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Islamic bonds and the new constitution

Abdel Monem Said

Published: Updated:

No sooner had the Egyptian constitution been adopted, than it was made clear that modifying it was possible. That is probably why even before the constitutional referendum began, President Mohamed Mursi decided to have the opposition and experts prepare a list of the articles that they believed were defective and needed revision by the legislature, then put to another referendum.

Islamic bonds are to be issued by the Egyptian Finance Ministry, which according to Article 4 of the constitution needs to consult al-Azhar University, which in turn would consult Article 2, which states that the principles of Islamic law are the main source of legislation.

Those ‘principles’ are defined in Article 219 as those in line with authorized Islamic schools of thought and jurisprudence. Based on all this, and after consulting the Supreme Council for Islamic Affairs and senior economic experts from al-Azhar, the final decision was that those bonds do not comply with Islamic law.

The idea of bonds is not new, and does not necessarily have an Islamic frame of reference

Abdel Monem Said
The idea of bonds is not new, and does not necessarily have an Islamic frame of reference. Bonds are similar to deeds or stocks, in the sense that they represent the value of a public asset.

Dealing in bonds is beneficial for the purchaser, who receives interest because the profit generated by each bond is divided among its owners and for the community, because bonds create a saving fund that absorbs a percentage of public money into the market.

Bonds, therefore, reduce monetary demands and eliminate one of the main reasons for state inflation. As for the public asset in whose name the bonds are issued, be it a factory or a farm, it gets money that enables it to expand and invest in new assets. Consequently, growth is achieved without burdening the community or the state.

Thus, the idea of bonds is beneficial for several parties, and is considered one of the many ways in which all, or some, public assets are privatized. It worked perfectly in the Czech Republic, but failed miserably in Russia, because in the second case all the money went to the rich.

The Egyptian case

As for Egypt, the idea was discussed a decade ago by then-Minister of Investment Mahmoud Mohei al-Din, who saw it as the best way to get rid of public sector companies that are either losing or nor generating enough profit for the state to support them. There were 314 public sector companies in Egypt, which constituted 18% of the country’s public economy.

Of those, 149 were privatized, either sold to one investor or the workers, or offered as bonds in the stock market. The remaining 165 stayed as they were. The idea of ‘popular bonds’ was seen as the solution, but the initiative was opposed by several entities, including ones affiliated to the state, and which retained their socialist character and rejected all sorts of privatization and the capitalist transformation of the state.

Other entities were staunch capitalists that believed the entire public sector in Egypt was on its way to being dissolved as a percentage of total local revenue, so there was no point in creating futile disputes. The project eventually failed, and the minister who initiated it resigned and took a senior position in the World Bank.

A new trend

This time, it is no longer ‘popular bonds,’ but ‘Islamic bonds’ to follow the general trend. Those who are keen on implementing the project in the Ministry of Finance possibly assumed that inserting the word ‘Islamic’ would render the idea legitimate, and offer a solution for a big part of Egypt’s financial crisis through offering public assets in the form of bonds, that would bump money into the rundown public treasury. The last thing the ministry expected was for the objection to come from al-Azhar.

Its objection came in an unexpected way, for it was based on two Islamic rules: first, that it is not permitted, according to authorized Islamic schools of thought, to sell public Islamic assets in the form of bonds; and second, that foreigners might be able to buy public Egyptian assets of extreme strategic importance, such as the Suez Canal, for which generations of Egyptians sacrificed their lives.

I am not an expert in jurisprudence in order to judge the degree of the project’s compliance with Islamic schools of thought, but no doubt there is a problem. Egyptian assets are already dealt in through the country’s stock market, and the problem is that they are very difficult to sell due to the circumstances which Egypt is experiencing.

What makes the matter more complicated is that it is not known which religious matters al-Azhar would be consulted on, what would have happened had the Ministry of Finance overlooked the university’s advice, and if, in this case, pious Egyptians would still buy bonds labeled ‘illegitimate’ by al-Azhar.

Historical differences

There are many questions. The likes of most public assets that are now to be turned into bonds did not exist in the early Islamic era so that a comparison could be made. We know that cattle and palms were private property, and pasture and grass were public property. It was probably different in the Nile valley, and those of the Tigris and Euphrates, where agriculture and other forms of crafts were practiced.

However, the difference is still huge between one era and another, and perhaps the Egyptian Consultative Assembly will manage to bridge the gap. When jurists study the matter thoroughly, they will either find a way that makes the selling of Islamic bonds legitimate, or admit that it is not worth the hassle. In any case, the Muslim Brotherhood’s Freedom and Justice Party possibly knows the right interpretation.

This article was first published in Asharq al-Awsat on Jan. 9, 2012: http://aawsat.com/leader.asp?section=3&issueno=12461&article=712385

(Abdel Monem Said is the director of al-Ahram Center for Political and Strategic Studies in Cairo. He was previously a board member at Egypt’s Parliament Research Center at the People's Assembly, and a senator in Egypt's Shura Council.)

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