By VINCENT OWINO

More by this Author

Kenya’s Capital Markets Authority (CMA) this week allowed the issuance of the first-ever Islamic bond in the country, tapping into the unexplored potential of sharia-compliant financing and setting the tone for diversification of capital markets in East Africa.

The issuer of the sukuk bond, Linzo Finco Trust, targets to raise Ksh3 billion ($20 million), at a return of 11.13 percent, to build some 3,069 housing units to support the government’s affordable housing agenda.

CMA said the bond is also a milestone in efforts to diversify the country’s capital markets to provide inclusive investment avenues for both local and foreign investors.

“This financial initiative represents not only a new investment opportunity but also a significant step towards addressing the housing deficit in Kenya,” said CMA’s chief executive officer Wycliffe Shammiah.

Read: EA nations treasuries’ pressure to fund campaign projects

The regulator’s chairman Ugas Mohammed said the new instrument will further open up the country’s capital markets to groups of “ethical investors who want to participate in our capital markets but have not had an opportunity.”

Sukuk bonds are governed by Islamic law (Sharia), which forbids charging or receipt of interest or investment in businesses considered undesirable or unlawful. It also forbids any form of uncertainty or transactions that involve speculation.

As they primarily target Muslims, Sharia-compliant financial instruments have generally been uncommon in the region as countries have large Christian populations. In Kenya, for example, just about 9.7 percent of the population is Muslim, while about 11.5 percent of Ugandans and 31 percent of Tanzanians subscribe to Islam.

Credit rating agency Moody’s in 2018 named Kenya among 18 African countries which have a huge “growth potential” for sukuk issuance.

But such an instrument has never been deployed in the country’s capital markets, until this week.

According to a recent research by the World Bank, sukuk bonds are uncommon outside Malaysia and the Middle East because in many markets, there have been no sovereign issues of sukuk bonds, which should serve as “a benchmark yield curve for the market.”

“Without such a benchmark yield curve, it is difficult for other issuers as well as investors to access the market with confidence,” says the World Bank research.

Read: Why Kenya may delay issuing Islamic bond

Another issue is the general lack of secondary markets that causes illiquidity as investors cannot buy or sell the assets easily. The World Bank research says investors normally hold their sukuk bonds to maturity because of the difficult to find others.

Juma Mvudi, a certified Sharia adviser and auditor, says that although the Kenya and East Africa markets have been ripe for a Sukuk bond for a while, there has been no issue mainly due to the lack of “suitable governance structure to guide the government” and political will.

According to Mvudi, institutional investors like Islamic banks and sharia-compliant pension funds will be the biggest investors for sukuk bonds, but there are also several potential retail investors who are unserved by the conventional financial instruments.

In the region, while there has been no sovereign issuance of a sukuk bond yet, countries have lately been making steps towards improving access to sharia-compliant financial instruments and services.

Uganda this month licensed its first Islamic bank to offer Sharia-compliant financial services to the populations unsuited for conventional banking products.

Read: BoU licenses first Islamic banking institution

Kenya has also been exploring the option of issuing a sukuk sovereign bond to raise finance from the international markets as it prepares to settle the $2 billion Eurobond maturing in June 2024.

In Tanzania, at least two Sharia-compliant bonds have been issued by private entities in the past two years, but there is yet to be a sovereign issue. KCB Bank Tanzania last year issued a sukuk bond to raise Tsh10 billion ($4 million) to finance its Sharia-compliant bank’s subsidiary’s asset portfolio.