Islamic bonds poised to meet Kenya’s infrastructure gap

Stats

-Sukuk bonds afford investors the opportunity of direct participation in the projects, and Sukuk markets have potential to be a source of funding for long term projects
– They can also be used by an institution to unlock funds tied up in assets through monetisation for the purpose of reinvestment
-Fitch expects government debt to rise to 51.2perent of GDP by FY2016, from 43.3percent in FY2013 and 36.9percent in FY2008.

Kenya is slowly embracing large-scale Islamic finance as countries like South Africa and Senegal among other economies seek to tap cash-rich Muslim investors to finance infrastructure projects.

 

The market for Islamic bonds or Sukuk received a boost last year in December when Treasury Cabinet Secretary Henry Rotich indicated he would debut issuance of Sukuk in the current financial year – as the instrument emerges as a potential game-changer in the country’s financial sector following the success of Eurobond that raised over $2billion in June 2014.

 

But a new report  by Standard & Poor’s Ratings Service casts doubt on the efforts being made and has cited lack of proper regulatory framework as a big hindrance to the country’s aspiration to develop 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 & Poor’s credit analyst Samira Mensah, who thinks African governments, Kenya included will take time to introduce new regulation and fiscal adjustments to foster Sukuk markets while at the same time increasing investment options for potential investors, and attract 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) has compelled several economies to venture beyond their borders in pursuit of investment opportunities, which have triggered appetite for Shari’ah compliant products.

 

Kenya for instance heavily relies on debts from Chinese firms to finance its infrastructure projects.

 

The report further recommends that Kenya adjust its tax regimes in order to encourage Sukuk issuance as well as engage local players conversant with Islamic financing including Shari’ah 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.

 

According to Gulf African Bank (GAB) CEO Abdalla AbdulKhalik, the Central bank needs to critically engage local Shari’ah 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, who 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 this writer.

 

Kenya’s public finances have loosened steadily over the past decade, and according to Fitch Ratings, Kenya’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+’.

 

Written By:  Steve Umidha