This month, the Central Bank of Egypt (CBE) removed previously imposed limits on foreign currency transfers abroad. The US$100,000 cap had been in place since shortly after the 2011 protests. Foreign currency transfer limits were both symptomatic and contributing factors in Egypt’s economic crisis. The overall decrease in foreign direct investment pushed the CBE to retain as much foreign currency as possible, while the limits that were put in place reduced foreign companies’ willingness to invest in Egypt, given restrictions on their ability to repatriate funds through the banks.
The floating of the Egyptian pound, however, has increased the CBE’s reserves of foreign currency. In May 2017, the reserves reached US$31.1 billion, up from US$28.6 billion the previous month, according to Trading Economics based on data from the central bank. This rebound rendered the foreign currency transfer cap unnecessary. The CBE’s decision has not only reduced the potential costs of investing in Egypt, but it has also created an environment that is friendlier to Islamic investment instruments such as Sukuk.
Large-scale international investment projects require the ability to transfer large sums of money abroad, and investment projects launched through Islamic finance instruments are no exception. Take for example, asset-based Sukuk issued in foreign currency with the assets located in Egypt and the SPV located abroad. Should the assets generate profits in excess of US$100,000, the transaction costs of transferring the funds to the SVP would increase, which would decrease the overall profit of the investment scenario.
Another example is a Salam sales transaction, in which the purchaser specifies the assets to be delivered, and pays the price in advance. This type of transaction is useful for the purchasing of raw materials to be used in building or manufacturing projects. If the purchaser is located in Egypt and the seller of the raw materials is located abroad and demanding payment in foreign currency, then the value of the materials could not exceed US$100,000 for a single transaction, unless the payment is spread out over multiple transactions, leading to inefficiency. The CBE’s lifting of the foreign currency transfer cap will lead to an overall increase in the value of investment projects and of international transactions between Egyptian companies and their foreign counterparts.
It would be wise and advantageous for Islamic financial institutions both in Egypt and abroad to take advantage of this decision and expand the scope and value of investment projects. In 2016, Faisal Islamic Bank enjoyed a net profit of US$2.89 billion despite the difficult conditions afflicting the country. The CBE’s decision, in tandem with the eventual passage of the long-anticipated Sukuk law, could lead to a new renaissance for Shariah compliant investment in Egypt.