Following widespread debate and commentary on the first draft of the Egyptian sukuk legislation (the sukuk legislation), the Egyptian cabinet has approved a second draft of the sukuk legislation to be presented to the Egyptian Shura Council for parliamentary discussion. The legislation is a significant change in legal direction for Egypt that has only embraced Islamic finance to a limited degree to date.
The first draft of the sukuk legislation was subject to widespread criticism, including that the sukuk legislation may facilitate privatisation of some parts of the public sector in Egypt.
The sukuk legislation allows joint stock companies and companies limited by shares, governmental and quasi-governmental entities, municipalities, banks regulated by the Egyptian Central Bank and international and regional institutions to issue sukuk subject to certain conditions.
“Sukuk” is defined as nominal securities having equal value issued in Egyptian pounds or foreign currency in a public or private offering tradable until its maturity representing an undivided ownership interest in: (i) title to a property, beneficial interest or services; (ii) assets of an investment project; (iii) capital of a murabaha; (iv) manufacturing cost of a property; or (v) purchase price of a Salam product.
“Governmental sukuk” is defined as sukuk issued by the government, public entities, municipalities or other public juristic persons.
Sukuk shall be issued in one of many forms of sukuk defined in the sukuk legislation. The forms of sukuk are divided into five main categories and each main category is divided into sub-categories as follows:
- financing sukuk – includes murabaha sukuk, Istisna’a sukuk and Salam sukuk;
- ijara sukuk – includes ownership title sukuk, beneficial interest sukuk and services ijara sukuk;
- istithmar sukuk – includes mudarabah sukuk, investment wakala sukuk and musharaka sukuk, which includes, profit musharaka sukuk, muzara’a sukuk, musakat sukuk and mogharasa sukuk;
- investment funds and portfolios sukuk; and
- any other sukuk approved by a central Shari’ah committee to be established pursuant to the provisions of the sukuk legislation.
Interestingly, the last category permits the addition of new qualifying structures as may be approved by the central Shari’ah committee.
The central Shari’ah committee will be composed of seven members, each of which shall have certain qualifications including three years of work experience at a Shari’ah committee. The central Shari’ah committee will fall under the umbrella of the Egyptian cabinet of ministers and its members will be appointed directly by the prime minister. The decisions and fatwas of the central Shari’ah committee will be final and binding upon all parties involved in sukuk issuances.
The powers and authorities given to the central Shari’ah committee are broad and far-reaching. They interestingly go beyond the traditional role of a Shari’ah committee and include the power to monitor the trading of sukuk and distributions made thereunder to ensure compliance with Shari’ah in addition to supervising from a Shari’ah perspective projects that have been financed through sukuk issuances.
Private institutions such as banks and corporations are generally allowed to have their own Shari’ah committees to exercise the same powers and authorities that are given to the central Shari’ah committee. However, it is contemplated that decisions of such independent private institution Shari’ah committees shall be approved by the central Shari’ah committee.
The sukuk legislation is moving through the legislative process and we shall detail any significant developments on Al-Mirsal.