ISLAMIC BANKING BULLETIN

Islamic Banking BulletinOctober – December 2020Country Model: Egypti.IntroductionThe Arab Republic of Egypt is a Mediterranean country bordering the Mediterranean Sea, betweenLibya and the Gaza Strip, and the Red Sea north of Sudan. The country is bisected by the fertile Nilevalley where major economic activities take place. Over time, Egypt’s economy has been shiftingfrom a highly centralized economy to an open economy. Its economy mostly depends on agriculture,petroleum, natural gas and tourism.ii.Legal and Regulatory Framework for Islamic BanksThe banking sector in Egypt is regulated by the Central Bank of Egypt. Both conventional and Islamicbanks are regulated by a single regulatory framework, except the decentralized Shariah board whichregulates Islamic financial activities and Shariah compliance. Notably, the establishment of Islamicbanks in Egypt were permitted under the special Law No. 48 enacted in 1977.In April 2013, “Sukuk Law” was passed but could not be implemented due to changes in politicalenvironment. Later in 2017, the government attempted to regulate the issuance of Sukuk byapproving amendments to Law No 95 of 1992 of the Capital Market Law, including recommendationsto repeal the 2013 Sukuk Law and the establishment of a new legislative frameworkfor Sukuk issuance and trading in the country.In 2017, AAOIFI conducted its first ever public hearing in Egypt concerning itsnew Shariah governance and ethical standards with the cooperation of the Egyptian Islamic FinanceAssociation, covering the sale of debt, the external Shariah audit and the Shariah compliancefunction at Islamic financial institutions.iii.Islamic Banking and FinanceMit Ghamr Savings Bank was established in 1963 and is commonly referred to as the first Islamicbanking prototype in the world. Mit Ghamr banking practices were known to be Shariah compliant,albeit, without the suffix of ‘Islam’ in it. The bank faced closure in 1967 due a number of reasons.Nonetheless, after Islamic banking and finance was formally incorporated in the Egyptian financialsystem in 1970s, Mit Ghamr Bank was recognized as the first Islamic financial institution in thecountry.Post enactment of Law No. 48 in 1977, Faisal Islamic Bank was the first full-fledged Islamic bankestablished in 1979, whereas the first Islamic window is considered to be set up by Banque Misr in1980. At present, there are three full-fledged Islamic banks in Egypt: Faisal Islamic Bank, Al BarakaBank Egypt, and Abu Dhabi Islamic Bank Egypt having 138 Islamic Banking branches in the country.There are 14 conventional banks operating Islamic windows, offering Shariah compliant productsand services. As of September 2019, the country Islamic banking assets stood around 7 percent ofthe domestic banking assets and contributes 0.8 percent of the global Islamic banking industry assets(Islamic Financial Stability Report, 2020).6

Islamic Banking BulletinOctober – December 2020The Ahil United Bank, which currently offers Shariah compliant products on Islamic window basis,plans to convert to a full-fledged Islamic bank. Currently, there are two full-fledged lease companieswhich offer Shariah compliant products allowed under the recent mortgage laws.iv.TakafulThe Takaful sector in Egypt is making progress since its inception in 2003. The Saudi EgyptianInsurance established in 2003, was the first Takaful insurance company in Egypt. Currently, theTakaful sector comprises of nine companies and contributes 12 percent of the insurance business.The Egyptian Financial Supervisory Authority regulates the Takaful sector and does not allow theoperation of Takaful windows yet. Early in 2020, a state-run Misr Insurance Holding signed anagreement with the National Bank of Egypt and Banque Misr to establish a life Takaful insurance firmwith a capital of US 9.42 million. In April 2020, the Financial Regulatory Authority approved the reTakaful operator Kenya Re to enter the Egyptian Islamic reinsurance market.v.SukukThe Egyptian government planned to issue sovereign Sukuk of worth US 1.5 billion in 2012, however,it could not materialize its plan despite new regulations being issued to support the Sukuk market.Moreover, Civil Aviation Finance and Operating Leases Co., or CIAF-Leasing dual currency SukukMurabahah facility worth US 50 million has been delayed at least three times due to legal issues.A positive development in Sukuk market took place in the beginning of 2020, when the Egyptianholdings company Talaat Moustafa Group’s construction and real estate subsidiary ArabCompany for Projects and Urban Development issued its first corporate Sukuk. The EGP2 billion(US 126.78 million) facility is also the largest Egyptian pound-denominated debt issuance in thecountry’s financial markets to date. The landmark issuance of first corporate is considered a promptfor other corporates looking to issue Sukuk.vi.ConclusionBeing a populous Muslim country, home to the oldest seat of Islamic learning “Al Azhar” andreputable Shariah scholars, the Islamic banking and finance has a great potential for growth in Egypt.Islamic banking and finance is the area where Egyptian government can focus and play its role in theglobal Islamic finical services industry. Further, development of Sukuk market and strengthening ofregulatory framework for Islamic banking would facilitate further growth of Islamic banking in Egypt.Source of Information IFSB Islamic Financial Services Industry Stability Report 2020 Islamic Finance News {https://www.islamicfinancenews.com/brunei} Website Central Bank of Egypt {https://www.cbe.org.eg/en/Pages/default.aspx} The World Bank {https://www.worldbank.org/} International Monetary Fund {https://www.imf.org/external/index.htm} Global Islamic Finance Report{ http://www.gifr.net/gifr} Central Intelligence Agency the Fact Book gypt/#economy} IIFM Sukuk Report IFM-SukukReport-9th-Edition.pdf}7

