solve the government’s financing deficiency, eliminate under investment in infrastructure and fix Egypt’s declining foreign currency reserves.

Those opposing the Muslim Brotherhood waged widespread campaigns of criticism against the Sukuk Law on the pretext that its promotion was being used for political rather than purely economic reasons. The assistant to the Minister of Finance however, said that it was necessary to look at sukuk as a financial rather than political tool and revealed the minister›s predisposition to amending the law before its implementation.

The law would be “gradually” implemented once the date set for it to come into effect arrives, he said, adding that sukuk was a financial tool like any other and had received more than its fair share of interest during Muslim Brotherhood rule.

During the Muslim Brotherhood’s rule, a dispute broke out over sukuk amongst the Islamists themselves after Al Azhar rejected the first draft of the law. The conservative Noor Party said it supported Al Azhar›s point of view that the possibility of selling the asset to repay the sakk violated sharia law whereas the Muslim Brotherhood saw it as a political stance stemming from the desire for state assets and unrelated to sharia law.

“The Muslim Brotherhood had refused to trace the Sukuk Law back to sharia law despite forming a council of leading Muslim scholars to oversee proposals and confirm their accordance with Islamic sharia law, and appointing each of the council members serve its political interests,” the assistant said.

The creation of an Islamic sukuk market was the essential component of the Muslim Brotherhood›s program to strengthen the extremely weak levels of Islamic financing in Egypt. After the Muslim Brotherhood’s constitution transferred legislative powers to the Shura Council, the Sukuk Law was the first law placed on the council›s legislative agenda. Fayyad Abdel Moneim, the former Minister of Finance, said that under President Mohammed Morsi, sukuk did not face opposition because it is a financial tool just like stocks and bonds. He noted that the Financial Market Law had given companies the right to issue sukuk as well.

The Sukuk Law had been passed to be implemented rather than postponed and the ministry had worked to conclude its implementing regulations but regime changes had hindered its implementation. He also noted that a sukuk unit had been established in the ministry and staffed with experts in transforming projects into a financial tool in accordance to a specific legal contract which specified the rights of the transacting parties, the manner in which profits and sakk holders› returns were distributed as well as the process through which the sakk was liquidated at the end of its term.

The director of the sukuk unit in the Ministry of Finance said the ministry had not issued its decision regarding the use of sukuk as a financial tool in the coming transition period, noting that to date the minister was yet to release a statement about it. However, although Fayyad called for maintaining the interest in sukuk during the coming period in order to diversify the sources of financing for both the public and private sector, the Ministry of Finance recently merged its sukuk unit with the public debt unit as it considered the former to be a financial tool just like the other government financial tools overseen by the unit.

Hussein Hamed Hissan, a professor of sharia law at Cairo University and one of the most prominent scholars in the field (Photo from Al-Borsa News)
Hussein Hamed Hissan, a professor of sharia law at Cairo University and one of the most prominent scholars in the field

The campaign to promote sukuk during Muslim Brotherhood rule contained inflated expectations about the size of foreign investments it could bring to the Egyptian market. Hussein Hamed Hissan, a professor of sharia law at Cairo University and one of the most prominent scholars in the field, said that investments in sukuk could generate $100 billion for the state because the market was large in Egypt and the Egyptian economy was in need of sukuk. Fayyad Abdel Moneim said that according to consultations with international and Islamic institutions, it was expected that sukuk issues introduced at $5 billion in the first year would grow to $10 billion the following year.

He went on to say that the previous government had also intended to present infrastructure projects to those investing in this tool, which included plans to establish a high-speed train connecting the industrial cities of Al Ubur and 10th of Ramadan to Cairo and to construct silos to store the strategic wheat reserves.

