Kenya has indicated that it may issue Sukuk before the fiscal year ends to repay some of its liabilities. Market chatters revolve mostly around the East African nation’s crushing debt burden, but some see this as a chance to set a new tone for the country’s Islamic finance industry. VINEETA TAN has the story.
Investors are worried, and so is the Kenyan government. Dollar shortages, escalating energy and food import costs continue to deal paralyzing blows to the Kenyan economy, at a time when the government is scrambling to pay off a US$2 billion eurobond maturing this year.
President William Ruto’s administration is weighing several options, including one where the government would buy back half of the US$2 billion eurobond, a plan that Moody’s Investors Service said it may treat as a default. Not surprisingly, Moody’s stance, which has been called “premature” by the African Credit Rating Research & Advisory, triggered a selloff of the bond and a yield spike.
Another option is to tap the international Islamic capital market through a sovereign Sukuk facility, which has been on the cards for years. The government, in its 2017 budget, outlined measures to allow it to issue Sukuk as an alternative funding source.
“An issuance of the long-awaited Sukuk by the Kenyan government would be a signal to Islamic financiers at large that the country is now ripe for Islamic financing. This may also stir direct Islamic investment in other sectors such as public infrastructure, as we have witnessed in other African countries that have embraced Islamic finance,” opines Anaciata Mbula, a senior partner at Mulu & Abuja Advocates.
The impact could be wider, even bearing regional importance, believes Sheikh Mohamed Issa, CEO of Mayzuh Company, which is advising at least one Kenyan corporate on issuing Sukuk.
“The significance of Kenya issuing a Sukuk bond is huge. Kenya is an economic powerhouse in Africa, and if it adopts Sukuk bonds like Nigeria, it will kick-start the Sukuk bond issuance race in Africa. Tanzania will soon be next, followed by a quasi-sovereign Sukuk by the Zambian government, and then we will see Uganda coming in.”
Regulatory Readiness
Wanting to take that Sukuk step is one thing, but whether the country is ready and capable of doing it is another.
For a population of about 53 million, with only 10% being Muslim, Kenya is ostensibly doing relatively well. It has:
- Three fully-fledged Islamic banks
- Two Takaful operators
- Several Islamic banking and insurance windows
- Islamic cooperatives
However, there is very little activity on the Sukuk front. Further, two of the Islamic banks are struggling financially, with one even being placed under receivership.
Market practitioners believe Kenya’s legal infrastructure is not yet ready to fully embrace Islamic finance and banking.
“The local legislation is not robust enough to support fully compliant Islamic finance at the moment,” Anaciata tells IFN.
“As much as the banking industry has partially embraced Islamic finance over the years, other supporting legislation such as tax laws, securities laws, and even the jurisdiction of the Kadhi’s court to hear Islamic finance matters are yet to be incorporated into the legislative efforts.”
Kadhi’s courts are a system in Kenya that enforces Islamic law on inheritance, family, and succession for Muslims.
Technically, the government can issue sovereign Sukuk, but several key institutions must be aligned for it to happen, according to Dr. Aziza Yarlaeva Ebrahim, the strategy and Islamic finance advisor at the Islamic Finance Think Tank.
She highlights that the Treasury, Central Bank, and Capital Market Authority must all be on the same page to make the issuance happen.
“Islamic financial institutions are currently only recognized through the regulations under the Banking Act but are not regulated by the Central Bank of Kenya. This is about to change if parliament approves the bill and further paves the way for the inaugural Sukuk issuance,” Dr. Aziza shares with IFN.
Two weeks ago, a member of parliament proposed an amendment to the Banking Act of Kenya to empower the central bank to establish a dedicated Islamic banking regulatory framework. Parliament is also discussing a bill to establish a Shariah Advisory Council, which would be a key step toward issuing Kenya’s first sovereign Sukuk.
“The biggest challenge Kenya faces in the Islamic debt capital market is the novelty of the concept—it is not a ‘tried and tested’ product in the Kenyan market,” says Anaciata.
“A lot of policies and laws need to be put in place to create an enabling environment that is certain and predictable. Once these policies are implemented, the market will be ready for Islamic finance.”
Credit Concerns
Another major obstacle to Kenya’s Sukuk ambitions is its deteriorating credit rating.
International rating agencies such as Fitch Ratings and Moody’s recently downgraded Kenya’s credit status:
- Fitch revised the debt outlook to negative while affirming its credit rating at ‘B’
- Moody’s downgraded debt and currency ratings to ‘B3’ from ‘B2’ and also cut its outlook to negative
- S&P Global Ratings is due to release an update on August 25
At the center of these concerns is Kenya’s ability to settle the 2024 eurobond, as its foreign reserves stand at only US$7.4 billion, leaving investors anxious.
Many African nations believe credit rating agencies apply unfair risk perceptions to the continent, explains Dr. Aziza.
“There have been discussions among African nations that the perception of risk continues to be higher than the actual risk, and that credit rating agencies are biased against Africa.
The ‘blanket approach’ used by rating agencies, ignoring the positive developments in Africa, has left only two countries—Botswana and Mauritius—with decent ratings. This makes it extremely difficult for other nations to recover from the post-COVID economic downturn.”
A rating downgrade increases the cost of borrowing, potentially deterring foreign direct investment (FDI), which could make it even harder for Kenya to access international debt markets.
However, Anaciata remains cautiously optimistic.
“Despite the downgrade due to perceived political instability and national debt, the Kenyan government has assured investors that it is implementing financial policies to shield the country from a financial crisis and build forex reserves.
While FDI may slow down, many debt providers are still willing to invest in Kenya’s market, which has been flourishing for years.”
Repeated Recurrence
It is unclear whether Kenya will raise Sukuk to repay its eurobond, as it is also considering a Samurai bond as an alternative. However, what is certain is that the National Treasury is actively seeking lead arrangers to execute an international capital market deal before June 2024.
If the government chooses Sukuk, many believe it will become a regular feature in Kenya’s financing strategy—similar to Nigeria.
“It won’t be a one-time issuance like South Africa,” predicts Sheikh Mohamed.
“Kenya has a huge need for development funding, and President Ruto’s approach emphasizes African solutions rather than relying on Western nations. Sukuk is one of those solutions.”