Hopes high for Egypt’s shariah-compliant index

June 13, 2024, 10:49 AM

Egypt's new Shariah Index says it has received strong interest from a large number of local, regional, and international investors — Egypt's new Shariah Index says it has received strong interest from a large number of local, regional and international investors

EGX33 Shariah Index launched
Expected to attract investors
Boost to Egypt’s Islamic banking

The Egyptian stock exchange has announced the launch of a long-awaited shariah-compliant index, a move observers say is likely to attract new investors and boost the North African country’s latent Islamic banking sector.

Gulf investors are said to be particularly interested.

The chairman of the Egyptian Exchange (EGX), Ahmed el Sheikh, announced that the new EGX33 Shariah Index would feature 33 companies representing 16 sectors that are “in accordance with the principles of Islamic shariah”, with a maximum weighting of 15 percent.

The companies include Talaat Moustafa Group Holding Company, one of the largest listed real estate development companies in Egypt; Elsewedy Electric Company; Abu Qir Fertilizers; Telecom Egypt; Fawry for Banking Technology and Electronic Payments; Orascom Construction; Sixth of October Development & Investment; and Emaar Misr for Development.

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The value of the index at time of writing was EGP890.3 million ($18.7 million) with a total market cap of almost EGP764 billion.

El Sheikh said that the new index had already received “repeated requests from a large number of local, regional and international investors”.

Mohamed al-Beltagy, chairman of the Egyptian Association for Islamic Finance, who reviewed the index, said he expected it to attract investors to enter the market, particularly from the Gulf where “one of the main priorities for investors” is for investments on offer to be “in accordance with the shariah”.

Beltagy said that the EGX had been missing out on business from those who would not enter the market at all without assurances of shariah compliance. “I often have people asking me how they can invest in the market in a way that adheres to Islamic shariah,” he said.

The EGX33 said that its initial companies were selected from the EGX100.

Outlining the broad requirements for listing, the EGX33 said the ratio of a company’s interest-bearing investments and loans must not exceed 33 percent of its total assets or market value and its liquid assets must not make up more than 70 percent of its total assets.

Growth doubts over Islamic finance despite trillions in assets

It also stipulated that income generated from interest and “activities incompatible to the shariah” should not be greater than 10 percent of a company’s revenues.

The ratio is double the standard 5 percent ceiling usually used by shariah-compliant indices, according to Anwar Misbah Soubra, an assistant professor in Islamic Banking at Beirut Islamic University and a shariah-compliant banking consultant. It makes the EGX33 one of the less strict shariah indices on the market.

The rules also allow for non-EGX100 listed companies to join the index, providing they have a shariah supervisory board.

Beltagy said that many other companies had expressed interest in joining, and the new index was likely to put pressure on existing firms to improve shariah compliance.

Lack of knowledge

Egypt’s Islamic banking sector is relatively small. The government issued its first sukuk, or sharia-compliant equivalent of a bond, only last year, and the majority of Islamic banks in Egypt are owned by companies and individuals based in the Gulf, where Islamic banking accounts for a much larger proportion of the banking sector.

Soubra said he believed the new index would help popularise the Islamic banking sector in Egypt which, he said, suffers from “a lack of knowledge” and familiarity with Islamic banking practices.

One of the aims of the new index is to attract investment from the Gulf. Amr Abol-Enein, CEO of CI Capital Asset Management, said that the EGX33 should attract some of the new GCC investors in the market, and maybe Europeans who are looking for shariah-compliant underlying assets.

Abol-Enein said that CI Capital Asset Management may launch the first shariah-compliant index tracker fund for Egypt at the start of July. “The target for us is to have that fund among the top five largest funds in the Egyptian market,” he said.

The asset management company Azimut told Al Borsa newspaper that it had also filed an application with Egypt’s Financial Regulatory Authority for a new shariah-compliant fund that it hopes to launch before the end of the year.

Islamic finance is a growing industry worldwide. The Egyptian Islamic Finance Association said it was expected to grow to EGP215 trillion by the end of this year, from EGP191 trillion at the end of 2023.

The association measured the size of the domestic Islamic banking sector at EGP600 billion at the end of last year.

Beltagy said he believed that figure has since grown to EGP800 billion, with a growth rate of around 22 percent per year. He believes the new index will add to the momentum and help the sector to grow further.

“I expect that the Islamic banking and lending sector will reach EGP1 trillion by the end of the year, God willing,” he said.