During the first half of this year, the Ministry of Finance had transformed into an international port of call for the major investment banks to search for the opportunities available in this field. International banks like HSBC and JP Morgan sent delegations to check out the plans and projects that the Government would offer up to sukuk financing and to present their experience in managing sukuk projects in international markets. In the same vein, Walid Hejazi, the founding partner of Hejazi & Associates, in cooperation with Crowell & Moring, said that sukuk as a financial tool had developed a poor political reputation due to misinformation and a lack of knowledge about it.

He explained that the Sukuk Law contained an article that stipulated the issuing of sukuk for state owned assets in the public domain was not permissible in order to soothe fears of using sukuk as a backdoor to sell off state assets. He added that sukuk were not expected to be put up for sale at the present moment because of the temporary Al Beblawi government and indicated that sukuk and related matters may be studied once an elected government able to make these decisions came into office.

Walid Hejazi, the founding partner of Hejazi & Associates, in cooperation with Crowell & Moring

Hejazi continued by saying «sukuk have their own wealth and are not Morsi’s magic wand» noting that sukuk had been implemented in a number of the countries for nearly fifteen years and as such are not a new or novel tool. He added that the Muslim Brotherhood had declared them the only financial tool able to repay the budget deficit despite the existence of other tools like bonds and government treasury bills that help bring about the same purpose. The Muslim Brotherhood’s use of sukuk as a solution to all the economic problems and their foundations was “more than necessary”. Hejazi concluded by pressing home the necessity of using sukuk-funded projects to meet consumption as well as production needs.

Currently, sukuk is not one of the alternatives and financial tools offered by the governmental debt unit to help to control the costs of government borrowing and generate liquidity in the government debt market. Instead, the tools currently studied by the unit include launching investment fund indices in the government debt market and expanding repurchase agreement (repo) procurement to include treasury bonds. In previous times, zero coupon bonds have also been suggested as a means to address the temporal gaps between the current government debt tools.

Is the rise of Islamic finance good news for the environment?

Economic and ethical focus of fast expanding Islamic banks could be good news for green investments

By Nilima Choudhury

The growing Islamic finance sector could spell good news for investments in clean energy according to experts RTCC has spoken to.

Islamic finance is growing 50% faster than the traditional banking sector, and it has huge growth potential, with assets expected to increase by 250% this year.

Its profile was boosted last week when UK Prime Minister David Cameron told the World Islamic Economic Forum he wanted the country to be the “first western sovereign to issue an Islamic bond”.

Is the rise of Islamic finance good news for the environment?

Is the rise of Islamic finance good news for the environment?

In an interview with RTCC, Professor Habib Ahmed, a World Bank author and Professor in Islamic law and finance at the University of Durham said the principles and values on which Islamic finance is based could contribute to sustainable economic development.

“There is an increasing demand from different stakeholders that Islamic finance should also reflect the ethical, social and environmental aspects in their financing,” he said.

“Many non-Muslims are attracted to Islamic finance because they find it sound from economic and ethical perspectives.”

This could be positive news for the clean energy sector that in 2012 suffered a 14% drop in investment as Europe curbed green subsidies and the USA’s attention was diverted from renewables to fracking.

Last month analysts at Bloomberg New Energy Finance reported that annual investment in renewables and energy-smart technologies will fall for the second consecutive year.

Emerging sector

There are already signs the clean-tech sector is starting to benefit from Islamic finance.

The Islamic Development Bank (IsDB) is already a major player in the clean energy sector investments of around $1 billion between 2010-2012.

The top five beneficiary countries of IsDB’s renewable energy sector financing were Morocco ($908 million), Pakistan ($896 million), Egypt ($886 million), Tunisia ($764 million) and Syria ($668 million).

Last month the IsDB agreed a $100 million investment with the Industrial Development Bank of Turkey for the development of renewable energy and energy efficiency projects.

On a wider scale, a report by Ernst & Young published in December 2012 valued Islamic assets at about $1.8 trillion in 2011, representing about 1% of the global financial market.

Green shoots

Some analysts believe Islamic finance will be good for the environment because it values more than just profits.

