Kenya is slowly embracing large-scale Islamic finance in what is becoming a growing trend by African countries including South Africa and Senegal to tap cash-rich Muslim investors to finance infrastructure projects.
The market for Islamic bonds or Sukuk, received a major boost last year in December when Treasury Cabinet secretary Henry Rotich indicated he would debut issuance of Sukuk in the current financial year.
The financing model is emerging as a potential game-changer in the country’s financial sector following the success of Eurobond that raised more than $2billion (Sh207.3 billion) in June last year.
But a new report released last week by Standard and Poor’s Ratings Service, cited lack of proper regulatory framework as a big hindrance to the country’s aspiration to developing an Islamic bond.
“We believe legislation gaps are the main causes of delay between a country’s intent to issue and its effective issuance of Sukuk,” said Standard and Poor’s credit analyst Samira Mensah.
She reckons African governments, Kenya included, may not be introducing new regulations and fiscal adjustments to foster Sukuk markets any time soon, while at the same time increasing investment options for potential investors, and attracting a pool of Islamic liquidity.
Sukuk are bonds structured in such a way as to generate returns to investors without infringing on Islamic law —which prohibits riba or interest.
Nascent market activity shows that the increase in commodity prices and huge levels of foreign direct investments (FDIs) have compelled several economies to venture beyond their borders in pursuit of investment opportunities, which have triggered appetite for Sharia-compliant products.
Kenya for instance, heavily relies on debts from Chinese firms to finance its infrastructure projects. The Standard and Poor report recommends that Kenya adjusts its tax regimes in order to encourage Sukuk issuance as well as engage local players conversant with Islamic financing, including Sharia-compliant banks and financial institutions.
“Sharia-compliant instruments require equal treatment with conventional instruments for investors to consider them. Malaysia for instance, introduced various tax incentives that made Islamic finance a cheaper economic alternative for institutions to raise funding,” reads the report.
Central Bank of Kenya, according to Gulf African Bank (GAB) CEO Abdalla AbdulKhalik, needs to critically engage local Sharia-compliant banks and financial institutions in developing the bonds but reckons that no engagement is happening. “CBK has not involved us.
I believe they are talking to other institutions from outside Kenya,” he says. AbdulKhalik believes Kenya’s recent low credit rating might have been caused by increased national debt.
“Its therefore important that we issue the Sukuk sooner before we are downgraded further since our local debt is likely to get worse,” he said during a phone interview with People Daily.
Kenya’s public finances have loosened steadily over the past decade, and according to Fitch Ratings, the country’s long-term foreign and local currency Issuer Default Ratings (IDR) is currently ranked at ‘B+’ and ‘BB-’while the issue ratings on unsecured foreign currency bonds are rated at ‘B+’.