Kenya’s First Shariah-Compliant Bond
An Islamic law or Shariah-compliant bond (Sukuk) aimed at reducing domestic borrowing and lowering interest rates will be issued in the next financial year. This comes as the country chose to borrow an additional $750 million from its maiden $2 billion Eurobond issued at the start of this financial year. Plan to introduce the bonds was launched in 2009.
Sukuk offers a wide range of benefits to the economy in terms of liquidity management, fundraising, balance sheet management and securitisation. A mix of Sukuk actively traded in the secondary market helps manage liquidity for Islamic financial institutions. For instance, a bank with excess liquidity may choose to invest in Sukuk which affords it a return and can be traded as well.
Parliament is set to consider a recommendation by its finance committee to double the government’s external debt ceiling to $28 billion by tapping into capital from Arab states with cash from oil, in order to fund the megainfrastructure projects such as the new Standard Gauge Railway, Lamu Port, roads and power plants.
According to Henry Rotich, Cabinet Secretary for Finance, the cabinet secretary for the Treasury, said the re-opening of the Eurobond, which is expected to be completed on Wednesday, had given the government time to prepare the documentation for the Sukuk issue.
“We will prepare for Sukuk but for the next financial year,” he said in a statement. He, however, did not indicate the potential size of the bond.
Islamic banks have grown in the Kenyan banking sector since being the first country in Eastern and Central Africa to allow Islamic banking, through First Community Bank and the GulfAfrican Bank (GAB) in 2007, catering to customers who want to follow Islamic rules by avoiding direct payment or earning of interest - viewed as extortion under Islamic law.
GAB invested KSh500 million ($6.2 million) in the Sukuk portion of a government infrastructure bond issue in 2009 and received a 13.5 per cent rate of re- turn, according to Central Bank of Kenya figures.
The growth is so rapid that it is becoming an integral part of the mainstream global economy and changing the financial landscape. It is being driven by the sustained interest in Islamic finance by conventional financial institutions. The Sukuk market is currently valued at $270 billion (Sh24.5 trillion).
Islamic banking already operates in nine African countries but several others including Tanzania, Malawi, Zambia and Uganda are in the process of licensing Islamic banks. The West African nation of Senegal is also planning to issue its first sovereign Sukuk later this year