Islamic Banking BulletinOctober – December 2020AAOIFI Shariah Standard No. 23 on ‘Agency and the Act of an Uncommissioned Agent(Fodooli)’State Bank of Pakistan, vide IBD Circular No. 01 of 2020, has adopted three AAOIFI Shariah Standards:(i) No. 19 Loan (Qard), (ii) No. 23 Agency and the Act of an Uncommissioned Agent (Fodooli) and (iii)No. 28 - Banking Services in Islamic Banks. In the current issue, an abridged version of Standard No.23 ‘Agency and the Act of an Uncommissioned Agent (Fodooli)’ is being presented below along withthe amendments recommended by the Shariah Advisory Committee of the State Bank of Pakistan.1. Scope of the StandardThis Standard covers agency and the acts of an uncommissioned agent in concluding contracts onfinancial transactions (such as sale, Ijarah and compensatory reconciliation), disposing of assets,providing services and conducting practical acts such as receipt, payment and delivery. TheStandard also covers areas such as fund management, real estate and investment agency.However, it does not cover agency and the act of an uncommissioned agent in several other affairsof life.2. Agency2/1 Definition, permissibility and characteristic of agency 2/1/1 Agency is the act of one party delegating the other to act on its behalf in what can bea subject matter of delegation and it is, thus, permissible. 2/1/2 Agency is, basically, a non-binding contract for both the parties thereto. However, itmay sometimes become a binding contract.2/2 Basic elements of agency 2/2/1 The basic elements of agency include the form, the subject matter of agency, and thetwo parties to the contract (the principal and the agent). 2/2/2 The form of agency comprises any act that customary practices traditionally considera delegation of the right to acting by someone on behalf the other. 2/2/3 Agency may take place in any of the following forms: 2/2/3/1 Immediate Agency 2/2/3/2 Conditional Agency 2/2/3/3 Future Agency 2/2/3/4 Agency, whether free or limited, shall be subject to specific conditions. 2/2/4 While conditionality and limitation may be resorted to in concluding agency contracts,they may also be confined to the disposal of the subject matter of agency. 2/2/5 The subject matter of agency is for what the contract is entered into. 2/2/6 The two parties to the contract are the principal and the agent.3. Conditions on the Agency Parties3/1 Conditions on the principal 3/1/1 The principal should possess legal capacity to enter into contract. 3/1/2 The principal should have the right to dispose of the asset in question.3/2 Conditions on the agent 3/2/1 The agent should have full legal capacity.8

Islamic Banking BulletinOctober – December 2020 3/2/2 The agent should be aware of his status as an agent.3/3 Conditions on the subject matter of the agency 3/3/1 The subject matter of agency should be known to the agent. 3/3/2 It should be owned by the principal, or he has the right of deposing thereof. 3/3/3 It should be something that can be disposed of through agency.4. Types of Agency4/1 Agency may take the following forms: 4/1/1 Specific versus general agency. General agency includes all methods of disposing ofassets provided that the interest of the principal and the customary practices are wellobserved. 4/1/2 Limited versus absolute agency. Absolute agency is bound by customary practices andthe interest of the principal. 4/1/3 Paid versus non-paid agency. 4/1/4 Binding versus non-binding agency. 4/1/5 Temporary versus continuous agency.4/2 Paid agency 4/2/1 Paid agency is permissible in Shari’ah. 4/2/2 When agency is paid, it falls under the Shari’ah rulings on Ijarah. 4/2/3 The amount payable as remuneration for agency should be known. 4/2/4 When remuneration for agency is not specified, it may be measured in terms of theprevailing market rate for similar effort. 4/2/5 Remuneration for agency may be any gain in excess of a specific amount of output ofthe operation, or a share of the output. 4/2/6 A certain share of the output may be added to the specific remuneration of the agent,as a motivation. 4/2/7 When the agent, for no reasonable excuse, refrains from carrying on agency that hehas been paid for, and the work he has done was beneficial, he becomes entitled to theremuneration commensurate with the part of work done, and within the limits of thecontract value for that part of work.When the principal, for no reasonable excuse, forces the agent to discontinue the workbefore the end of the agency period, the agent becomes entitled to the full remunerationagreed upon.When the principal, for a valid reason, forces the agent to discontinue the work before theend of the contract, the agent becomes entitled to remuneration for that part of work hehas already performed. 4/2/8 Damage of the subject matter of agency does not relieve the principal from payingremuneration to the agent for the part of the work the latter has already performed.4/3 Binding agencyAgency is, basically, not binding. However, agency becomes binding in the following cases: 4/3/1 When it involves rights of others. 4/3/2 When agency is a paid agency.9

