I LEGISLATIVE AND REGULATORY FRAMEWORK
i Legislative and regulatory regime
Egyptian law does not have a codified definition as to what constitutes Islamic finance or an Islamic financial instrument, as the Egyptian Civil Code is meant to be compliant with Islamic shariah. However, the following points are worth mentioning:
- Banks can offer corporate or retail products denominated as 'Islamic' upon obtaining a relevant licence from the Central Bank of Egypt (CBE) (e.g., an ijarah licence or a sukuk licence). Only licensed banks can request these licences from the CBE.
- Takaful insurance is also regulated by the Financial Regulatory Authority (FRA) and there are licensed takaful insurance companies operating in Egypt. It is expected that a new version of Law No. 10 of 1981 (the Insurance Law) will be issued to take takaful insurance into account. Non-banking financial activities are generally subject to FRA supervision with the FRA board regulating said activities by way of decrees and FRA board resolutions.
- Sukuk are the most specifically regulated Islamic financial instruments, by virtue of Law No. 95 of 1992, as amended by Law No. 17 of 2018 (the Capital Markets Law), which covers all envisaged sukuk types, the issuance regime and redemption rights, with FRA being the competent regulator. Note, however, that as a matter of practice there has been no major sukuk issuance to date. It is also worth noting that Law No. 148 of 2001 (the Real Estate Finance Law), as amended, recognises ijarah as a method of financing real estate and defines it as the leasing of real estate ending with ownership. The Capital Markets Law prescribes different structures, including, inter alia, sukuk murabahah, sukuk istisnah and sukuk ijarah. In addition, the Real Estate Finance Law allows for all types of ijarah in relation to real estate in Egypt.
ii Regulatory and supervisory authorities
The two main bodies competent to regulate and supervise Islamic finance activities are (1) the CBE, which is the entity competent to grant licences to Egyptian banks seeking to offer Islamic finance products; and (2) FRA, which grants licences for takaful insurance activities (in addition to its general competence to oversee financial non-banking activities, including those activities that are structured or branded as Islamic). Only banks registered with the CBE can request the licence mentioned at (1) and such banks must have established a competent shariah board, as a matter of standard market practice based on best international market practice.
Regarding financial non-banking activities, FRA Board of Directors' Resolution No. 8 of 2014 provides that an investment fund or a takaful provider that offers products marketed as 'compliant with shariah provisions' must establish a board to ensure compliance with shariah principles (i.e., the shariah board, similar to the board established by banks offering 'Islamic products'). Takaful companies as such are subject to shariah audit by FRA. The board's members must be chosen from a list of scholars and professionals registered with FRA, in a special register made for that purpose. FRA also has its own shariah board, which, as a matter of practice, serves to provide supervision and follow-up to the FRA board on products deemed Islamic.
II COMMON STRUCTURES
Most major Egyptian banks offer a range of Islamic corporate and retail finance products, and have their own shariah boards. These banks may also offer conventional finance products in addition to Islamic products. For large-scale greenfield projects or asset acquisition financing, it is typical to have an international bank or development finance institution participate in the financing (with a shariah-compliant mandate forming a part of the finance scheme), with ijarah being the most commonly used tool. Because there is no specific regime under Egyptian law for ownership in Islamic finance transactions (since Egyptian law only recognises the transfer of title of real estate by way of official notarisation, which can be impractical in the case of Islamic financing owing to the timescales involved), Egyptian banks must proceed with an Islamic transaction as if it is a conventional one. For example, in an ijarah, whenever a bank is leasing an asset to a lessee, it is considered as the owner of said asset under the finance documentation, but the lessee will remain the registered owner and will provide a security on said asset to the bank. Egyptian companies must also adopt the Egyptian Accounting Standards for auditing purposes, even if the documentation provides for other accounting standards (e.g., those of the Accounting and Auditing Organization for Islamic Financial Institutions).
Egyptian banks with a licence from the CBE offer a range of shariah-compliant products, including murabahah, for consumer goods purchases (with purchase of cars being relatively successful) and banks have also started to offer service ijarah to finance service needs, in particular in the healthcare and education sectors.
There is no specific treatment for Islamic financial products under Egyptian law. As long as the provider of the financing is a licensed bank, the transaction will be treated as a financing by the Egyptian tax authorities and, accordingly, the general tax provisions under Egyptian law would apply, including withholding tax, stamp duties, income taxes and VAT.
There is no specific insolvency or bankruptcy regime for Islamic finance participants under Egyptian law. The Egyptian bankruptcy regime was previously set out in the Egyptian Commercial Code; however, a new Bankruptcy Law2 was issued recently. The competent Egyptian commercial courts would adjudicate insolvency and bankruptcy-related disputes, regardless of whether the creditors or debtors have used shariah-compliant products in their dealings. As a matter of Egyptian law, the main criterion for the determination of an Egyptian court in relation to any bankruptcy proceeding would be the debtor's general inability to meet its debts when they fall due. The Bankruptcy Law introduces a new approach in dealing with persons and entities who are facing financial or administrative distress, such as: mediation, restructuring procedures and company rescue procedures, giving both debtors and creditors a higher degree of flexibility in dealing with debts.
V JUDICIAL FRAMEWORK
There is no separate court system for Islamic finance products or participants. Civil courts or the economic courts would have jurisdiction to oversee disputes in this area (or arbitration, if agreed upon by the parties in their contractual arrangements). There is no separate legal regime for shariah under Egyptian law. However, it is worth noting that the Egyptian Constitution provides that shariah is one of the country's principle sources of legislation. To the extent that a shariah principle is claimed, Egyptian courts would have a discretionary authority to apply that principle in light of Egyptian legislation and public order.
There have been no recent cases in Egyptian courts relevant to the topic of Islamic finance.
Although one of the earliest modern finance initiatives intended to be shariah-compliant was in Egypt (Mit Ghamr Savings Bank, 1963), Islamic finance has not yet picked up in Egypt. The association made by the general public between Islamic finance and various pyramid schemes dubbed 'Islamic' in the 1980s and, more recently, certain political groups, is often said to be part of the reason for this. This is changing, however, as several 'Islamic banks' have started operating in Egypt, whether directly (such as Abu Dhabi Islamic Bank, which has an Egyptian presence) or through specific project financing, often with a development angle. The Islamic Development Bank's Islamic Corporation for the Development of the Private Sector is a notable example of this. There are also signs that the regulatory landscape is starting to integrate Islamic financial concepts. Sukuk have been regulated since 2013, and there have been announcements that a new Insurance Law will explicitly recognise and regulate takaful. Also, as clarified above, FRA is increasingly adapting its tools to oversee financial non-banking products marketed or intended as shariah-compliant.