While our research and analysis has sought to identify global trends in the industry, we direct our analysis towards Egypt and its emergence in the Islamic finance industry in this article. In terms of product development, we place our attention on the various Shariah-compliant funds that have emerged over the last few years, and while their number remains small it is the speed of development that is worthy of note.
In contrast to the more established core markets (with Saudi Arabia leading the way in the Middle East and Malaysia in Southeast Asia), Egypt represents one of several regions that are fast developing their capabilities (Pakistan and Indonesia are additional examples of this). In fact we find that a country-specific analysis can shed light on the components that are present (or absent) which will aid current and future market participants. These “periphery” markets, when considered as a whole, represent a fresh source of investment products and new market participants. To an extent, we argue that they constitute a third core market for Islamic finance, and should not be underestimated.
The Egyptian stock market is an interesting one; it became alive between 2002 and 2003, with a curious drop in the number of listed companies in the Cairo and Alexandria stock exchanges from a high of 1,100 listings down to the current tally of 515. While the decline could be attributed to consolidation and/or unattractive de-listings, this certainly boosted the liquidity and market value of the remaining market. In fact, the market capitalisation currently exceeds LE$645 billion (more than triple its 2003 levels), and annual trading volumes of over 6.8 million transactions (a five-fold increase from 2003 levels).
On the other hand, it hasn’t been smooth sailing all along – the CASE 30 tumbled from 8,100 to 4,600 points in early 2006. However, it has gained back most of this lost ground and is now edging close to an all-time high of 8,900 points, as depicted in Figure 1 below.
Another puzzling fact is that despite having a vast Muslim population (more than 90% in a country of 75 million inhabitants), it is clearly lagging behind in terms of the adoption of Islamic financial products and services. The reasons are varied but mostly political in nature: the current political/electoral climate, a hangover from Islamic bank failures in the eighties and regulator predilection towards government-linked banks (ie conventional ones).
Thus, Islamic banks remain a small component of the overall Egyptian financial landscape. However, the last two years have seen a concerted effort to launch Islamic funds and we explore them in the following section.
Figure 1: CASE Index Values (2003-2007)
Source: Cairo & Alexandria Stock Exchange
At first glance, the numbers are not impressive – only four out of a total of 13 funds launched in Egypt between 2006 and 2007 are Islamic funds (all known Islamic funds are summarised in Table 1). However, these funds have managed to raise close to US$100 million between them (bringing the overall total to US$168 million). This has been achieved mostly by tapping into their local investor base although some have made inroads into attracting GCC assets as well.
All of these funds are structured in fairly standard terms – all are equity focused (not so much by choice since Islamic money market and fixed income products have no depth at the moment). They follow fairly standard terms with an average management fee of 0.78% and average performance fee of 11%. Even more interesting is that they don’t owe their existence to multinational banks nor to any mega Islamic bank; they are home-grown across the board.
In terms of performance comparisons to conventional funds, these Islamic funds have mostly underperformed against funds with longer track records (ie more seasoned managers). However this conclusion would be premature since the vast majority of Egyptian funds posted double-digit negative returns in 2006, whereas no data is available for the Shariah-compliant range for this period.
Even more interesting is a comparison between the funds launched in the same time period (between 2006 and 2007). Here Islamic funds have on-par performance to their conventional counterparts, with an Islamic fund so far at the top of the list of year-to-date returns of these “young” Egyptian funds.
Table 1: Islamic Funds in Egypt
(CIB & Faisal Islamic
Bank Mutual Fund)
Commercial International Asset Management
Banque Misr Fund No. 4
HC Securities & Investment
Egyptian Saudi Finance Bank Mutual Fund
Hermes Fund Management
Faisal Islamic Bank of Egypt Mutual Fund
Hermes Fund Management
Prime Asset Management
There is one over-riding component to the Egypt story: diversification. This is particularly of interest in the context of an Islamic portfolio, considering most fund offerings originated in the GCC and Southeast Asia. In this scenario, Egyptian equity markets provide a very low correlation against these and diversification benefits can be expected.
Telling statistics come from S&P, with their Egypt index exhibiting very low correlations against all major market indices (over a 5-year time period). In fact the Egypt index exhibits a very low correlation of approximately 0.35 against the S&P Middle East Africa index. In contrast, Saudi Arabia’s correlation to the same index is above 0.6 and the UAE correlation is higher at 0.8.
Taking it further, the Egypt index’s correlation against the global composite index is only 0.35 (with Malaysia’s correlation being at around 0.6). Few other markets have similar diversification profiles (coincidentally these include Pakistan and Indonesia which we mentioned earlier).
It might be too early to deliberate on Egyptian Islamic funds and the country’s role in the developing of the Islamic finance industry. The support system is below optimal and a far cry from the one present in the UAE or Malaysia, but despite this, the market is making significant inroads in terms of product development and market validation – that is not only encouraging but can only yield positive results. In terms of financial performance, it is too early as well but from a macroeconomic standpoint the stock market trend and the overall correlation factors present investors with a fairly enticing argument in favour of this young market.