CAIRO // When Ahmed El Naggar opened the world's first Islamic bank in Egypt in 1963, the country looked as if it could harness that legacy to grow into one of the biggest Islamic finance hubs in the world.
But years of suspicion that the Muslim Brotherhood, illegal at that time, would use Islamic finance as a way to gain prominence in the country has left Egypt trailing behind its Arabian Gulf neighbours mainly because no tight regulation or laws have been implemented.
As Egypt's first Islamist president Mohammed Morsi takes the helm, the country's Islamic finance fortunes are beginning to look up.
The Muslim Brotherhood wants to boost the market share of Islamic banks to 35 per cent in five years from 5 per cent now. It also wants to add an Islamic banking section to the country's banking law, which currently has no specific regulations covering the sector. Analysts say the draft amendments, although delayed by the dissolution of parliament, signal an opportunity to quicken the pace of Islamic finance development in Egypt.
"The Arab Spring opened the door to Egypt's re-entry into Islamic finance in the coming six months and the pace is going to be quicker with Islamists in power," said Shahinaz Rashad, the executive director of Metropolitan, a financial consultancy firm that has also worked on carrying out Sharia-compliant transactions.
She said Islamic finance could be one alternative to hugely unpopular taxes and cuts in government spending to reduce budget and balance of payments deficits inflated by a year of political and economic turmoil.
In February, the Egyptian government said it was preparing to raise US$2 billion (Dh7.34bn) through its first issue of Islamic bonds to help to plug the deficit gap, which is equivalent to 8.8 per cent of GDP. Soon after, the country's regulator said it was finalising regulations that would allow local companies to issue Islamic bonds, a much-awaited move expected to boost market liquidity.
The Egyptian government also signed an agreement this month with the Islamic Development Bank, based in Saudi Arabia, that will provide $1bn to finance energy and food imports.
The finance, which is part of a previously announced agreement to provide Egypt with $2.5bn, signals that Egypt must operate some of its financing in a Sharia-compliant manner, said Ms Rashad.
Egypt's economy was badly damaged after a drawn-out uprising that began early last year. International reserves had fallen to $15.53bn by the end of last month from $36bn in January last year and the balance of payments deficit has doubled to $11.2bn in the nine months to March this year from $5.5bn a year earlier.
Islamic banking may not offer a "fix-all" for Egypt's economy, analysts say, but it would encourage a fairer playing field.
Egypt now has 14 Islamic banking licences but only three fully fledged Islamic banks, including Faisal Islamic Bank of Egypt, Al Baraka Banking Group, headquartered in Bahrain, and Abu Dhabi Islamic Bank of Egypt. Despite several more lenders with Islamic finance windows, the approximately 120bn Egyptian pounds (Dh71.66bn) of assets in Egypt's Islamic banking industry are dwarfed by Egypt's conventional banks.
Total assets of the entire banking sector are about 1.3 trillion pounds, according to Egypt central bank data.
Bankers say the country has to work more to convince international investors that Egypt's sukuk is worth buying.
"There is no accepted benchmark for the sukuk business in Egypt …so for a company in Egypt to issue a sukuk instrument and be in a position to have an investment grade instrument is pointless because nobody would buy it," said Douglas Johnson, an investment banker based in New York and the chief executive of Codexa, a specialised investment bank that creates Sharia-compliant financial structures.
He said better regulation and a stronger capital market law was needed before Egypt could begin to attract the billions of dollars of sukuk investment Saudi Arabia, Malaysia and other Islamic finance hubs were getting.
"The next government in Egypt is going to have to prioritise getting the economy back to shape before restructuring and, to be brutally frank, Islamic finance probably has to stand in line," said Mr Johnson.
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