Islamic Banking BulletinOctober – December 2020 4/3/3 When the agent commences tasks that cannot be discontinued or phased out withoutcausing injury to him or to the principal. 4/3/4 When the principal or the agent undertakes not to revoke the contract within a certainperiod.4/4 Temporary agency 4/4/1 Basically, agency has no time limit beyond which the contract becomes no longer valid,because the agent can be terminated at any time. 4/4/2 The effect of specification of a time limit for agency is confined to restrain the agentfrom commencing new operations subsequently. 4/4/3 Unless the contract stipulates otherwise, the agent may commence new operationsduring the contract period even if the effects of such operations will succeed the period ofthe contract.5. Commitment of the Principal and the Agent5/1 Commitments of the principal 5/1/1 In contract of procurement agency, the price and other expenses should be borne bythe principal. 5/1/2 In paid agency, the principal should pay the agent the amount of remuneration agreedupon in the contract. 5/2 Commitments of the agent The agent is considered as a trustee in holding the asset in question, and therefore, he is notbound to indemnify the principal for that asset in case of damage.6. Stipulation of the Agent6/1 Performing deals with one’s self and relatives 6/1/1 In case of deals that involve relatives who are under the guardianship of the agent, ordeals that involve the agent’s spouse, the agent should obtain the consent of the principal. 6/1/2 An agent should not conduct deals with his own self or with his son/daughter who isstill under his guardianship, or with his partner (Sharik) in the same contract. 6/1/3 The agent should not act for both parties to the contract. 6/1/4 An agent may purchase what he has bought for the principal, by way of offer andacceptance.6/2 Monitoring of the provisions and the rights of the contractMonitoring the provisions of contract is the responsibility of principal, whereas monitoring theactivities is the responsibility of agent.6/3 Breach of contract stipulations 6/3/1 When the agent breaches the contract in a way that does not serve the interest of theprincipal, the latter is free to maintain the contract or declare it invalid. 6/3/2 When the agent breaches the contract by purchasing at a price that exceeds both themarket price and the price set forth by the principal, he should compensate the principal forthe difference between the purchase price and the market price.10

Islamic Banking BulletinOctober – December 20206/4 Appointing a subagentThe agent has no right to appoint a sub-agent except with the permission of the principal.6/5 Appointing more than one agentWhen more than one agent are appointed in the same contract, none of them should becomethe sole decision-maker unless with the authorization of principal.7. Expiry of Agency7/1 The agency contract expired in the following cases: 7/1/1 The contract expires when the principal or the agent dies or loses legal capacity orwhen the Institution undergoes bankruptcy or liquidation. 7/1/2 When the principal terminates the agent or the latter resigns. 7/1/3 When the agent completes the work assigned to him in fixed task agency or theprincipal performs the task in question. 7/1/4 When the principal no longer owns the asset in question or the principal has lost theright of disposing thereof. Agency also expires if the principal has performed the work, orthe subject matter of agency no longer exists. 7/1/5 At the occurrence of the incidence that has been stipulated for ipso facto expiry of theagency. 7/1/6 At the expiry of the contract term in temporary agency. In this case, the contract maybe extended to the required term when necessary.7/2 Interminable agency remains effective even after the death of the principal or liquidation ofthe Institution. It continues up to the end of the subject matter of agency.8.Act of an Uncommissioned Agent (Fodooli) 8/1 An uncommissioned agent (Fodooli) is a person who discharges (in the absence of anyneed or urgency) the affairs of others without being an agent or having a right to do so byvirtue of Shari’ah. 8/2 The approval or denial of a contract concluded by an uncommissioned agent is subjectto the discre

Islamic Banking Bulletin October - December 2020 1 Progress & Market Share of Islamic Banking Industry Overview During the quarter under review (October-December 2020), the asset base of Islamic Banking Industry (IBI) grew by 12.1 percent (Rs. 461 billion) and reached Rs. 4,269 billion. Similarly, the