Framework gaps to delay Sukuk issuance

Business Daily Kenya:  Kenya’s debut entry into the Islamic bond (Sukuk) market is expected to take much longer due to absence of liquidity...

Business Daily Kenya: 

Central Bank of Kenya in Nairobi. Photo/FILE

Kenya’s debut entry into the Islamic bond (Sukuk) market is expected to take much longer due to absence of liquidity management guidelines by Central Bank of Kenya (CBK).

International Monetary Fund (IMF), in a report, has cited lack of liquidity provision for Islamic Banks (IBs) as well as slow pace of development of Shariah-compliant money markets, as the main reasons holding back strides made in pushing through legislation to permit the bond’s issuance.

“Kenya does not have a Sukuk market yet, CBK does not have liquidity provision or absorption operations for IBs. IBs, however, have access to overnight standing credit facility for acceptable collateral such as government securities.

IBs also have access to interbank markets for conventional banks, though this might raise Shariah-compliance issues,” reads the report released last week.

These factors are threatening approval of Islamic debt while at the same time pilling pressure on government finances. Last week, President Uhuru Kenyatta signed into law the Stamp Duty Act, among other bills that provide Islamic financial products with tax neutrality to enable them to compete favourably with conventional products, but the IMF favours full appraisal into existing gaps in the Shariah governance framework.

Treasury had proposed, in its 2017/18 Budget, amendment of Public Finance Management Act to pave way for issuance of sovereign Sukuks as an alternative source of financing to the country’s development projects.

The proposals also called for amendments on tax statutes which will provide equivalent tax treatment of new financial products in Islamic finance. Sukuks are bonds that generate returns to investors without infringing on Islamic law – which prohibits riba or interest.

Sukuk bonds afford investors the opportunity of direct participation in the projects and have the 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 purpose of reinvestment.

Gulf African Bank Chief executive Abdalla Abdulkhalik has consistently blamed CBK for lack of proper engagement with Shariah compliant banks in developing the bonds.

“It’s important that we issue Sukuks sooner before we are downgraded further since our local debt is likely to get worse,” he said in a previous interview. Kenya has for years relied on debts from Chinese firms to finance its mega infrastructure projects that include roads, railway and bridges.

In 2015, the Standard & Poor report recommended that Kenya adjusts its tax regimes in order to encourage Sukuk issuance as well as engage local players conversant with Islamic financing.

“We believe the 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 in 2016.

The country’s attempt to borrow Sh50 billion through an Islamic model, failed on right regulatory requirements in 2014, but the country’s ranking according to Fitch Ratings would be a valuable factor. Kenya successfully raised over $2 billion (Sh200 billion) Eurobond in June 2014.

The post Framework gaps to delay Sukuk issuance appeared first on Mediamax Network Limited.

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