FRA finalises Sukuk regulations’ amendments, paving the way for promising investment

Alyaa Stohy
12 Min Read

After the great success of the first Sukuk issuance for the Talaat Mustafa Group (TMG), Daily News Egypt met with the Financial Regulatory Authority’s (FRA) team responsible for issuing Sukuk in Egypt. The team is led by Sayed Abdel Fadeel, head of Central Department for Corporate Finance at the FRA. The success of the first Sukuk issuance can be credited to Abdel Fadeel for creating an attractive and accessible legislative climate for companies to enter this new field easily and quickly.

Participants in the interview are Abdel Fadeel along with Noha Ehab, supervisor of the Sukuk department at the FRA; Marwa Mahmoud, a researcher at a financial consulting company; and Mohamed El-Beltagy, chairperson of the Egyptian Islamic Finance Association.

How long did it take the FRA to create a appropriate legislative environment for sukuk issuance?

Sayed Abdel Fadeel: We started preparing the legislative structure for the sukuk in August 2018. We have been keen throughout this period to facilitate the procedures and make them simple, clear, and uncomplicated. The FRA prepared guiding models with all the required steps in the various stages of issuing the Sukuk. The issuer of the Sukuk is required to only fill out and complete those documents. The FRA’s work team also had a role in marketing and promoting the Sukuk product, which resulted in several companies currently wishing to issue it, including CIAF Leasing whose Sukuk issuance was postponed due to the ongoing coronavirus pandemic. In addition, other companies from the private sector seek to issue their own Sukuk, from construction, agricultural reclamation, and service sectors, plus Sarwa Capital. We are targeting EGP 5bn worth Sukuk issuances this year.

Sayed Abdel Fadeel, head of Central Department for Corporate Finance at the FRA

How long did it take TMG to obtain the FRA approval for its Sukuk issuance?

Sayed Abdel Fadeel: TMG started the procedures on 23 March and its request was approved on 8 April. It’s a record time in light of the current conditions. Most of the time was spent in obtaining the credit rating of the issuance and preparing its feasibility study, so once TMG had completed these two steps, the next move was simple and easy, in contrary to the long period that companies usually took in IPOs.

After this experience, has the FRA felt the need to make amendments to the regulations of Sukuk issuance?

Sayed Abdel Fadeel: The executive regulations has not represented an obstacle to the issuance of the TMG’s Sukuk, however, the FRA has prepared amendments to the regulations to make them more comprehensive for all types of Sukuk in the global financial markets. The amendments included adding five new types of Sukuk: Istisna’a, investment agency, Salam, Muzaraa, and Musaqat. The current regulations include four types: Murabaha, Ijara, Musharaka, and Mudaraba. The amendments have been sent to the cabinet for approval.

What is the advantage of Sukuk over other financing instruments?

Sayed Abdel Fadeel: Sukuk has more than one competitive advantage over other financing instruments. Most notably, financing through Sukuk has the least burdensome, in addition to participating in profits, as the issuing company determines a specific return for the holders that they receive throughout the life of the Sukuk. They also share the loss if the project incurs losses, so it is a balanced financing instrument  between stocks and bonds, besides being compatible with the Islamic law, a great feature that attracts new blood and a broad segment of investors who prefer this type of investments.

In addition, the issuing party also gets the advantage of separating its financial performance and the new project funded by Sukuk. This means that the issuing company may not have a good financial performance, but the company has strong and successful feasibility studies for its issuance. The Sukuk depends only on feasibility studies and credit ratings for the issuance, not the company, in contrary to bonds and other financing instruments. So the Sukuk is very attractive for companies, especially in the public enterprise sector.

Noha Ehab, supervisor of the Sukuk department at the FRA

As for the investor, the Sukuk is safer than stocks and bonds. Stocks are known for their high risk. But the Sukuk gives its holder regular returns according to the projected cash flows from the issuance based on a feasibility study. At the same time, the Sukuk holder is considered a partner in the process [profit and loss], so it is compatible with the Islamic law.

Sukuk is also distinguished from bonds in being evaluated, monitored, and followed by more than one authority, starting with feasibility studies, credit rating, the Central Shariah Supervisory Committee and other Shariah sub-committees, the FRA, and the Egyptian Exchange.