Western banks are required by law to provide the best return on investment for their clients regardless of where that investment goes.

But according to Asad Zaman from the International Institute of Islamic Economics in Pakistan, while green growth in the west is secondary to economic growth, this is not the case in Islamic financial circles.

“Natural resources are a sacred trust and protecting them for future generations a primary responsibility,” he said.

“Economic growth is not (directly) a goal at all, though it may be desirable as a means to (say) poverty alleviation.”

It’s a view shared by the heir to the British throne Prince Charles, who recently said Islamic banking could provide the answers where conventional banking could not, given Islam’s emphasis on a “moral economy”.

Where large Western banks have divested from oil and gas, it has generally taken place not because of ‘green’ reasons, but as a result of long term investment planning.

“Scottish Widows divested from these [fossil fuel] companies not on ethical grounds but because we think they’re not a very good investment decision. That view is shared very widely in the investment community,” said the bank’s head of sustainability Craig Mackenzie.

New investment model

The Islamic financial structure is so attractive that the UK Treasury is now investing about £200 million to work on the practicalities of issuing “sukuk”, or Islamic law compliant bonds in the country.

Sukuk bonds do not pay interest, but instead offers the investor a share of ownership in the project they are supporting.

In order to develop an environmentally friendly sector financed by Islamic banks, the Green Sukuk Working Group was launched last year by think tanks Climate Bonds Initiative, NGO Clean Energy Business Council of the Middle East and North Africa and the Gulf Bond & Sukuk Association.

“Interest in both Shari’ah compliant and ethical investing is on the rise. Green sukuks can support this trend by expanding the range of available financial instruments,” said the GBSA’s Michael Grifferty at the group’s launch.

“Green sukuks also support national development strategies by offering longer term finance for essential infrastructure.”

The group aims to develop best practices and promote the issuance of sukuks for the financing of climate change investments and projects, such as renewable energy projects.

Banks like UK-based Islamic investment bank Gatehouse Bank offer people the opportunity to invest in sustainable companies that offer technology, products and services throughout the water industry to help with water desalination, a burgeoning sector in the Middle East.

According to Professor Ahmed, the Islamic financial sector’s growth is likely to continue because it has proven to withstand events like the 2008 global financial crisis.

“After the crisis, Islamic finance came to light because it had features that would have lessened the intensity of the crisis,” he said.

Social responsibility

A paper published in July this year by the International Institute for Sustainable Development (IISD) argues that increasing levels of debt in the ‘West’ will make Islamic banking a safer bet for many investors.

“Islamic finance principles serve to insulate the Islamic financial system from excessive leverage, speculation and uncertainty, which in turn contributes toward promoting financial stability and long-term sustainability,” the authors say.

“As a result, the implementation of Islamic finance principles is anticipated to grow, not only in Muslim countries’ financial markets, but also in those markets concerned with socially responsible objectives and ethical financial solutions.”

Muhammad bin Ibrahim, the Central Bank of Malaysia’s deputy governor, argued earlier this month that it was an Islamic bank’s duty to “enhance the general welfare of society.”

“The teachings of Islam basically promote preservation of natural resources and the need to respect all living things. Failure to do so would be detrimental…where severe destruction of the land and sea would come upon those who mistreat the environment,” said Ibrahim.

There are, of course, plenty of examples of Islamic banks lending to oil and gas companies. Money based in Saudi Arabia and Qatar is, in all likelihood, derived from the extraction of fossil fuels.

But the rapid growth of a financial sector underpinned with strong ethical and environmental leanings indicates that the damage investments may do to the planet may come under increasing scrutiny.

Ahmed argues that currently there is little sign of a “green” culture in the Islamic financial sector, perhaps not a surprise given its relatively small size.

But he says there is a debate among bankers over what the sector’s role should be moving forward, and how it can be a force for the global good.

“As the industry moves forward it will be expected that they consider social and environmental issues as the values on which Islamic finance is based on [these] demands,” he said.