How many companies have got Sukuk issuer licence in Egypt? Have you received new licensing requests?

Noha Ehab: Currently, there are only two companies that have obtained a Sukuk issuance licence, EFG Hermes and Sarwa Capital. There are also licensing requests from more than one company, the most prominent of which are the First Abu Dhabi Bank and Banque Misr.

When do you expect the CIAF Leasing’s Sukuk issuance?

Noha Ehab: CIAF’s sukuk issuance is in an advanced stage, and I expect it to be ready in the fourth quarter (4Q) of the year. The current flight suspension was expected to affect the issuance. However, the success of the TMG Sukuk will increase investors’ appetite for this type of financing instruments. This would stimulate the Sukuk issuance operations for companies during the coming period. In addition, the interest rate cut by 300 basis points will push the market for non-bank financial activities in general.

Would the repercussions of the coronavirus affect the Sukuk issuance?

Noha Ehab: There are four companies working on issuing Sukuk with the FRA. The 3Q 2020 will see another issuance after the coronavirus situation abates.

A booklet for individual investors is being presented in the form of Q&A to clarify all the issues related to Sukuk. The FRA issued also a Sukuk guideline to clarify the procedures for the investors and the different types of Sukuk.

Marwa Mahmoud, a researcher at a financial consulting company

What are the criteria for choosing the Sukuk type?

Marwa Mahmoud: The entity wishing to issue Sukuk shall determine the type or the appropriate formula for the issuance according to two factors: the nature of the project and which financing formula will be more appropriate with it. For example, if a project relies on buying and selling goods and speculation to make profits, then the best Sukuk type is Mudaraba. But if a project is a building that makes profits from rents, the best type is Ijara with a stable and semi-guaranteed return. The type of instrument is also determined according to the tendency of the issuing party. In many cases, the issuing party is not willing to share the project’s profits with Sukuk holders and only disburse a certain amount periodically. In this case, the most appropriate type of Sukuk is Ijara or Murabaha. In the event that the company desires to include the Sukuk holders in profit and loss, the most suitable type is Mudaraba or Musharaka, and it has the highest risk compared to other types.

Do the current Sukuk legislations need amendments?

Marwa Mahmoud: During the period of preparing Sukuk legislations, the FRA’s work team reviewed all global legislations on Sukuk issuance. This stage took a lot of time and effort that resulted in the FRA’s success in presenting appropriate legislation for the Egyptian market.

To determine if we need amendments, we have to first study TMG’s Sukuk offering, being the first in the local market. With more companies working in different fields, the FRA would make amendments to provide more types of Sukuk.

Mohamed El-Beltagy, chairperson of the Egyptian Islamic Finance Association

How did you ensure that the Sukuk complies with the Islamic law?

Mohamed El-Beltagy: Aside from the nature of the project, which must be in line with the Islamic law, it must be ensured that the accounting standards, financial foundations, revenue calculation mechanisms, and the company’s liquidation mechanisms are compatible with the Islamic law. This is ascertained before the issuance of the instrument, through its review by the Sharia supervisory committee of the company, on the one hand, and also by the Central Sharia Supervisory Committee of the FRA.

How do you see the success opportunities of Sukuk locally, especially with the increase in Islamic financing locally and globally?

Mohamed El-Beltagy: The sukuk will be a preferred financing instrument at banks, both Islamic and non-Islamic, which will be issued to exploit surplus capitals and as an alternative to treasury bills. It will be attractive to a broad segment of investors who prefer investments compatible with the Islamic law. The size of investors in banking products compatible with the Islamic law is about 3 million customers out of a total of 15 million customers in Egypt. Those 3 million customers are expected to direct their investments to Sukuk to diversify their investment portfolio.

I expect the sukuk to contribute to the growth of the Islamic transactions in Egypt. The volume of Islamic deposits in the Egyptian market reached about EGP 280bn in 2019, and constitutes 6.6% of the Egyptian banking market, an increase of EGP 42.9bn from 2018. The number of Islamic bank branches of Egyptian banks is 236 branches, which constitutes 6.2% of bank branches in Egypt.

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